As the recovery from the Great Recession continues and the bull market charges ever upward (until it slips again), those tasked with growing the funds of endowments and foundations are faced with difficult choices.
On the one hand, it has to be tempting to go heavily into equities. The returns have been incredible. And, well, that’s the point, isn’t it?
On the other hand, that may not be the point at all. In fac,t the best managers are looking past the short-term hot investments by making sure their funds can weather whatever economic storm comes their way.
A report this summer on the Endowment Index revealed that the largest college endowment fund, Yale’s, underperformed the market during the current run-up. But an examination shows that Yale and other similar funds outperformed the markets during the recession. The key to both circumstances is diversification. It’s a strategy investors would do well to remember when managing their portfolios.
And Northern Trust noted that theendowments and foundations it tracks had a yearlong increase of 14.7% as of the end of 2014′s third quarter .
(For more, see Why Endowment Funds Like Yale’s are Doing Just Fine and Top 20 Richest Colleges for 2013: The Biggest Endowments.)
Mercer Capital’s experts on endowments and foundations released a Top 10 list of best practices for fund managers and boards to contemplate as they consider their investment strategies.
Check out 10 Tips for Endowment and Foundations Managers to Keep Funds on Track:
Tip 1. Currency Values Matter
The dollar has grown stronger this year and that means it’s important to take a close look at foreign investments. That’s because the strength of the dollar compared to other currencies makes them less lucrative.
Mercer’s Take: Foreign currencies are still a good bet, but this is a good time to move some of those holdings to domestic investments as a hedge.
Tip 2. Assess Private Equity
Stocks are an important component of the portfolios held by endowments and foundations. However, making sure they bring expected returns over the long haul takes work and planning.
Mercer’s Take: Board and committees need to review private equity holdings to ensure they are meeting long-term goals. Policies must be put in place so that equity holdings continue to generate targeted returns throughout multiple cycles.
Tip 3. Consider Emerging Markets
Once the hot ticket for investors, emerging markets have been less attractive compared to mature ones.
Mercer’s Take: Inexpensive compared to developed markets, this is an excellent time to invest in emerging market stocks. Still, such investments must be managed actively to ensure long-term gains.
Tip 4. Watch the Tail
After a strong beginning to the year, U.S. markets have been more volatile during the final quarter. Still, the Dow is consistently threatening to push ever higher (as it did on December 23, finishing over the 18,000 mark for the day).