Investment considerations for endowments and foundations in 2023
It’s important to understand how different scenarios affect your portfolio and overall mission.
Plotting a course through volatile markets
This year has ushered in a combination of interconnected challenges for investors, from geopolitical conflicts to high inflation, supply chain problems to financial market volatility.
Inflation in some developed countries has exceeded 10%, levels not seen in decades. In response, central banks have steadily – and rapidly – increased interest rates to their highest levels in several years.
At the same time, Russia’s invasion of Ukraine has shaken equity markets, with global indexes falling by as much as 25% during 2022 as investors adopted a ‘risk off’ approach. Economic sanctions as well as energy and food supply issues have exacerbated investor concerns, particularly in Europe.
According to Mercer’s survey of endowments and foundations, half of respondents cited higher inflation as one of their two main investment challenges for the next three years. This was second only to concerns about low expected investment returns. In addition, 39% said they were not sure or did not believe that their portfolios were prepared for a market downturn.
If your portfolio has experienced investment losses, it’s easy to be pessimistic and focus on the worst outcomes. While it is prudent to be prepared for worst-case scenarios and ensure that these short-term headwinds don’t affect your organisation’s overall mission and spending plans, it is also important not to be caught flat footed and instead ensure that you are positioned to capitalise on compelling opportunities.
To do this, you’ll need information – and plenty of it. Without a clear path over the coming months and years, it is best to explore different scenarios and how they may affect your portfolio, its liquidity, and the ability of your investments to support your organisation’s mission and objectives.
We have identified four important strategic issues currently facing E&Fs. In this paper, we introduce approaches to navigate through them to achieve long-term success, while managing short-term disruptions.
Rather than make snap decisions based on market movements, endowments and foundations should take time to assess their strategy, model different scenarios, and ensure they have as much relevant information as possible so they can act when the time is right.
Four areas of consideration for endowments and foundations
High inflation and interest rates can pose considerable challenges to endowments and foundations, making it difficult to achieve a real return that would preserve spending power. This circumstances also bring opportunities, so it’s important to be fully prepared to mitigate risks and seize opportunities.
Addressing inflation concerns:
- Stress test your portfolio
- Reassess your bond allocation
- Explore inflation protection options
- Review spending plans
The recent backlash against ESG investing, combined with concerns about greenwashing, may cause some endowments and foundations to reassess their approach to environmental or social issues. While regular reviews are important, be sure to keep your focus on long-term goals and objectives.
Considerations for investing sustainably:
- Engage with your asset managers
- Explore alignment with your broader objectives
- Capture long-term opportunities
- Model climate scenarios
Endowments and foundations are perfectly placed to benefit from the unique qualities of private market asset classes, as they can truly invest for the long term. Other investors may be challenged by short-term headwinds, so look for opportunities to access managers as others step back.
Considerations for investing in alternative markets:
- Review private markets allocations
- Assess opportunities with best-in-class asset managers
- Explore investments that align with your objectives
- Prioritise diversification
As long-term investors, endowments and foundations can look to buy into long-running trends in public markets at more attractive prices following this year’s volatility. China’s growth, technological advances, and demographic shifts are all examples of themes that will prevail through short-term uncertainties.
Considerations for trends in public markets:
- Assess your exposure to emerging markets
- Explore global themes
- Review managers and flexibility
Plotting a course through volatile markets
Global Not for Profit Investment Survey findings*
Allocating to alternatives
65% see diversifying away from traditional asset classes as their greatest opportunity over the next three years.
Seeking expert advice
55% of survey participants say they're using external expertise to help navigate this complexity.
Sustainable investments
39% of survey participants believe meeting their ESG investing goals means compromising on returns.
Before accessing this website you must read and accept the following terms and legal notices.
You are about to enter a website intended for sophisticated, institutional investors based in New Zealand. The information contained herein is only intended for investors who are wholesale investors for the purposes of the Financial Markets Conduct Act 2013. Any person unable to accept these terms and conditions should not proceed any further.
In New Zealand, Mercer’s Outsourced Chief Investment Officer, Delegated Solutions and other Investment Services are delivered by Mercer (N.Z.) Limited, the manager of the Mercer Investment Trusts New Zealand and the Mercer Wholesale Funds.
Information about Mercer strategies and solutions is provided for informational purposes only and does not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities, or an offer, invitation or solicitation of any specific products or the investment management services of Mercer, or an offer or invitation to enter into any portfolio management mandate with Mercer. None of the content on Mercer.Com should be considered as regulated financial advice. No actions should be taken based on this content without first obtaining professional advice. Mercer makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. Past performance does not guarantee future results. The value of investments can go down as well as up, so you could get back less than you invest.
Mercer reserves the right to suspend or withdraw access to any page(s) included on this Website without notice at any time and accepts no liability if, for any reason, these pages are unavailable at any time or for any period. The solutions, products and services described in these pages are not available in all jurisdictions.