February 1, 2017

United States, New York

A changing political environment brings potential for reflation and market volatility

Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), today announced areas of focus for endowment and foundation (E&F) investment committees in 2017 as a changing political environment brings the potential for reflation and market volatility. 

“Philanthropic giving has recovered from the global financial crisis of 2008, and endowments and foundations have benefited from strong equity markets during the last few years,” said Ken Shimberg, US Endowment & Foundations Chief Investment Officer for outsourced CIO services, Mercer. “That said, there is potential for political and monetary policy changes, which could have an effect on the markets. This is an opportune time for E&F investment committees to revisit their investment and risk strategies and consider other sources of return.” 

Mercer suggests that endowments and foundations prioritize the following areas for 2017: 

  • Evaluate home country bias: E&F investor portfolios have evolved over time and taken on increasingly global investment profiles. However, US markets have outpaced most other markets since the Great Recession. This has caused some market observers to debate the value of holding a globally diversified portfolio. The outcome of the US election perhaps adds fuel to the debate.  As E&F investment committees review the role of global stocks in a portfolio, there are many factors they should consider beyond recent performance.  

  • Assess hedge funds: E&Fs are among the largest users of hedge funds, embracing a wide variety of strategies in pursuit of stronger returns and/or to manage portfolio risk. In the last seven years, however, many hedge fund strategies haven’t generated the expected results, which have led a number of investors to reduce or eliminate their exposure. E&F investment committees should revisit their hedge fund portfolio and confirm the role and expectations for hedge funds. Why are they used? What impact should an E&F’s spending rate and the nature of their underlying charitable commitments have on their allocation and strategy-specific implementation decisions? These among other criteria should be used to recognize the benefits that hedge funds may be able to bring to a portfolio relative to traditional strategies. 

  • Explore the multi-faceted benefits of benchmarking: Benchmarks should reflect the risk/return posture of the organization and provide a means to evaluate the success of the investment program. Too often benchmarks are used as a simple binary measure of success or failure, and that measurement may lead to discussions and potential changes in tactical or strategic investment policy at an inopportune moment. E&F investment committees should dedicate a significant amount of time to designing customized benchmarks that not only assess performance properly but also consider quantitative and qualitative risk factors. 

  • Weigh the pros and cons of liquidity: According to the National Association of College and University Business Officers (NACUBO), many E&Fs with assets under $500 million maintain more than half of their portfolios in daily traded public securities. E&F investment committees should evaluate if maintaining this level of liquidity comes at too high a price just to have the ability to quickly sell investments in a portfolio either to generate cash for specific needs or to maintain “flexibility” that might never be used.  An E&F investment committee should consider the institution’s liquidity budget and what steps are necessary to inform committee and staff views around liquidity goals in order to determine optimal levels of liquidity against the backdrop of desired returns, risk levels and opportunity costs. 

  • Consider private debt assets:  In today’s current investment landscape of low interest rates and fully valued equity markets, E&Fs must work hard to find opportunities to generate returns that meet long-term growth and spending needs. Since the global financial crisis, the visibility of middle-market private debt has grown substantially.  It offers flexibility and a connection to the real economy among other benefits. E&Fs should consider private debt assets–the benefits, the risks and how this kind of asset can help support mid- to long-term goals while providing more liquidity than other private investments. 

  • Embrace active management: In anticipation of the Federal Reserve’s upcoming moves, E&Fs should consider repositioning their portfolios to derive more return potential from active management. E&Fs should use their long time horizons to optimize their active management risk budget. 

  • Explore ESG: The interest in environmental, social and governance, or ESG-driven investing, has been steadily growing for years. US investors, including most E&Fs, have been slow to embrace ESG as an implementation approach, even if they agree in principle with the basics behind it. E&Fs may want to explore ESG from the perspective of global scarcity and changing demand patterns, which may prove attractive as a long-term return and responsible investment enhancement for portfolios. 

  • Evaluate the endowment model: The objective of the endowment model is to generate long-term returns that can maintain or increase the real value of spending and to do so in a way that balances volatility with the long-term growth need. Some have predicted the demise of this investment model, though Mercer disagrees with that position. E&F investment committees should assess if private equity continues to provide a premium to public markets and if active strategies such as hedge funds will demonstrate value-add going forward. Some E&Fs may find it challenging to remain committed to the endowment model, but it should be evaluated to determine what suits the current and future needs of the organization.  

  • Review the long term role and importance of gifts:  Most E&Fs real purchasing power comes from balancing the inputs of their spending rate and their expected return along with the third key area to consider -- gifts. Gifts may be the difference between decline and real growth in a low-return environment. E&Fs need to consider the long-term impact of gifts on the endowment and whether or not greater gift inflows could provide more flexibility for organizations to increase the long-term focus of their portfolios. 

  • Implement governance best practices: Sound governance practices are vital to successfully running an E&F investment committee. E&Fs should review key areas of investment committee operations and ask the following questions: Do we have best practices in place that define governance roles and responsibilities? Are the protocols and communication guidelines effective or just routine? Flexibility is important in a dynamic market environment. Are the investment processes and program flexible enough to act appropriately? 

The Top Ideas for Endowment and Foundation Investment Committees paper can be found here: 


About Mercer

Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries.  Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit Follow Mercer on Twitter @Mercer

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