MCF's Investments and the COVID-19 Pandemic

Last Updated 3/23/2020

During times of uncertainty and stress, we recognize the importance of communicating with our community. Many aspects of our lives have been affected by the outbreak of COVID-19, and many of these same changes also have an impact on the financial markets.

We want to reassure you that MCF is always in close touch with Commonfund (our Outsourced Chief Investment Officer) and Boston Trust Walden (our socially responsive portfolio). We are communicating frequently with both. We developed our investment policies to help ensure investment decisions will align with our long-term mission and vision, and to help weather periods of market volatility. Together, we remain committed to these policies, which will support nonprofits in the short-term and help us achieve our long-term objective to build endowments that will support our community for generations to come.

On this page, we will provide insight into how we are responding to recent market developments and their potential impact.

Update on Commonfund Portfolio

As of March 20, 2020

While 2019 was a very strong year – inflation remained under control, employment was strong, and earnings growth was still supportive for equities – Commonfund recognized that we were in the late stages of a long growth cycle and decided to take a focused approach to sell into strength. As such, Commonfund tactically reduced its overweight to equities in the MCF endowment throughout 2019.

The policy portfolio, collectively designed by Commonfund and the MCF Investment Committee, is aligned with MCF’s long-term objectives. It is well-diversified to account for our return needs, risk tolerance, and liquidity requirement (to provide steady income to support annual distributions). As such, our portfolio contains four primary components: equities, fixed income, diversifying strategies, and real assets.

Equities (Growth Assets): The role of equities in the portfolio is to provide long-term growth and capital appreciation in support of our return needs.

MCF executes equities through both public and private strategies and, collectively, they represent the largest allocation in our portfolio. As noted above, we had been carrying a tactical overweight to equities in the portfolio, which has served us well in recent years. We reduced this overweight and changed the portfolio allocation to a neutral position by the end of 2019 in recognition of the signs of a slowdown in global growth and to sell into a position of strength.

Our public equity managers have generally performed in line with benchmarks during the recent downturn. The private equity investments, where value calculations are delayed by one quarter, are expected to boost MCF’s first quarter returns (because they will reflect fourth-quarter valuations). They will be priced into the portfolio by the second quarter of 2020. The use of both public and private equities (with regional and sector diversification) has enhanced portfolio returns over time, while also providing important diversification.

Relative to our peers, MCF has a higher allocation to private investments and these investments have been the primary driver behind our top decile performance for the 1-, 3-, 5- and 7-year returns ending December 31, 2018*.

Fixed Income (Deflation Hedge): The role of fixed income in the portfolio is to provide a source of income and liquidity, while also providing potential downside protection from negative volatility in the equity markets.

While fixed income has not offered attractive returns in the past few years, we’ve maintained an allocation close to our targets for the very reason that unfolded: an unforeseen drop in the equity markets. The fixed income portfolio has served its purpose and helped dampen the impact of the recent equity market volatility.

Diversifying Strategies (Diversification Benefits): The role of diversifying strategies in our portfolio is to provide a source of return that does not rely on the broad direction of either the equity or fixed income markets.

Over the past year or so, our portfolio has carried a slight overweight to diversifying strategies. Given a desire to add more flexibility and liquidity to the portfolio, we reduced the allocation to target weights coming into 2020. Not all diversifying strategies are priced daily, so we do not have a full comparative picture of how the strategies are faring relative to benchmarks. But the portfolio has provided much needed diversification away from traditional asset classes during this volatile period.

Real Assets (Inflation Hedging Strategies): The role of real assets in the portfolio is to serve as a hedge against inflation, and, for select strategies, to drive long-term capital appreciation.

Our real assets portfolio is diversified and includes both public and private natural resources, as well as both public and private real estate. The disruption we’ve seen across the energy sector has caused the valuations in natural resources to decline. Given our diversification between both public and private strategies, we expect the impact on values will be stretched out over the next several quarters because of the lag effect in reporting private returns that we described earlier. While inflation has been modest over the past several years, we do believe having a component of the portfolio that can provide inflation protection characteristics will be beneficial over the long-term.

* The last year available for comparisons from the Council on Foundations | Commonfund Study of Foundations, which we use as the basis for peer comparisons.

Looking Ahead

The major drop in equity valuations over the past several weeks has served to drive forward-looking price/earnings ratios below their 15-year average in the United States. Equity investments outside the United States, which had already been viewed as inexpensive from a valuation perspective, have experienced similar weakening in valuations. Given the interest-rate drop in fixed income, the recent market downtown has served to increase the attractiveness of equities relative to fixed income from a valuation perspective. To put this in context, the dividend yield on the S&P 500 is now three times greater than the yield on a 10-year Treasury note. Just as we “sold into strength” coming into the new year, we believe that increasing our equity and real assets allocations will enable us to potentially “buy into weakness.”

Update on Boston Trust Walden Portfolio

As of March 16, 2020

How does your investment performance compare to the recent volatility of your benchmark?

The precipitous drop in stock prices began on February 20, 2020. Relative to history, this is a particularly sharp decline over a short period of time. This selloff was triggered by increasing investor concerns over the spread of the coronavirus and its implications on global economic growth. It is far too soon to know the ultimate human, economic and market impacts from the coronavirus; therefore, we expect market volatility to remain high until the coronavirus is contained and we have passed peak infections rates. We have no insight as to exactly when that will happen.

In periods where volatility rises quickly and steeply, correlation among stock returns tends to be high. Selling tends to be indiscriminate and that is what we have experienced to date. In our experience, as market corrections become more prolonged, our focus on higher quality companies with sustainable business models trading at reasonable valuations has added value. The period from that date is only a few weeks, but our U.S. large cap strategy has generally held up modestly better than the S&P 500 and outperformed by about 125 basis points or 1.25%

Do you identify any opportunities with the recent market correction?

Yes, we are systematically reviewing our existing holdings (price changes, current valuations, etc.) as well as a much broader list of high-quality companies that we regularly monitor. During this time of crisis, we seek to identify companies in the portfolio that could be meaningfully impacted by the specific issues plaguing the market. Concurrently, we seek to identify new company investments that have very durable business models that have been dragged down with the broader market and now sell at very attractive valuations. We have made a few minor adjustments to the portfolio over the last few weeks and would expect to make a few more in the weeks ahead. Our aim is for Madison Community Foundation to remain invested in diversified portfolios of reasonably valued, high quality stocks with strong financials and attractive growth prospects.

As long-term investors, does COVID-19 currently affect your 5+ year outlook?

There will undoubtedly be an impact to markets and the broader economy in the short term. We cannot predict the future, but we do not think the companies we invest in will be feeling the effects of coronavirus in a meaningful way in 5+ years. For some perspective, in the Great Recession, it took about six years for the market to fully recover to the pre-crisis peak value (2007 to 2013).

Our general view over the past few weeks has mostly been driven by experience, which is that all crises pass. Further, actions taken in the midst of panic selling are incorrect more often than not. We believe that this crisis will pass as well, though we have no special insight on the timing of when this will be over. We note that the Madison Community Foundation has approximately 40% of its Boston Trust Walden portfolio holdings in bonds and money market funds. These holdings will help to buffer the volatility of the stock portfolio.

Finally, a philosophical note: to partake in stock market returns, investors must accept that volatility and uncertainty of returns are to be expected. And today, unfortunately, there are no attractive “safe harbors.” Longer-term bond yields are close to historic lows and their prices have been as volatile as stocks over the past week. Cash equivalents, which also have low yields, are the only stable choice. We would also not advise selling now and planning on buying back later when markets are calmer. That approach rarely works well. We believe having a long-term strategy and sticking with one’s discipline, especially during times of crisis, is the best way to build wealth over time. Even so, this is likely to be a very volatile and difficult period.


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