April 9, 2025

MCF’s Investment Strategy: A Bulwark Against Market Volatility

On Thursday, April 3, the lead story on The New York Times website homepage read, “Tariffs Send Wall St. Tumbling Toward Worst Day Since 2020,” after the S&P 500 fell nearly 5% during the day. By April 9, the markets had rallied, stalled and retreated again. As is typically the case in times of economic uncertainty, investors are trying to minimize risk in their portfolios by selling shares in companies, industries and sectors they fear are becoming riskier.

MCF's investment approach helps us stay the course, even when the waters get rough.

This is understandable, and perhaps prudent, behavior for individual or corporate investors who will need to tap the value of their portfolio in the short- to intermediate-term. With its perpetual investment horizon, however, Madison Community Foundation (MCF) views its investment portfolio through a different lens.

Time Horizon and Risk Tolerance

When fundholders establish an endowment at MCF, they do so because they want to create a permanent legacy; they are investing to provide benefit for generations to come. Given this long horizon, MCF operates under significantly different investment conditions than individual investors.

Risk often is seen as a trade-off between earning a higher return and having a lower chance of losing money in a portfolio. When you’re investing for a more distant goal, you have more time to make up any losses, which may make you willing to take risks for the potential of higher returns. As you draw closer to needing that money, your willingness to risk losing any of it will naturally diminish.

While an individual investor’s time horizon is typically measured in years or decades, MCF’s investment horizon spans hundreds of years. This perpetual time horizon means MCF’s investment manager faces different risk considerations than individual investors. An endowment’s sensitivity to loss is much lower than that of most individual investors (meaning it has a higher risk tolerance) because the endowment has ample time to make up for any short-term losses it may experience. And while these short-term losses can affect annual distributions, MCF’s spending policy is designed to minimize their impact.

Being able to stay invested for the longer term is ideal, because, historically, the markets have always rebounded from short-term volatility and rewarded investors who stayed the course.

Liquidity Needs and Investment Objectives

Liquidity needs – how much of your portfolio needs to be readily accessible for spending – also affect investment strategy. MCF’s endowment is invested so that it has the liquidity to support annual distributions, while combating inflation and preserving the real value of the fund’s principal.

These goals also differ from those of most individual investors who are more likely to be weighing objectives such as overall portfolio growth versus potential losses or income versus expenses. Because of this, MCF can keep a much higher percentage of its assets in investments that are more illiquid, and that typically offer higher returns in exchange.

MCF regularly runs stress tests of the portfolio to assess whether it has sufficient liquidity to meet the projected spending needs (annual distributions from funds) in a market crisis. We did this most recently in August 2024.

For this stress test, we looked at the worst market drawdowns of the past 50 years (between 2000 and 2002 and between 2007 and 2009) and assumed a 45% drop in public equity returns over two years. Based on our endowment’s current asset allocation, returns would be down 20% in the first year and 10% in the second. The recovery from these two market events over the two years following the drawdowns (2002 to 2004 and 2009 to 2011) saw the equity markets go up 26% each year. The liquidity assumptions we made included not only covering projected spending, but also maintaining our alternative investment strategies.

Using these assumptions, the analysis showed MCF’s portfolio would have three- to four-times the needed liquidity to cover spending and private investments during the drawdown periods, and potentially realize a positive post-crisis return.

An Asset Allocation That Has Evolved Over the Years

MCF established its first endowment in December 1942 with a $30,000 contribution. At that time, endowments invested primarily in safer assets, such as bonds. Endowments began investing in the stock market in the 1940s, which allowed them the potential for higher growth. Although investment records no longer exist from those early years, MCF’s portfolio most likely followed the same strategy as its peers.

Since Commonfund became MCF’s outsourced chief investment officer in 2006, it further diversified the portfolio’s asset allocation. Today, MCF invests in a much broader range of investments, such as private equity and real estate, than is appropriate for most individual investors.

Currently, MCF allocates approximately 30% of its diversified portfolio to alternatives investments, including private capital, venture capital, private real estate and natural resource programs, and diversifying strategies such as hedge fund investments. Our investment management firm, Commonfund, and our Investment Committee have long recognized that alternative assets classes offer better return prospects, and that the longer time horizon allows them to take on the greater risk of alternatives.

Investing to Serve the Community

MCF’s disciplined, steadfast investment mindset allows us to realize the legacy our fundholders intended. Our diversified portfolio continues to outperform its benchmark for the longer time periods, and its 10-year performance puts it in the top 20% of our peer community foundations nationwide. Our approach to investing and the strength of our portfolio allow us to continue to play a key role in helping the Madison community thrive – today and long into the future.