March 27, 2018

Playing the Long Game

Madison Community Foundation investment strategies ensure permanence and sustainability

Ann Casey

Pictured above: Commonfund Managing Director Steve Snyder shares investment strategies and results with MCF fundholders.

I recently attended Commonfund Forum, an annual conference for clients and investors of Commonfund asset management firm, which serves nonprofits throughout the country. Since 2006, Commonfund has served as Madison Community Foundation’s strategic investment partner assuring the sustainability of our permanent endowments. MCF Board and Investment Committee members Ron Mensink, Blaine Renfert and Diane Ballweg attended as well.

I have attended Forum almost every year since we became Commonfund clients (OK, yes, it’s in Florida—in March) because it’s a convenient, one-stop-shop to meet with Commonfund leadership, interact with other foundation and endowment investors, deep dive into investment strategies, and learn from global economic experts.

The Forum is also my annual opportunity to reflect on why we invest the way we do and how important the investments are to the mission of MCF. Our funds must give us and our fundholders the ability to make grants to support our community. Consistently. Forever. So the theme of the conference, Building Resiliency, really resonated with me.

We’ve been in a long, strong bull market for several years now. One big point of discussion was the question of how long this will last. Commonfund posed the question this way in a survey of all the attendees as we checked into the conference: “If the current business cycle was a calendar year that starts in January and ends in December, what month are we in?” About 50 percent of the respondents said we are somewhere between September and November. Commonfund’s official answer is October, so the general consensus is that we are pretty far into this cycle, but it’s not over yet. We have had market volatility and pull-backs since the beginning of this year. What will long-term endowment investors do? Probably nothing.

The biggest difference between individual and institutional investors is the reaction to market volatility. One of the speakers at the conference showed graphs on how individuals reacted to changes in market returns in the early 2000s. In 2003-2007, when the S&P 500 had strong returns, individuals poured into the stock market; after the big decline in 2008 they sold out in a big way. They didn’t return until several years later, effectively missing much of the market recovery. Meanwhile institutional asset allocations remained steady.

The speaker also presented data on the returns of institutions versus individual investors. The average individual investor has achieved a 5 percent annualized return since 1997, roughly doubling the investment. Meanwhile, large institutions have an average return of 9 percent. The single biggest reasons for the difference are policy and discipline. These institutions know they will be around for a long time and they have distribution targets that they need to meet. So they have well thought-out investment policies, and they have the discipline to follow them. Policies protect institutions. Perpetual investors maintain their exposure to stocks, even when markets are volatile, and they enhance their returns by investing in private markets. In addition, they limit risk by maintaining diversification to a variety of assets classes, especially those that move differently in market cycles. They can handle volatility because they will be around for a long time, and they have the time to recover from periodic market declines. Prolonged declines, though, can impact their ability to make grants and distributions, so how quickly an endowment recovers from a market correction is fundamental.

These are the principles that MCF follows as we steward assets for our donors and fundholders. Our Board and Investment Committee never lose sight of these important facts. MCF is here forever and our funds give us the ability to do all the good we do.

Stay in touch with your questions, comments and observations at mcfblog@madisongives.org.