Endowments & Foundations

Uncertainty – or what some might refer to as “risk” – is a core consideration in endowment and foundation portfolios. Common risks might include whether a portfolio will be able to grow its capital quickly enough to meet future needs, or preserve its capital diligently enough to safeguard its current spending commitments. At Manning & Napier, we believe it’s important to review which risks a portfolio is exposed to in the current environment and take steps to manage them as best as possible. We also believe it’s helpful to understand how certain goals might play out in the future. No one can know for sure what the future will bring, but portfolio modeling techniques, including projections, “what-if” scenarios, and regular monitoring, can aid in this sort of preparation and prioritization. Consider the following tools:

Market Context – It’s important to build expectations for a range of future outcomes. “What might returns look like for my portfolio?” History is one common guide. Broad market indices make historical returns accessible for many types of securities; although there is a limit to how far in the past data may be available.

Understanding the current market environment is even more important. Broadly speaking, today’s market characteristics (i.e., valuations, earnings, dividends, interest rates, etc.) can provide a framework for assessing future outcomes. For example, history has shown that higher starting valuations in either the stock or bond market tend to lead to lower future returns. Market context like this helps determine what might be expected from a portfolio in the future.

Base Case Projections – A projection is a type of financial model that can estimate what a portfolio’s value and spending power might be in the future. Likewise, a base case projection is one where assumptions are tailored to specific client situations and where estimated investment returns are based on a conservative outcome of what the future might bring. This can be useful as not only a planning tool but also a standard of measurement. As a portfolio heads down its path, how closely does it match this projection and what might be the drivers of any deviation? A base case projection can help answer these questions.

Stress Test – Of course, a base case is only one of many possible outcomes. Any assumed variable (i.e., investment returns, portfolio withdrawals, deposits, etc.) can be “tested” to determine how potential outcomes might differ as assumptions change. This involves using a range of different assumptions than those used in the base case. For example, a low return scenario can be applied to a portfolio’s model to determine how a withdrawal rule might be impacted if future returns are below historical averages.

The ultimate goal of any model or stress test is to help determine if something should be done to better manage uncertainties. However, as mentioned before, endowments and foundations often have multiple goals that may conflict with one another. A portfolio can try to safeguard its assets by investing conservatively, but the tradeoff is that a conservative approach often doesn’t generate enough growth to meet a portfolio’s long-term goals. Therefore, a board’s role, along with its investment manager, is to prioritize what’s most important to the organization. A planning process, such as the one described above, can help define those priorities, provide important insight about tradeoffs, and help clients stay on the right track.

Download a Sample Portfolio Modeling Report or Contact Us to learn more about how Manning & Napier’s Endowment & Foundation Team can help your organization manage risk and achieve your goals.