In our 2023 Outlook for Endowments and Foundations webinar, our team reviewed the biggest risks to non-profit investors in today’s market environment and shared actionable advice to organizations seeking to start the year off right. During the event, your peers asked important questions that we are going to expand on today.
Is a 60% stock/40% bond portfolio still appropriate for non-profit portfolios?
A 60/40 portfolio is often touted as a good starting point for long-term portfolios with an ongoing spending need. Stocks are intended to provide capital growth, while bonds help mitigate volatility and provide income. But after a difficult 2022, many are questioning the viability of a 60/40 allocation. Both stocks and bonds lost money in 2022, and based on index returns, a 60/40 portfolio had one of its worst years on record.
There are arguments for and against a basic 60/40 portfolio going forward. On the one hand, painful years like what happened in 2022, are generally – though not always – followed by better returns. Yields have risen meaningfully across all maturities, which bodes well for performance. On the other hand, yields are still generally below their long-term averages. Bonds have benefitted from secular tailwinds since the 1980’s when the 10-year treasury briefly yielded more than 15%. Given starting yields today, this dynamic can’t be replicated to the same degree going forward. If future inflation turns out higher than the market expects, bond yields may rise further.
The reality is that while 60/40 may be a good starting point, it has never been a total solution. Returns for this mix have averaged 8.6% annually since 1926, but in almost half of rolling 20-year periods, annualized performance has failed to hit this target. Rather than relying on a single target, like a 60/40 portfolio, it may be more beneficial to use a range of asset allocation.
Keep in mind that there are times when you will want to own more or less of any given asset class. Having the flexibility to actively allocate according to the risks and opportunities prevalent in the market is a more attractive solution then sticking with any single asset mix in all environments. That flexibility, and open communication with your advisor, remains crucial today and going forward.
Should capital campaigns or other fundraising initiatives be postponed given current economic uncertainty?
It’s possible that donor capacity will be down this year. High inflation and a major stock market pullback are enough to make most donors consider reevaluating their financial situation. However, that doesn’t mean they won’t be charitable – and more importantly, it doesn’t mean an organization should pause or postpone a campaign.
It’s very difficult to time a campaign perfectly. Markets move quickly, and in the months that it takes to plan and seek lead donors, the environment can shift. Organizations that press ahead are well positioned to benefit when a rebound in sentiment and capacity occurs.
It’s also possible to acknowledge a donor’s financial uncertainty but still actively engage them and cultivate support. A feasibility study is a good tool to test your assumptions about your donor’s intentions and hear directly from them regarding their concerns. Other ideas include:
- Allowing for longer pledge periods and using other flexible ways to give can help lessen donor uncertainty.
- If you feel a donor is not quite ready to make a pledge, pivoting to cultivation and stewardship strategies can help keep the door open for a future gift when timing is better.
Ultimately, donors who are truly “invested” in your organization care most about your case for support. There are particulars at every organization, but fine tuning your case statement and finding people who can communicate the message will usually trump any financial uncertainty.
Given higher inflation and potentially lower future investment returns, are you recommending endowments lower their withdrawal amounts going forward?
To achieve parity between current and future support, endowments generally target returns high enough to preserve purchasing power after both inflation and withdrawals are taken. A risk today is that higher inflation and/or lower returns could cause a portfolio to fall short of this goal.
One way to compensate is with lower withdrawals. This provides more flexibility to pursue capital growth and lowers the overall return needed to maintain a portfolio’s purchasing power. Of course, this also means lower levels of support in the near-term, which isn’t always desirable or possible.
An endowment could also choose to pursue higher returns while keeping withdrawals at the same level. But since higher volatility is a byproduct of the pursuit for higher returns, fiduciaries need to be comfortable with the overall level of risk they are taking. For example, if a market drawdown occurs at the same time as a large withdrawal, this could cause a portfolio’s value to fall farther then it normally would and increase the time it takes to recover that value.
From a planning perspective, there is unfortunately no perfect solution – only certain levers to pull that come with natural tradeoffs. An organization should find the balance between growth and preservation (to fund withdrawals) that makes sense for their situation. Portfolio modeling and testing of different assumptions can help contextualize this decision.
Staying up to date on market conditions should be of top importance for you and your organization this year. This knowledge will help you make informed decisions regarding your investment portfolio and whether or not you'll have to adjust your organization's withdrawals. It will also help foster important conversations with your donors to get a pulse on what kind of support you can expect from them.
Source: Board of Governors of the Federal Reserve System
The data presented is for informational purposes only. It is not to be considered a specific stock recommendation.