Endowment Management 2020

By Strategic Investment Group April 16, 2020 May 27th, 2020 Blog Post
Blog Post

This has been a very unsettling time.  The human tragedy of COVID-19 dominates the news, as it should, yet for the individuals leading colleges and universities, the financial impact is likely leading to some sleepless nights.  There is a limit to how well even the most dire scenario analysis would have prepared a university for the current combination of falling endowment values and revenues, fewer gifts, and uncertainty about both the 2020 class sizes and the timing of when students will again be allowed on campus.

But times of unprecedented turmoil and uncertainty are often when investment committees make the most expensive mistakes.  When we were writing “Endowment Management for Higher Education” the mistakes of the Great Financial Crisis were seared into my memory.  How can you avoid these mistakes?

In the introduction to the book, we wrote:

“Most investment committees do not accurately assess their tolerance for risk.  Some committees may take too much risk (only to subsequently be forced to unwind it at an inopportune time), while others may take too little risk, creating significant opportunity costs.  Often, a lack of communication and coordination between a board’s finance and investment committees prevents the development of an integrated “enterprise risk management” approach that considers the overall operating, financial, and investment risks of the institution, rather than the suboptimal approach of assessing each in isolation.

Maintaining appropriate liquidity is critical.”

Here are other ideas to consider:

Communicate frequently and more broadly than may have been your standard practice.  If you have been spending time educating your full board on the investment program and why you have been doing what you have been doing, what we call “making deposits in the confidence bank,” now is the time you may need to make a withdrawal.

Do not attempt to market time.  Revisit the reasons for your long-term asset allocation policy and do not reduce equity risk in your portfolio outside of the policy ranges at this time.  Recall our caution posted in June of 2019 in our blog post found here.  Just three months ago, many investment committees were complaining that they didn’t have enough equity risk to take advantage of a solid economic environment and what seemed to be a ceaselessly rising equity market.

Tap into your institutional memory.  Engage long-serving members to provide stable leadership during this time.  We found that the committees that were most constructive in 2008-2009 had the longest average member tenure.  If your committee and Board is filled with newer members, reach back to some of your best leaders and engage them now.  We have seen this done with amazing success and given their love of the institution, most people will gladly serve again when called upon in the midst of crisis.

Steady and firm leadership is required.  If you have allowed a counterproductive member to stay on your committee for too long, brace yourself for some leadership tests.  This is when poorly behaving members often wreak the most havoc, demanding change.  I have heard of statements like, “We must sell all of our equities or I will never give another dollar to this institution.” Those are leadership tests that only the most skilled and strong leaders can handle well.  Many more committees reduced risk in 2009 than is widely reported, and this reduction in risk and lost returns cost some institutions millions of dollars.  Many of these same institutions continued to add risk in late 2019.  These can be the most expensive mistakes.

It is difficult to build a solid governance foundation in the midst of a tornado, yet it is critical to do this to best position your beloved institution for the time when the weather calms.

For more information about these ideas, please tune into our Endowment Management 2020 webcast on April 21st at 12:30PM ET as well as some of our prior blog posts:

With Thanks to AGB Partner: Strategic Investment Group

Nicole Wellmann Kraus, CFA
Managing Director and Global Head of Client Development
Strategic Investment Group
nkraus@strategicgroup.com