Endowments and Foundations Also Carry Unrealistic Return Expectations

New data from CAPTRUST shows there is a continued misalignment between foundations’ and endowments’ expected returns, risk preferences and asset allocations.

CAPTRUST has published the results of its second annual Endowments & Foundations Survey, compiling the responses of more than 130 organizations that focus on a broad variety of religious, educational and charitable missions.

Of respondents, 64% identified as private, while 36% were public.

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Discussing the findings with PLANADVISER, James Stenstrom, senior manager of asset and liability at CAPTRUST, and Eric Bailey, principal and financial adviser at CAPTRUST, say the data shows a clear disconnect surrounding risk appetites and return expectations. Case in point, 72% of respondents indicate their organization’s expected return on assets falls within the 5% to 8% range—which is higher than investment managers were projecting even before the outbreak of the coronavirus pandemic—with 13% expecting returns over 8%.

As endowments and foundations look to increase their returns, it would be reasonable to anticipate an increased tolerance for risk, Stenstrom and Bailey explain. However, the survey shows no significant differences in levels of equity exposure between respondents with moderate and high return expectations. In this sense, endowments and foundations appear to be subject to many of the same misconceptions and challenges hampering individual investors.

In the survey results, the vast majority (91%) of nonprofits indicate an annual loss tolerance of 15% or lower. However, when simulating their asset allocations through the 2008 market crash, each group saw declines in excess of 20%. More troubling, Stenstrom and Bailey observe, nearly half of respondents indicate an annual loss tolerance of only 5% or less, which was far exceeded when run through simulations of both the 2002 and 2008 market downturns.

“These misalignments put endowments and foundations at risk to sustain permanent damage in the event of a major downturn, like the one we are currently experiencing,” Stenstrom warns. “To mitigate any long-term effects, endowments and foundations should develop a playbook for making necessary shifts in asset allocation to limit losses.”

“The first thing about building a playbook like this is to understand the cash flow needs,” Bailey explains. “If you know what the year ahead is going to look like in terms of outflows, and you have that amount in cash or cash equivalents, this will mean you don’t need to tap other assets in a severe downturn.”

It’s also important to look at the donor funding streams and to understand the timing on that side of the balance sheet. Is it state funding? Mostly grants? Are these sources stable or variable? Are they seasonal?

“Finally, with an organization that is responding to natural disasters, there is no correlation to the current state of the economy,” Bailey says. “On the other hand, for an organization that is funding housing and addressing food insecurity, when there is an economic slump, their needs go up dramatically. Those two types or organizations need very different plans.”

Overall, those organizations willing to tolerate larger annual losses allocate measurably more to equity and other assets, such as alternatives. As the survey shows, 56% of organizations indicate their current portfolio includes an allocation to alternative asset classes. The most common alternatives include real estate (61%), hedge funds (39%) and private investments (35%).

While each organization’s portfolio allocation may not match the potential magnitude of loss, taken as a group, more conservative nonprofits do invest larger proportions of their portfolios in fixed income and cash.

Another enlightening portion of the survey focuses on the perception and use of investments with environmental, social and governance (ESG) themes. While most organizations surveyed (70%) do not currently leverage ESG investing themes, the survey shows that foundations with less than $100 million in assets are much more likely to use ESG funds when compared with larger organizations.

Looking forward, only 2% of respondents plan to reduce their allocation in ESG funds. Half of respondents (51%) are undecided when considering ESG funds, while more than a third of respondents plan to maintain their investments and another 9% plan to increase allocation into the funds.

With half of respondents remaining undecided about their participation in ESG investments for the next year, Stenstrom and Baily observe, it is important to note that many donors have been embracing these funds. Further, a number of national grants are only awarded to foundations that invest in ESG funds, and by not investing in those funds, foundations could be inadvertently restricting which grants they can access.

Beyond the challenges brought about by volatility and lower returns, additional issues respondents point to that could inhibit their organizations in the future include difficulty expanding the donor base, government policies restricting fundraising, competition from other organizations and staffing shortages.

CAPTRUST finds the bulk of organizations exhibit strong governance practices, but room for improvement still exists. For example, fewer than half (43%) of organizations conduct fiduciary training for board or investment committee members, and even fewer (21%) include training on investment-related topics as part of new board member orientation.

Majority of Americans Are Concerned About Finances

More than one-quarter are extremely or very concerned, according to Fidelity.

Fidelity Investments has released the findings of its Market Sentiment Study and found that 60% of Americans are concerned about finances. Of this group, 38% are extremely or very concerned, and 22% are moderately concerned.

Sixty-two percent are concerned about job security, with 43% extremely or very concerned, and 19% moderately concerned.

Millennials and Generation Xers are the most concerned about their finances in the next six months, with 69% of Millennials saying this is a concern for them, and 68% of Gen Xers sharing that anxiety. By comparison, only 51% of Baby Boomers are concerned about their finances over the next six months.

Forty-three percent of Americans say their stress levels related to finances have worsened. Thirty-three percent say it is affecting their sleep, 24%, their exercise habits and 22%, their healthy eating habits.

Forty-nine percent say they don’t have the time to address their investments and retirement savings because of increased responsibilities at home and work.

Women tend to feel the impact more than men, with 37% of men and 48% of women saying their anxiety about their finances has gotten worse. Sleep habits have gotten worse for 28% of men but 37% of women. Healthy eating habits have gotten worse for 19% of men but 25% of women.

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As the pandemic continues to impact financial markets and everyday life, 49% of Americans say they are worried about paying down student debt. Forty-six percent are concerned about having enough saved to retire as planned, and 45% worry about paying down debt other than student loans.

Forty-three percent are worried about their ability to pay for their children’s college education, and the same percentage is also worried about finding money to save for other goals, while 40% are concerned about their ability to pay monthly bills.

In spite of all of these concerns, Americans are taking steps to better manage their money. Forty-eight percent are cutting back on discretionary spending. Forty-four percent  are working to increase their emergency savings, and 34% are rethinking how they manage their money.

Thirty-one percent are talking more about money and finances with family or friends, and 20% are reviewing their existing financial plan more regularly. Fifteen percent are investing new money in the stock market, and 11% are creating a new financial plan.

Overall, 51% say they have a plan in place to help them save and invest to reach their financial goals. Of those who say they have a financial plan, 50% have at least three months’ worth of emergency savings, while this is true for only 34% of those without a plan. Thirty-five percent of those with a plan are less stressed about paying monthly bills, compared to 45% of those without a plan.

Thirty-five percent of those with a plan say they are less likely to feel especially concerned about finances over the next six months, but this jumps to 42% of those without a plan.

Asked what would make them feel more confident in making financial decisions about the future, 34% said having a financial plan, and 31% said understanding how to better prioritize their savings. Twenty-six percent said access to a financial professional would help, and 28% cited free workshops and online educational content. Finally, 25% said they wanted checklists and other actionable resources to guide them through different life events and market situations.

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