When Investments Disappoint: The Endowment Perspective

An investment management commentary for periods ended December 31, 2016

By A.F. Drew Alden / February 06, 2017

The Community Foundation's consistent record of investment performance above market benchmarks for more than two decades makes it an attractive and trusted option for endowments and endowment-like assets for our community's donors and nonprofits.

While the Foundation's corporate portfolio performed below its targeted market benchmark for 2016, the net returns generated over more recent (3 years and 5 years) and longer-term (7 years and 10 years) periods are all significantly above the market benchmarks, as of December 31, 2016. Since the Foundation's adoption of our investment strategy in January, 1995, the Foundation has surpassed its benchmark on an annual basis by 1.4% by generating an 8.4% net return for the 22 years just completed.

While 2016 was disappointing, the Foundation is a perpetual endowment steward, broadly diversified, with a global perspective and focused intently on the longer-term performance. In examining our strategies, asset allocation, and underlying sub-advisors, the Foundation assesses rolling 3-year and 5-year market cycles, which for the past decade have all resulted in substantial excess return against our market-driven targets.

In our review of the sub-par year just completed, as we do each year, we examine the results not only against the markets but also against our peer universe. The Foundation's 3-year and 5-year performance have placed us in The Endowment and Foundation's (Investor Force) Survey among the top 5% of the universe. Looking out even further, the 7-year and 10-year results landed us in the top 10% of that Investor Force population.

In an effort to assist our donors and nonprofits with understanding the past year, below please find a few of the key factors that contributed to 2016's results:

  • The Foundation's global equity exposure to life sciences, growth-style with a particular focus on international and emerging market equities, and our allocation to financial equities and certain Asian and European markets were all detractors to performance;
  • The Foundation's hedge strategies, much like our global equity allocations, and our globally-focused hedged managers were also hindered by the foreign markets and produced inferior results versus expectations; and
  • The Foundation's increasing commitment to private assets (real estate, private equity, natural resources) over the past couple of years, given that these managers are in the early stage of deploying that capital, have not yet had a reasonable timeframe to mature.

Understanding the causes of a below-benchmark year is critical, and may lessen the disappointment, but even more important is that our critical analysis is essential for assessing opportunities going forward — and we believe the divergence in the world's markets have created opportunities, and that our underlying sub-advisors are positioned well to meet those challenges.

We thank our community for the trust it has placed us, and we will continue to be the patient and diligent investor that has served our community and our nonprofits so well over the many years.

If you have questions, please don't hesitate to contact me via email or by calling 203-777-7061.

Drew Alden
Sr. Vice President for Investments & CFO
Chief Compliance Officer