COVID-19 rocked your portfolio. So what should you do now?
For a non-profit organization, the pandemic likely changed more than the returns on your investment portfolio.
It may have increased your needs and decreased your contributions. The community you serve may be so stressed by the current economic situation that you may be spending more in the short-term than you planned. And your dependable donors may have additional financial worries causing your contributions to be either down, less dependable, or both. Colleges, universities and other organizations have seen their entire business models disrupted—both now and for the foreseeable future—with typical income streams suddenly drying up and a dark cloud of uncertainty settling on the horizon.
When will we return to normal? What will happen in the fall? What will 2021 bring? The only honest answer is that no one knows for sure.
All these variables add up to unparalleled enterprise risk. One aspect of that risk is your investment portfolio. It's gone through record stresses as well with unmatched volatility, liquidity issues and more uncertainty about what's next.
When it comes to your investments, we see two saving graces: The first is that we can learn lessons from previous market events such as the dotcom bust of 2000 and the 2008 Global Financial Crisis. The second is that meaningful help is available. The stress of managing your portfolio? That's a stress that can be reduced by delegating to experts in the form of an Outsourced Chief Investment Officer or “OCIO”.
Let's talk in real-world terms - would outsourcing your portfolio management really decrease your stress? Or, would it simply increase the cost and reshape the headaches? Let's talk about the key points that are contributing to that stress:
Real-time analysis – On one of those particularly dark, down-market days in March, how easy was it to determine your real-time exposure to energy, to airlines, or to any other hard-hit sectors? First of all, the right OCIO provider can tell you what you own right now—and what it's worth. That may sound simple but imagine getting daily reports with your detailed market-sector exposures, without asking. Or being able to pick up the phone during the day and ask the questions you need answered, right now. World-class OCIO providers come with risk-management platforms. Ideally, the platform is security-based, updated daily and able to provide actionable information.
Strategy for all market cycles – The dust hasn't settled yet. Markets are still volatile. So how can you know if your asset allocation strategy is still the right one for your organization? If your spending levels have increased and your contribution levels are likely to be down for the next 18 months, does your strategic asset allocation address that? Does it address it when you consider a down market on top of all that?
We believe the best asset allocation strategy should account for the worst-case scenarios. No approach can avoid all downside risk, but the strategy to manage that downside event should be built in based on decades and decades of market-cycle experience. With the right OCIO provider, black swans¹ are an expected part of the environment.
In the darkest days, you need to know that your provider is fully aligned to your success. As such, a big part of your consideration of an OCIO is if provider will become a co-fiduciary. Although in an OCIO solution you will be delegating the day-to-day management of your investment portfolio, you retain your fiduciary obligations. Will the OCIO provider stand with you as a full co-fiduciary partner and ensure that their actions are aligned with your goals and objectives?
Speed and power – How did rebalancing go for you during March and April? If you look at the market data, there were clearly a lot of firms following the herd—a natural tendency when those fight-or-flight instincts kick in, but one that can lead to fatal mistakes. Others likely struggled with liquidity issues and high trading costs.
An OCIO can reduce the impact of emotion by assuming rebalancing responsibilities and documenting the key parameters in a clients' investment policies. An experienced OCIO will do this in the most cost-effective way possible. Minimizing transaction costs requires world-class trading capability but also requires traders with decades of experience. Make sure your trading partner knows through experience what it costs to move money in normal markets as well as in stressed markets and that they are large enough to have the scale to be effective.
An extension of your team – Even in more typical times, it's vital to keep your team members focused on your key mission. And when a crisis like COVID-19 hits, such focus can be even more vital. One of the key advantages of adopting an OCIO solution is that it should take work off your plate and free up more time and resources to address issues core to your business.
Lastly, on the cost issue. In most cases we've found that expenses are more likely to decrease with an outsourcing model simply due to economies of scale. Instead of building internal capabilities that serve only your organization, an OCIO solution connects you to providers who do this for many organizations, so they can do it more cost effectively.
We recognize just how stressful 2020 has been so far. But we think an OCIO provider could relieve some of your stress going forward. If nothing else, it would likely be reassuring to other leaders in your organization to know that you took the proactive step of exploring the issue. If you decide it's not right for you, at least due diligence was done. And that, in itself, can be a significant stress reliever.
¹The concept of black swan events was popularized by the writer Nassim Nicholas Taleb in his book, The Black Swan: The Impact Of The Highly Improbable (Penguin, 2008). The essence of his work is the world is severely affected by events that are rare and difficult to predict. The implications for markets and investments are compelling and need to be taken seriously. Source: Investopedia.