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The old and the new of investing in the time of crisis

This is the second article in the series Reflections on the past three decades of charity investing by Edward Jewson, founder and CEO of PMCL Consulting.

 

We are in turbulent and difficult times with financial and investment challenges mixing with geopolitical shifts and a humanitarian crisis with the ongoing war in Ukraine. These times can seem unprecedented and present challenges to many trustees and investment committees, amplified by the fact that most have operated in their particular groups mainly through a period of relatively strong markets over the past decade. However, from an investment perspective, the current crisis is not the first or the last and we have been here before.

In my experience, many of the challenges can be attributed to some of the following issues - conflict of the time horizon of a charity (often very long-term) and the individual trustees (often no more than five years), where trustees take a tactical stance rather than keeping to their strategy and making decisions on fund managers only based on the past quarter or year performance figures. This knee-jerk reaction frequently results in firing the managers for the wrong reason.

It is often difficult for trustees of charities who give their time for free and only meet infrequently to make decisions when markets are very volatile and potentially illiquid and quite understandably investment committees can become anxious. However, if they sit on the committee of a permanent endowment then volatility and illiquidity are not necessarily a major problem in the short term.


Tactical vs. strategic decisions

Often the confusion comes when the long-term strategic decisions on asset allocation are merged into tactical decisions. The strategic asset allocation is what is determined by trustees and they should “own” the long-term strategy. The tactical calls are made by the fund managers inside the strategic asset allocation.

Some years ago there was a substantial fall in the equity market. The trustees of a charity with an endowment with a time horizon of 100 years + met for their quarterly meeting and without reference to the long-term strategy (or in fact their managers), they chose to sell down their equity portfolio where their investment strategy was very long-term. They were making a short-term tactical call and unfortunately no sooner had they sold down the market rallied and by the time they had reinvested, the overall value of their portfolio was substantially less in value than it would have been if they had stayed put. Sadly they chose not to seek external advice until they had sold and then reinvested.
Time horizon

It is difficult for those charities who are sitting on spare cash which could be invested for the long term, to decide when to invest. Many would admit that market timing is as much about luck as good judgment. There is no hard and fast rule when investing in the market from cash. Some chose to invest the whole amount immediately, some on a drip feed programme.

I remember that a manager recently appointed to manage a portfolio invested at the top of the market as was required due to the transition and it took many months to demonstrate that they had done and continued to do a good job. It was not the fault of the manager but unfortunate market timing. However, at each quarterly meeting, the manager stated that if only they had taken on the portfolio six months earlier it would have been a lot better!
Reviewing managers that lose money or underperform

In the past, so often managers were changed due to 3 years of poor performance and replaced by a manager who had performed well for the past 3 years and, low and behold, trustees saw the sacked manager out-perform the new manager over the next 3 years.

One of the reasons for this is that one manager was a “growth” manager and the other was a “value” manager and depending on the market cycle one style will outperform the other. Therefore, if trustees appoint a manager for a particular style they should watch closely that as markets change that the manager still continues to pursue the style for which they were appointed.

 

In conclusion, in times of extreme volatility trustees should not be panicked into making hasty decisions on asset allocation and managers when dealing with long-term strategy. Strong governance and good discipline around a strong investment policy is even more important in these difficult and challenging times in the investment world.


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