Volatility has returned to the equity market with a vengeance. As measured by the S&P 500, the first quarter of 2018 saw more moves of greater than 1% to the positive (11) and negative (12) than all of 2017 (4 positive and 5 negative). In addition, the first quarter also posted the index’s best single day since 2015 and its worst single day since 2011. This volatility reversed many of the market’s recent gains and made 2017’s four straight quarters of positive performance seem like a distant memory and served as a reminder that markets remain unpredictable.
The real question is what might trustees (as well as other decision makers and stakeholders) take away from these events, and more importantly, could action be warranted? First, a reminder that the key principles of investing and diversification have not changed and that it is even more important during periods of market turbulence to remain vigilant and mindful of long-term objectives. Second, it may also be a good time to review the things than can be controlled, regardless of market conditions. Here are three areas to consider:
1. Review the Investment Policy Statement
It is important to ensure that the Investment Policy Statement (IPS) is kept current and up to date to make sure it conforms to the goals and objectives of the Fund. This includes the regular review and revision, where necessary, of asset allocation targets and weightings so they remain consistent with long-term objectives. In conjunction with a broad asset allocation review, guidelines and procedures around rebalancing should also be affirmed to ensure short-term reactions and emotion do not overwhelm the decision-making process and drive the Fund toward a potentially different level of risk tolerance. These are not trivial items and may deserve significant regular discussion during review meetings.
2. Understanding Your Investment Managers
Turbulent market conditions only underscore the need for understanding what the Fund’s underlying investment manager strategies are, what they are invested in, and periodically performing additional manager due diligence. While picking managers for long-term performance is important, there may be managers in the Fund with a strategy that will have higher portfolio or sector concentrations (for example, technology or emerging market debt) by design and that could have an impact on the Fund’s portfolio and how it reacts to a variety of market events. Keeping in touch with the Fund’s investment managers, either directly or indirectly through a consultant or adviser allows for a stronger dialogue, greater understanding, and likely a better partnership. In addition to reviewing Fund performance quarterly, consider having managers periodically present at an investment meeting to help trustees understand the manager’s specific investment strategy. These “due-diligence visits” will confirm the manager is remaining consistent with their mandated strategy and help ensure it complements the overall portfolio structure as well as the goals and objectives of the Fund.
3. Fees Matter
Performance may be king but fees are a persistent hurdle and a constant drag on performance. We believe Trustees should insist on understanding the fees being paid for each investment in the Fund. Higher fees are not necessarily bad, but they need to be viewed in the context of the potential return and risk the investment is designed to generate within the overall portfolio as well as any specific provisions within the Investment Policy Statement. There have been plenty of recent news stories regarding poor portfolio returns and their direct association with higher fees. Trustees should remain vigilant not only regarding Fund performance but also the fees associated with generating that performance. A greater understanding of fees may also lead to situations where Fund fees could be lowered due to asset growth, implementation of more cost-effective vehicles or even the introduction of performance-based fee structures.
Important Disclosure Information
The views and opinions expressed are solely those of AndCo Consulting. These statements are not guarantees, predictions or projections of future performance or of any outcome. This should not be regarded as investment advice or as a recommendation regarding any particular course of action.
This document has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. The material provided herein is valid as of the date of posting and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date.
AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.