Not For Profit Newsletter

In this quarter’s newsletter, we discuss how State Street uses our asset stewardship program to express our clients’ vision, mission and investment goals. We then review liquidity enhancements that nonprofits should consider. Finally, we provide an overview of the benefits of tactical asset allocation and review State Street Global Advisors’ current positioning as a source for potential alpha.

Asset Stewardship

Asset stewardship is an important consideration for nonprofit leaders who are tasked with ensuring their organization’s resources are being used in a manner that supports the overall mission. Investments in both active and indexed strategies can have a positive impact on society and the environment through the proxy voting decisions of the investment manager. This active voice is imparted to ensure that clients’ values are being reflected through the votes.

Our stewardship program is anchored in the three distinct pillars of ESG and their intersections. We regularly identify thematic focus areas that guide our proxy voting and engagement efforts. Within these focus areas, we elevate outcome-oriented stewardship priorities each year based on factors including client demand, stakeholder interest, market trends, and financial materiality.

Figure 1: 2022 Stewardship Priorities

State Street’s annual asset stewardship report is now available.

Developing a Resilient Portfolio: Tools to Increase Portfolio Liquidity

Most endowments and foundations have private markets investments with limited liquidity. Ideally, these investments are tracked along a path forward plan, balancing sectors, vintages, style, leverage, and currencies to provide liquidity estimates. Total portfolio liquidity should be frequently assessed during normal market conditions as well as crisis scenarios. This means considering both the inherent liquidity in underlying markets as well as in the structures themselves, estimating notice periods, settlement periods, and gating.

Portfolio construction should be mindful of the scenarios that will lead to rebalancing as well as the ramifications for each. Recognizing that stress periods are typically accompanied by a decline in liquidity and/or increased transaction costs, estimates during such periods should be analyzed prior to making any changes.

There are a range of liquidity enhancements to consider. Examples of these enhancements, along with their potential benefits include:

  • Using different vehicles for certain investment strategies that could provide more immediate access to cash due to lack of formal notice and settlement periods;
  • Utilizing equity and bond futures as a source of exposure, liquidity and cost efficiency. These provide additional liquidity through instruments that can be efficiently purchased, sold and resized, without impacting asset allocation targets.

To receive custom recommendations designed to improve the liquidity profile of your endowment or foundation’s portfolio, contact us.

Tactical Asset Allocation Overview

Investors must be mindful of the components within the indexes they are using to benchmark portfolios in order to avoid unintended biases. Even actively managed portfolios will use the benchmark portfolio as the starting point and consequently fall short of portfolio return objectives due to the inherent biases of the index serving as benchmark.

A strategy that can be used to manage this underlying risk is tactical asset allocation. This is a momentum-based approach that moves across broad equities, cash, fixed income, and within certain portfolio sleeves. Tactical overlays can be an effective way to add incremental alpha within a modest risk budget, as well as provide a trading cost-efficient method to make portfolio modifications without impacting strategic asset allocation. Tilting the total portfolio in this way to take advantage of the asset classes that are performing well in a given year can provide excess returns that are lowly correlated with traditional sources of alpha such as security selection, as shown in the figure below.

For more information about the potential benefits of tactical asset allocation, click here.

Tactical Asset Allocation: Current Views

Over the course of the year, headwinds to global growth have intensified while sources of resilience have softened. Consequently, State Street Global Advisors’ 2022 growth forecast for the United States (US) has moved from a little above consensus of 4% in March to a little below consensus now at 2.3%. While global shocks have continued to compound on each other and weigh on our outlook, the downgrade reflects a much faster monetary tightening pace that shifts the economy from a gradual deceleration to one of a more abrupt downshift.

Whether or not we record two consecutive negative quarters of growth resulting in recession, the slowdown is real. After falling -1.6% in 1Q, the Federal Reserve Bank of Atlanta's gross domestic product (GDP) model now estimates 2Q GDP to be -1.2% as of 8 July.

At present, we appear to be facing a shallow technical recession, a material slowdown in growth, rather than a more typical business cycle recession. Contrast the current decline in GDP growth, driven primarily by inventories and trade (important, yet more peripheral components of GDP), with a typical recession that contains meaningful imbalances or excesses which create vulnerabilities and ultimately push down consumer spending and investment in response to higher borrowing costs. The latter scenario is not part of our baseline assumption yet.

Figure 3: Asset Class Views Summary

The level of fear amongst investors remained extreme as stubbornly high and broad-based inflation persisted and central banks reaffirmed their commitment to tame inflation no matter the consequences. Our Market Regime Indicator (MRI) sits on the border of a high risk and crisis regime where it has oscillated since January. While all three factors remain elevated, increased risk anxiety is more prevalent in implied volatility on currency and risky debt spreads as both factors have resided in crisis most of June.

State Street Global Advisors’ tactical asset allocation views are based upon a 1–3 month forward-looking horizon. If you are interested in reading more about our current tactical positioning, please follow the hyperlink here.

About State Street’s Commitment to Nonprofits

State Street has a 35+ year legacy of investing on behalf of our nonprofit clients, and is currently one of the largest managers of assets for endowments and foundations globally with over $170+ billion in assets under management. Our team offers extensive solutions for charitable organizations including investment capabilities across all asset classes, OCIO, and planned giving. For more information, contact us.

State Street Global Advisors

Investment Solution Group

*As of March 31, 2022

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