How Not-for-Profits Can Navigate a Fast-Changing Environment
Nonprofit organizations are facing intense challenges. OCIOs can help.
The US economic landscape is in a period of flux, heightening uncertainty for markets. As the new administration’s policy changes take effect, we expect economic growth to slow to about 2.0% in 2025, down from 2.8% in 2024 and 2.9% in 2023. We are not predicting recession, and some policy decisions, such as moves toward deregulation, are likely to benefit markets. That said, we have already seen a significant US equity market correction and a drop in bond yields this year, and both can be problematic for not-for-profit investors.
Moreover, certain policy changes and budget cuts present particular challenges to nonprofit organizations. Some will lose federal funding, and a range of endowments may face new taxes.
Strong partnerships with investment providers can help not-for-profits navigate this difficult landscape. In particular, close collaborations with outsourced chief investment officers (OCIOs) can help organizations adjust their investment strategies in ways that support their spending priorities and their missions.
Tactical Changes for Today’s Shifting Outlook
Generally speaking, investors came into 2025 expecting new federal policies to boost economic and market growth. They reassessed that view during the first quarter, as consumer confidence sank, the administration’s aggressive use of tariffs raised the possibility of a damaging trade war, and the outlook for employment and labor income growth weakened. The S&P fell 9.0% from its February 19 peak through the end of March, more than offsetting its post-election bounce. By contrast, the MSCI EAFE Index of developed-market international stocks lost just 1.4% during the same period and gained more than 6.0% for the first quarter.
The changes in the economic landscape have important implications for organizations that use tactical asset allocation to help support their spending targets. Our OCIO team has adjusted its tactical positioning for 2025 based on the shifts in the outlook.
We were underweight equities for most of 2022, helping shield investors from the worst of the bear market that year. We transitioned in early 2023 to an overweight equity position with an emphasis on US equities, helping investors benefit from the powerful market rally that lasted through 2024. In February of this year, we reduced our equity position to roughly neutral, with an overweight stake in international equities balancing an underweight position in US equities. As the year progresses, we plan to remain nimble with our tactical positioning, drawing on our rigorous analytical process.
Federal Policy Changes Force a Re-Think
Federal budget cuts are affecting not-for-profits of all kinds. For example, many educational and arts organizations are not receiving grants they had counted on in previous years. College and university endowments face additional challenges: The potential dismantling of the Department of Education stands to reduce support for financial aid, while a looming potential tax expansion could force smaller endowments to pay the same excise tax that the largest endowments have long faced.
The impacts of these changes put new pressure on organizations’ spending decisions. To meet their annual spending targets, not-for-profits may have to find ways to offset declines in income and, for some, increases in taxes and other expenses. Their strategy could involve a combination of spending reductions, capital campaigns, and adjustments in the ways they invest and use their financial assets.
OCIOs can help. These outside experts provide objective thinking and fresh solutions, and they can free up staff to focus on the organization’s mission. They also may be able to help not-for-profits support their spending needs by pairing the pursuit of greater investment return with thoughtful risk management.
OCIOs may be able to use tactical asset allocation to boost returns and manage risks, as noted above. They also can help organizations that need to boost their strategic growth allocations to support annual spending needs. OCIOs can help implement larger equity allocations in ways that help manage the additional risks that come with them — for example, allocating to low-volatility equity strategies and/or enhancing diversification throughout the portfolio. Greater use of return-seeking fixed income strategies such as high-yield bonds and emerging market debt also may help when incorporated in the context of a thoughtfully diversified overall portfolio.
For larger organizations — typically those with $50 million or more in assets — allocations to alternative investments may help them pursue both stronger returns and greater diversification. Private equity and private credit offer the potential for higher total returns than corresponding public investments, with low correlations to other assets. Incorporating and managing alternatives allocations demand considerable expertise, resources, and planning, particularly with regard to liquidity; a strong OCIO relationship can help not-for-profit organizations capitalize on alternatives’ benefits while managing their risks.
Responding to New Conditions
As the year progresses, the effects of policy changes will come into clearer focus, and the administration may make adjustments based on economic performance and consumer and investor sentiment.
We will be watching market conditions closely, as always, and partnering closely with not-for-profits to help them continue fulfilling their missions through these challenging times.
Contact your relationship manager to learn more about State Street Global Advisors' investment solutions for not-for-profit plans.