Host: "In the short run, the market's a voting machine. In the long run, it's a weighing machine." That quote, from Benjamin Graham, the father of value investing and mentor to Warren Buffet, is applicable today for foundations and endowments. As boards and committees consider alternative investments in today's market, the quote is a reminder to focus on the long term.
Alan McKnight, Head of Institutional Investments with SunTrust Bank, outlines how an alternative investment strategy can outperform an organization's spending policy and, over time, accomplish the organization's long-term goals.
McKnight: We think it's more important than ever for foundations and endowments to consider the utilization of alternatives, and the primary driver there is we don't believe that expected returns are going to be as high going forward as they have been historically.
In the case of fixed income, historically they've generated an excess of 7 percent per year and we think that is going to be closer to 2 percent going forward. So, as a ballast in your portfolio, in a manner in which you can maximize return and minimize your volatility, we think that alternatives are the most effective asset to utilize.
Host: Education is critical to build an investment strategy. McKnight says it's the responsibility of boards and investment committees to seek out credible information.
McKnight: It's critical that, as a committee, you reach out to investment professionals and understand exactly what they might be able to do in your portfolio. And to do that work, you really need to spend the time. It requires multiple board meetings, investment committee meetings, to try to understand exactly how they might be utilized in your portfolio.
Host: Part of the education process for committees is maintaining focus on the long term. It may be easier or more comfortable to make short-term decisions in response to market fluctuations, but McKnight says a long-term outlook helps capitalize on the benefits of alternative investments.
McKnight: With alternative assets, while they haven't necessarily done as well in the short run in the most recent years with regard to performance, over the long run, they've done exactly what has been asked of them, which is delivering long-term, consistent expected returns without the volatility of many of the public markets.
Host: Once boards and investment committees have the education they need and a process in place, they can execute their strategy in four steps.
McKnight: The first step is finding the right partner. Finding an investment professional team, organization, that is capable of providing you the insights and the knowledge transfer that you need to improve your outcomes over the longer term.
Second, you need to create an investment policy statement or refine the current investment policy statement to capture your long-term view. The investment policy statement is a living, breathing document that needs to be reviewed at least annually. Ensure that it actually captures the assets and the roles and responsibilities appropriately.
Third, find the right vehicle. There are a litany of new vehicles available in the alternatives universe. You're no longer limited to partnership structures. There are mutual funds. There are RICs. You could still invest in partnership structures, but don't think that because you're not ready for a limited partnership, you're unable to invest in alternative assets.
And finally, you need to find out how to measure yourself. Measure what matters. Understand the outcome that is desired and then find the appropriate benchmark. So that can be a relative benchmark, things such as the S&P 500, the Barclays aggregate, or, which many foundations and endowments use, an absolute return benchmark.
Host: To learn more, call our foundations and endowments team at 866-223-1499. And for more information on alternative investments, read our Foundations & Endowments Specialty Practice white paper by visiting SunTrust.com, clicking the Commercial Corporate and Institutional tab, and then selecting Insights and Best Practices.
When thinking about their portfolios, now is a good time for foundations and endowments to consider the use of alternative investments. Alan McKnight, Head of Institutional Investments with SunTrust Bank, discusses how a foundation and endowment’s alternative investment strategy can outperform its spending policy, and, over time, accomplish the organization’s long term goals.
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