According to US founding father Benjamin Franklin, there were two universal truths – death and taxes. For me, there is a third, and that is that markets are always interesting. We are all living that right now.
We have seen heightened volatility amid a great deal of geopolitical uncertainty recently, but in truth, that is a perennial feature of history. As an investor, what can you do to safeguard your returns and your liquidity needs while maintaining long-term growth and delivering on your objectives?
The first thing is to plan and implement a clear investment strategy, one that lends itself to achieving your objectives. And for many not-for-profit investors, those targets are real returns in excess of inflation, building resilience into portfolios, and ensuring you have adequate liquidity both to fund your expenditure and to rebalance during times of market stress or turmoil.
The importance of diversifying your returns
Many not-for-profit investors have equities as a cornerstone of their portfolio. Particularly since the global financial crisis, equities have performed very strongly, which has been great for investors with large allocations.
We agree that it makes sense to have equity allocations as a key part of your portfolio (so long as they are constructed thoughtfully, with the right blend of geographical, style, and size characteristics, all for an appropriate fee), but it is vital to have other sources of returns to smooth the journey.
When you are significantly invested in equities, the profile of your investment journey will be jagged. As long-term not-for-profit investors, you can ride out that volatility, but it may cause you problems in the short term. So, it is crucial to build components into your strategy that diversify and reduce that volatility.
This includes considering other asset classes which are not simply traditional fixed income – areas we like at the moment include diversified hedge funds and assets that are uncorrelated to financial markets, such as insurance-linked securities. For investors who can take the long view, we like private markets as a real diversifier and booster to returns. Alongside that, in the current yield environment, having some fixed income or inflationlinked assets can continue to generate returns in a lower-risk way.
Staying the course amid market storms
Being a forced seller during market turbulence is never an attractive proposition as an investor. The key objective is being able to source your liquidity, and source the cash flow you need, from a variety of places so that you can weather any storms – while maintaining your overall strategy.
This year we have had concerns about global growth and inflation, driven by tariff and trade wars. Liberation Day in April was a significant driver of market volatility, and we also saw a lot of market fear in January that DeepSeek, China’s disruptive artificial intelligence (AI) startup, was potentially very cost-competitive relative to the AI-driven tech stocks that have propelled markets up to now.
A lot of market volatility, particularly on the downside, can be short-lived. If you are forced to sell assets while their values are falling, you lose the ability to benefit from the subsequent rebound. For example, the Liberation Day tariff announcements in April really set markets onto a downward slide. But that slide was halted reasonably quickly, and markets soon recovered very strongly.
In fact, holding your nerve amid market turmoil could enable windows of opportunity for investors, if they have got the right governance structure that allows for rebalancing and buying opportunities during market dips if the fundamentals remain strong. It is not for everyone, and there is a certain degree of sophistication and agility needed.
It is interesting though that the most recent tariff announcements in early August did not lead to nearly as severe a market reaction as we saw in April, which suggests that investors are now pricing in some of that unpredictability. While inflation continues to be relatively stubborn – which can cause concern for investors – what we are not seeing is a marked acceleration in the rate of inflation, though that does have repercussions for the interest rate outlook – which is another significant factor in market sentiment.
Structural safeguards to weather volatility
Forewarned is forearmed. As a charitable endowment with fixed cash obligations, you know how important it is to have a clear view of your cash flow forecasting, to plan a solid strategy that takes market detours and future needs into account.
For example, you may need 20% more cash than you expected. Perhaps you have another grant that you need to fund. In my view, you should stress-test both your cash flow requirements and the market environment.
I have just done exactly this with an endowment fund which wanted to better understand its overall financial sustainability, and found it really informative as part of its board and strategy discussions. This helps you see what your portfolio might look like in a market shock scenario, and how that might affect your ability to meet those cash flow needs.
Building portfolio resilience into an investment framework
Portfolio resilience is a tried and tested strategy that allows you to weather storms of all kinds, whether expected or unexpected. It is about having different building blocks in your portfolio that do different things in different market environments.
Reducing correlation or reliance on a single return driver is going to make you more resilient, and that should be the aim. In view of this, communicating the importance of portfolio resilience to stakeholders, so they are on board with it, is crucial.
Some investors may find it attractive to invest in a higher-risk portfolio than needed, to build up a greater level of return – but if you do not need to take risk, then you probably ought not to. A diversified portfolio allows you to build resilience in a way that maximises the return that you are taking, for the level of risk that you are willing to accept.
The challenges of counteracting ‘short-termism’
Standing in the face of market turbulence can bring its own psychological challenges for investors and some may get “cold feet” at staying the course. It is human nature, particularly where the uncertainty is unprecedented or perhaps of a different magnitude than may have been expected.
However, it is wise for investors to focus on their long-term strategy rather than short-term market dynamics. Your strategy should be your North Star, a clear focus you are guided by at all times, regardless of what is happening in the very near-term.
Short-termism is typically detrimental to decision-making. You need to make sure that you have a clear plan and execute it, rather than being led by sudden or short-term variations or vagaries.
Forward outlook: reasons to be cheerful
Looking at the investor outlook in the coming months, I am quite optimistic. The backdrop is fairly solid and markets are not wildly expensive in view of that profitability.
There are plenty of attractive opportunities for investors in various asset classes, such as insurance-linked securities, diversified hedge funds, private markets – infrastructure for instance – and even in certain segments of the fixed income market where you are getting paid to hold.
The key thing is to make sure that you are testing your investment strategies to ensure you meet your long-term objectives. By staying disciplined, diversifying thoughtfully and keeping a clear focus on your goals, you can build portfolio resilience and seize opportunities – even in turbulent times.
Jennifer O’Neill is head of not-for-profit investment at Aon
