With 2024 just around the corner, heightened concerns around inflation, recessionary fears, and evolving geopolitical risks are front of mind for endowment and foundation investors.
We convened the views of 115 investors, across seven regions, to learn how endowment and foundation (E&F) organisations are gauging risk, allocating portfolios and building resilience to navigate the complexities of the market environment, both today and over the long term. We aim to help enable this unique category of investors adequately navigate market challenges with assurance.
Portfolio risk and operational resilience
Concerns around inflation, fears of recession, ongoing market volatility and evolving geopolitical risks are even more elevated among investors contributing to this year’s research – with 52% of organisations anticipating a rise in spending targets over the next three years, and 54% of organisations feeling threatened by their ability to deliver a level of investment return sufficient to meet spending needs.
To prepare for these ongoing risks, investors would be wise to adopt a scenario-driven approach to assess portfolio risks across a range of time horizons, and the way in which risks of inflation and rising rates impact asset values. Further, reviewing governance arrangements through a dual lens will enable investors to assess potential short-term pressures in relation to long-term opportunities for outperformance.
Driving long-term performance through short-term challenges
E&F investors continue to advance into private market strategies and have pushed through near-term uncertainty to increase allocations to this sector. 68% of organisations increased allocations to private markets over the last three years, more than any other asset class. It is also clear that investors look to diversification as a – if not the – core component to drive growth across portfolios over the long-term.
Looking forward, investors may consider reviewing strategic asset allocations with an eye toward how small adjustments or adding new asset classes at modest weights could reduce risk or provide protection against specific risks. With diversification as a key focus, considering how allocations to real assets – across infrastructure and real estate could support an organisation’s sustainability strategy and objectives, is another thing to keep in mind. As it relates to private markets specifically, investors may look to assess whether there is opportunity to diversify existing private markets allocations, whether via other asset classes or alternative vehicles.
Aligning corporate citizenship with impact, ESG and climate
Approaches to sustainable investment and the net zero transition continue to vary by market and by size of portfolio. 26% cite impact investment as the mechanism through which they align their portfolio with their organisation’s mission.
At a global level, however, impact investing is not widespread across E&F portfolios; nearly two thirds (62% of organisations) do not have an allocation to impact strategies or projects. Investors further cite concerns around return implications, a lack of robust data, and the risk profile of investible assets as key barriers to invest in impact strategies.
If and when addressing these considerations in the future, the first step for investors is determining whether an impact strategy makes sense for the organisation and, if so, considering how impact investing might support the mission of an organisation on a local, national or international level.
A second point of action is assessing how an organisation’s desired level of values alignment and target setting for climate transition can inform the development – or revision – of a responsible investment policy.
And lastly, it remains increasingly important for investors to explore the steps required to formalise and implement a diversity, equity and inclusion policy across an organisation, especially to facilitate diversity of thought in the portfolio management process.
Read the full survey findings report here.
Important notices
This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client’s circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially. Not all services mentioned are available in all jurisdictions. Please contact your Mercer representative for more information
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