Investments are part of the operating budgets of most higher education institutions, and when markets are volatile, administrators can get a bit uneasy and nervous — and make some regrettable decisions.
If you, too, are feeling anxious, consider this: volatility is not only normal, it can be beneficial when you take a long-term view. If you have a good assessment of your college or university’s risk tolerance, market volatility may actually help enhance your returns when you stay the course.
Faith in the markets doesn’t always come easy, however, so here are six actionable tips to help you manage your institution’s investments with some degree of confidence and predictability.
Keep your emotions in check
Don’t panic. Emotionally reacting to market volatility can predispose you to costly mistakes. Acknowledge and accept the fact that markets cannot be timed, and remind yourself that they work over the long run.
Set a risk budget and stick to it
A risk budget attempts to quantify total portfolio risk by estimating what contributes to risk, namely sensitivities to equity market risks, widening credit spreads (or default risk), changes in interest rates, and currency cross rates. Knowing these exposures allows you to simulate (stress test) the potential downside to the portfolio for most any environment or scenario. With a properly set risk budget, you’re less inclined to make ill-timed portfolio adjustments at times of heightened volatility because the fluctuations are already built into the assumptions.
Opportunistically rebalancing the portfolio can help you take advantage of market volatility by systematically buying low and selling high, all while maintaining your budgeted risk exposures.
Plan your spend rate
Forward returns are likely to be more modest than past returns, so it is prudent to reduce spending policies. Many institutions are adopting spending policies of 4 percent and lower. Others use a 12-quarter trailing average return to dictate their spend rates. A few others have adopted variable spend rate calculations that match changes in the institution’s risk tolerance (though we don’t consider this is a best practice). Nevertheless, it is a good idea to rethink how your portfolios are invested, including your pension portfolio (litigation is growing rapidly for higher education institutions).
Hold your investment firm accountable
Be regimented in your investment approach and in measuring the success of your investment group. Measure results against your risk-based benchmarks, not the investment firm’s benchmark. If your institution consistently falls short, it’s time to consider a change.
Formalize your investment policy statement
The vast majority of institutions should have a well-conceived and comprehensive investment policy statement (IPS) to ensure the appropriateness of any investment strategy and infuse discipline into the entire process. The IPS can provide process context and consistency for future stakeholders.
How we can help
CLA’s institutional investment professionals can help your higher education organization navigate and employ best practices and procedures to manage your fiduciary liability and increase the likelihood of meeting long-term target returns.