What to Consider Before a Downturn Occurs
Pundits are pointing to near-term challenges to the global economy’s productive run since the 2008- 2009 financial crisis. RFG recently asked experts for their suggestions about what endowments and foundations should consider before the next downturn. An abstract of the suggestions, previously provided to RFG endowment and foundation consortium clients in RFG’s weekly newsletter, follows.
Consider the holistic needs of your organization – This includes access to other sources of revenue beyond the investment fund you manage and uncertainties concerning the organization’s costs and expenses.
Consider investment risks that did not exist in 2008 – Investment portfolios have changed over the past 10 years and those changes might impact performance and liquidity expectations. Significant changes might include:
Increased allocations to alternatives.
Increased reliance on passive strategies and ETFs (especially those tracking illiquid instruments).
Relaxation in traditional allocations from “cash” into instruments with higher yields.
Commodity investing through managed accounts, where new rules may require the combination of separate accounts of the same customer for margin calls.
Review impact of changes to financial structure to assess your vulnerability to counterparty failures and systemic risk – Consider new counterparty risks at “shadow” banking firms, financial firms and clearing houses.
Focus on liquidity – Consider a downturn’s impact on liquidity across the organization, its investment portfolio, and at investee fund managers and funds, including portfolio companies. Run projections to determine liquidity requirements for each of these organizations and investments and perform additional due diligence where necessary.
Review financial models and assumptions – Stress test material macro and investment-specific risk factors to understand their impact on your organization and its portfolio. A tempering of expectations regarding future returns and budgeting accordingly would be prudent.
For more information on RFG’s Weekly Roundup™ please click here.
RFG thanks the following expert contributors: Finbarr O’Connor and Federico Jost of BRG Alternative Advisory; Robert Ledig of the Antonin Scalia Law School, George Mason University; Susan Grafton of Dechert LLP; and Laurence B. Siegel, Director of Research at the CFA Institute Research Foundation.
RFG helps clients proactively understand regulatory and legal issues (and solutions) that arise from
engaging in investment activities. RFG represents clients that have approximately $150 billion in
combined assets under management, including a consortium of the nation’s leading endowment and
foundation investment offices. RFG advises clients through its weekly newsletter, white papers,
webinar presentations, semi-annual programs, and its online knowledge management portal, RFG
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