Nowhere to Hide: Managing for the Difficult Times
R. Thayer Tutt
2021 ended in the 12th year of a bull market, with interest rates near zero and on the heels of nearly $7 trillion distributed in government pandemic support. Since then, the first half of 2022 has been challenging for investors across all asset classes. Concerns over rising inflation and interest rates, a war in Ukraine and worries of recession have been top on investors’ lists.
Through the end of July all major global equity indexes are down double digits with foreign stocks, U.S. stocks, and small and large company stocks all under-performing. Bonds have also performed poorly in a falling stock market as the Federal Reserve tries to raise interest rates in an effort to slow inflation.
As we’ve all seen, there has been nowhere to hide this year.
Fortunately for El Pomar Foundation, our portfolio is well diversified and largely managed in a defensive manner. I describe my investment style as managing money for difficult times, which means I like to outperform the average portfolio in down markets more than in good ones. As a result, through the end of July, El Pomar’s portfolio is down approximately 10% for the year, which is far better than a diversified 60/40 stock-to-bond portfolio. In the long term, our portfolio has done very well, returning 10.3% per year for the last 10 years, which places us in the top 14th percentile of 302 peer private foundations.
The volatile investment environment has created opportunities for El Pomar, primarily in the fixed income portion of the portfolio. The Fed’s interest rate hikes have made bond investments attractive for the first time in more than five years, with ten-year yields doubling since the beginning of the year. We have added to our bond ladder in the six to ten-year range quite significantly over the last 60 days.
As a private foundation, El Pomar’s investment assets are critical to our operation because they provide the basis upon which our grant making is implemented each year, based on a 5% calculation. For 2022, this is approximately $31.5M. Any decline in the portfolios in one year are felt the next. The Trustees have a significant amount of time to plan in advance for such scenarios. We work very hard not to reduce grant making year over year by adjusting expenses before impacting grant payouts.
As we carefully manage our own assets, we also monitor how our grantees are impacted. We’ve seen grant requests addressing not only increasing costs for the nonprofits but also potential impacts on their fundraising activities. An example of direct impacts of inflation and rising interest rates are food security organizations, which have seen bulk pound food purchases rise more than four times in the past year due to increasing food costs and supply chain disruptions. Capital campaigns have also come in much higher due to increased material costs during construction as well as staffing.
The challenges investors continue to face in the financial landscape are inflation at levels we haven’t seen in more than 40 years, pandemic-driven supply chain challenges and geopolitical threats, including war in Ukraine. This kind of volatility makes investors nervous but does create opportunities at the same time.
Similar to our investment strategy of creating long-term sustainability and managing for the inevitable down times, our efforts to support Colorado’s nonprofits are similar – continue to be a reliable, responsive resource for supporting their core missions, while also serving as a resilient and resourceful partner when challenges arise.