Endowments need to think short term to counteract GFC

Endowments and foundations need to adapt their investment policies to incorporate more short-term alterations as a way to meet liquidity challenges presented by the global financial crisis, according to new research by Russell Investments.

Heather Myers, director of endowment and foundation strategy at Russell Investments, said traditional sources of liquidity have dried up in the past year, and endowments should review how they will meet their spending needs.

The liquidity pressure has come in many forms, including investment income and decreasing charitable contributions, and will force fiduciaries of endowments to approach their investments with a more short-term outlook, something they do not traditionally do.

“Non-profit entities need to carefully assess their spending policies and understand the true need for liquidity as well as the true liquidity of their portfolio,” Myers said.

“On the investment front, now may be a time for tactical manoeuvring where interim, short to medium term restrictions are not in play. Once we are in a more stable environment, endowments and foundations can consider reverting back to established strategic allocations.”

The report says endowments and foundations are challenged by the fact that the largest component of additions to their investment pools in appreciation and investment income have weakened.

In addition, charitable contributions have experienced a steep downturn, and even short-term bond funds where operating cash is often invested have been hit hard and in some cases frozen.

“The industry is facing unprecedented times, and with traditional sources of liquidity less available, fiduciaries of non-profit portfolios have to review how they’ll meet their spending needs,” Myers said.