SONI Results – Charities – Investment Performance

2020 was a year investor will not soon forget. A pandemic, a recession, the end of a more than decade-long bull market (and the beginning of another bull market), all-time highs for US stock indices, lockdowns & working remotely, a tense U.S. presidential election cycle, unemployment spiking more than 10 percentage points in a matter of months—the list could go on for some time. And after all of it, an above average calendar year return for U.S. stocks.

To allow a meaningful performance comparison, participant responses have been grouped together based on each participant’s long-term asset allocation. The seven groups range from very conservative (less than 20% to equity) to aggressive (more than 80% to equity). Except for the most aggressive group, the greater the allocation to equity, the higher the median return. This is expected given the tremendous rebound for stocks in the latter half of 2021.

As you’ll see in the section related to COVID-19, organizations that rebalanced their portfolio in March, 2020 reported the higher returns. We view this as an important reminder that bringing discipline and structure to portfolio management will likely results in effective decisions.

Rebalancing involves making decisions when markets are volatile. When stocks are down, for example, it’s human nature to believe they are “falling,” which assumes there is further to go. Without a clear policy to drive action, it’s likely investors will miss the opportunity to buy lower. Rebalancing presents an opportunity to take advantage of market volatility by systematically taking profits from market segment that have risen in value and using the proceeds to buy in to market segments that have fallen.

In our opinion, any rebalancing policy is better than not having one at all. Our preference, however, is a policy that allows a certain degree of drift from a target. While asset allocations should be monitored regularly, rebalancing is only necessary when a portfolio has moved too far from its target. Otherwise, the risk profile of the portfolio remains intact and incurring transaction costs is unnecessary.

We don’t believe it’s possible for anyone to consistently and reliable time markets. Absent some extraordinary ability to see the future, RIA strongly encourages nonprofits of all sizes to maintain clear asset allocation targets, consider the rebalancing strategy that works best for them, formally outline the rebalancing guidelines in their investment policy, and stick with it. Let investing be simple.

On average, survey respondents held more in cash in their long-term portfolios than in years past. Investors may maintain cash positions as “dry powder” they can keep available to time the markets by deploying when they see fit. In our opinion, this can be an expensive and futile endeavor that will inevitably become a drag on your long-term performance results. To dive deeper, we broke out the performance results of portfolios with less than 5% of their long-term allocation reported in cash vs. those with more than 5% in cash. The median return was markedly higher for organizations that reported less in cash, deploying more of their assets.

We also realize that the uncertainty of last year may have caused organizations to hold more in cash to have available to cover shortfalls in revenue. RIA recommends that organizations segment their overall reserves by the objective of the investments. Last year was an example of a time when shifting dollars to a Short-Term portfolio, invested in short-term high quality fixed income, could have been more appropriate than leaving cash uninvested in a Long-Term portfolio.

This report summarizes an informal study compiled by analyzing the survey results of nonprofit finance executives. The views expressed herein are opinions reflecting the best professional judgment of Raffa Investment Advisers (RIA). This report is for informational purposes only. Participant responses have not been verified or audited. The information contained has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Data analysis was performed by RIA. Nonprofits from our internal marketing database and a national external nonprofit database were solicited by direct email to participate in the SONI survey. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from RIA. Every participant did not answer every question in the survey. Percentages are based on number of participants that responded to each question, not total number of participants, unless otherwise indicated.