Key 2021 trends for the endowment, foundation, and nonprofit marketplace.
- COVID-19 has led many nonprofits to reassess their endowment strategies, fundraising goals, and strategic plans as the country starts to recover from the pandemic
While the stock market finished strong in 2020, and continues its strength in mid-2021, nonprofit boards continue to review their endowment strategies and strategic plans.
Many nonprofits are seeking ways to grow their endowment funds through a holistic approach that includes fundraising.
The following article summarizes key trends we’re tracking as we continue to focus on the endowment, foundation, and nonprofit marketplace. The Wilmington Trust Endowments and Foundations team categorized them into investment and fundraising trends, since these are the two key ways to grow endowment funds. COVID-19 has led many nonprofits to assess their endowment strategies, fundraising goals, and strategic plans as the country starts to recover from the pandemic.
The COVID-19 pandemic and societal unrest have led to great uncertainty on many levels, particularly on the direction of the U.S. economy and capital markets
While the stock market finished strong in 2020, and continues its strength in mid-2021, nonprofit boards are reviewing their endowment strategies and strategic plans. Many boards, concerned about the 1Q 2020 stock market volatility, have reassessed their asset allocations and liquidity positions. Investment committees are also speaking regularly with their investment advisors about their risk levels and applying stress testing to their portfolios.
Boards also continue to monitor and refine their investment policy statements, which include strategic and tactical asset allocation targets and endowment spending rates, as market returns are expected to be lower over the next ten years. In these current times, endowments and foundations are also asking about the overall value-add their managers bring to the relationship as they seek to grow their endowments in other ways, such as fundraising insights.
Investment committees have had to quickly review and respond to the new world of market volatility related to COVID-19. Many investment committees have reviewed their asset allocations more closely, and most of our endowment and foundation clients have maintained their target allocations and focused on being diversified. Some investment committees have moved to rebalance back to their targets, while some more conservative committees have remained underweight to their equity targets. Some boards have added underwater endowment language to their investment policy statements.
Many nonprofits continue to review their overall fee structures, including their direct advisory fees and the imbedded manager/mutual fund costs. Some nonprofits have commented on their desire in having a higher level of valued-added services.
The Fed’s move to cut short-term interest rates during COVID
continues to challenge nonprofits to find competitive returns The Fed moved to lower short-term interest rates in March 2020 as COVID-19 slowed economic growth and led to uncertainty on the economy and its ability to rebound. The current target for short-term rates is 0–25 basis points, or bps (0%–.25%) (Source: www.federalreserve.gov). This has led many nonprofits to review their short-term investment options. Nonprofits have also watched longer interest rates move to a lower level, despite rising in recent periods.
The lower interest rate environment is making nonprofits reassess their short-term investment funds. In some cases, they are building up their reserve funds to help them withstand the current environment. At the same time, some nonprofits are exploring ways to earn a more competitive return since short-term rates have moved close to 0–25bps. Some are maintaining bank deposits, while others are looking at enhanced cash alternatives that may offer greater returns through slightly longer maturities and incremental credit risk. For longer-term fixed income, some nonprofits are watching their credit exposures through their corporate bond holdings. Some clients are considering the addition of new strategies such as high yield and hedge funds.
Greater interest in socially responsible investing and sustainable investing
There continues to be interest in SRI (socially responsible investing) and ESG (environmental, social, and governance) investing. SRI investing refers to situations where we screen portfolios to avoid certain types of stocks (e.g., fire arms, tobacco, alcohol, etc.). On the other hand, ESG investing is when our managers actively try to identify companies with three attributes (environmental, social, and governance) in their businesses and potential for strong long-term investment returns.
We have worked with a number of nonprofits over the years that have followed specific SRI criteria. For example, Catholic organizations follow the U.S. Conference of Catholic Bishops, which releases guidelines, and health care organizations often have their own restrictions. Other religious groups have their own specialized screens; for example, one church was focused on excluding weapons, while another church was reviewing fossil fuel stocks. We have seen greater interest from some clients as they explore ways to add ESG strategies. One private school was following its own ESG criteria, while another church was planning to implement some impact investing criteria. A number of investment managers have been incorporating SRI as an overlay into all of their strategies.
Please see important disclosures at the end of the article