NPO Financial Leaders Expect Reduced Investment Gains

Only 1 in 10 institutional investors expect this year’s market returns to be greater than the average 10-year return for the S&P 500 Index, according to a recent survey. The majority (58%) of those surveyed believe this year’s returns will be less than 13.6%.

The survey was conducted during the 23rd Annual Commonfund Forum held virtually on March 8-9. The nearly 300 investors attending the conference represented $1.1 trillion in total assets, including institutional investors from endowments, foundations, healthcare organizations, family offices and public pensions.

Investors are apprehensive about the U.S. economic recovery, with the top concerns for 2021 primarily the prolonged impact of COVID-19 (76%) and bubbles of stock market valuation (60%). Only 5% cited the expanding U.S. deficit as a concern for this year.

When asked to choose their top three potential economic concerns for 2021, respondents were the least concerned about low interest rates (21%), hawkish Federal Reserve Board monetary policy (5%), and corporate debt levels (5%).

Looking at their own organizations, two-thirds (67%) of all respondents are “cautiously optimistic” that over the next 10 years they will be able to achieve returns of CPI (consumer price index) + 5%, a rate sufficient to cover inflation, distributions, and investment costs. This represents an increase from the last Commonfund Forum survey in March 2019, which found that only 46% of investors were “cautiously optimistic” about achieving CPI + 5%. An additional 9% of 2021 respondents are “very bullish” about their prospects, roughly even with the 2019 findings.

Despite the value of illiquid investments as a source of potential returns and a diversification tool, only a slim majority (57%) of respondents believe their board/investment committee fully understands and appreciates the role of these private (illiquid) investments in the portfolio. About a third (34%) are mixed, 6% say no, and 2% are unsure.

Half of respondents agree or strongly agree that their institutions can invest in focused strategies on Environmental, Social and Corporate Governance (ESG) without sacrificing financial returns, while 30% remain neutral, 11% disagree or strongly disagree, and 10% are unsure.

“The global economy appears to be on a path to recovery, but investors remain justifiably cautious about the effects of the ongoing pandemic, narrowness of market returns and increasing deficit levels,” said Mark Anson, CEO and CIO of Commonfund. “We believe that one of the keys to successful investing through uncertain times is to seek out pockets of opportunity created by these imbalances, while remaining true to strategic asset allocation targets,” he said.

“Following the tumult of last year, many institutional investors – and nonprofits in particular – face the prospect of significant changes in their operations and in the fulfillment of their missions,” Anson said. “However, these same investors remain cautiously optimistic which reflects their commitment to long-term strategic policies and investment practices that are aligned with their overall objectives.”