Everything in Moderation
Diversification guided Foundation through turbulent times in 20222022 presented challenging market conditions that resulted in double-digit losses for many businesses, corporations and organizations. Foundation Chief Investment Officer and Senior Vice President, Operations Jonathan Brelsford and Foundation Board member and Investment Committee Chair Amy Marsh explain how the Foundation’s balance sheet outperformed those of industry peers.
Q: What happened in 2022 from a market and economic perspective?
Jonathan Brelsford: 2022 was unique. We saw both bonds and equities lose money. This followed three out of four fantastic return years that preceded it. You really saw a pullback from a risk standpoint with concerns around rising inflation and the potential for a recession. The Fed took a very strong view and actively caused a rapid increase in interest rates that led to the loss in bonds. That then further exacerbated the returns to equity as the cost of capital increased.
Q: And how did the Foundation mitigate losses as those declines occurred?
Amy Marsh: I think that the key points would be twofold. One is that the diversification strategy protected, which is what we have expected it to do. There’s always been a lean toward a bit of a defensive posture in the portfolio, which at times can mean that you don’t have quite the momentum you’d like when it is just a straight equity boom environment. But the diversification is well worth it, and it paid off in 2022. I think the other piece is a key component to that diversification, and that is a lot of the migration that Jonathan and his team made into various private strategies both in real assets and in private equity and venture.
Brelsford: Yes, and private credit too. In a rising interest rate environment, what we’ve seen is that the returns on those portfolios, because they’re a variable rate of return, actually were adjusting with the change in interest rates, although definitely more exposed to potential losses. But we haven’t experienced that.
Q: There are concerns about the global economy, inflation after COVID and how the U.S. economy is performing in comparison to other nations. What do you foresee for 2024?
Marsh: Well, I think that it is probably more of the same for the coming years. I think the multimillion-dollar question is where are we with inflation? If the Fed has been able to stay ahead of it sufficiently, and the further action they need to take will not dampen growth too much, then it would suggest that there is still opportunity for decent economic growth.
But if the inflation is as sticky as it has been, and worsens, and the Fed is unable to stay ahead of it, then the actions that they would have to take would lead us to the point that we would have some kind of recession situation. And how far is it down the road, and how hard is the landing? Can the Fed ease us into it where we can come down and then come back out in relatively simple terms? Or does it get out of control and become pretty draconian? I think that there are too many global factors that also come into play in trying to ultimately answer those geopolitical questions.
Brelsford: I expect that inflation will moderate for the near term but that we are in a position of rising interest rates going into the future. And then what we’ve seen in the past year was a short, sharp shock. But I think there’s going to be longer pressure on rates to increase as the support that the economy received through the Fed buying bonds is unwound as they sell bonds. Interest rates normalize because we’ve been in a situation, really since 2008, where the Fed has been depressing interest rates pretty significantly. I think the policy responses during the pandemic were informed by the policy responses that occurred in 2008. I think that was really helpful for us.
Marsh: Yes, and in more simple layman’s terms, rising interest rates mean that for businesses, their cost for capital is that much higher. For consumers, for you and for me, that means borrowing costs are that much higher. So, it has a real dampening impact on the economy at some point.
Brelsford: Yep, that’s very true. Which themselves will impact our potential returns.
Marsh: Yes, yes.