Jason Kennedy | Chief Financial and Administrative Officer
Much has changed in our lives in the last couple of weeks. Just over a month ago, most of us had barely heard of the coronavirus or perhaps thought of it as an illness affecting people in another country far from us. Today, we’re more likely to be self-isolating or social distancing – words and actions we have only recently learned. COVID-19 has become a major disruptor of our lives.
But yes, life does, and must, go on.
Between mid-February and mid-March, many stock market indexes have declined by almost 30 percent. Affiliated funds in our network and people with an interest in NCF’s endowment and may be asking themselves a couple of questions: What effect does the stock market drop have on our funds? and What effect does the stock market drop have on our ability to make grants?
When thinking about endowments, one of the most important facts to keep in mind is this: endowments are forever.
When it comes to endowment-building, we knowingly accept the ups and downs in the market to capture the long-term benefits. While uncertainty, volatility and short-term losses are unpleasant, they are necessary conditions for generating outsized returns over the long-term. There is practically no other investment that has a time horizon of forever. That makes endowments unique from anything else you may be dealing with right now. Because we have experienced a decline like this before, we have experience managing our investments in this environment. Our primary investment manager, Bridges Trust, is closely monitoring the market and making small adjustments as appropriate.
Because global markets have been essentially rising for the past 11 years, it can be easy to forget what declines feel like. But NCF’s staff, board and Investment Committee have prepared for times like this. NCF’s Investment Policy was designed for both good times and bad. It has helped us:
- establish a strategic asset allocation that is expected to achieve long-term returns;
- diversify the portfolio by asset class and strategy as this improves the likelihood of increasing returns under different economic/market conditions;
- maintain that strategic asset allocation within established ranges through rigorous monitoring and regular rebalancing;
- and avoid the temptation to market time or change strategy based on current conditions or near-term outlook.
You will see a drop in value in your NCF endowment. When you receive your quarterly statement after March 31, values won’t be as high as they were last quarter. While we understand that any losses can be painful, this should be expected. Because of our diversification, the value of your endowment shouldn’t drop as much as the overall stock market. And because of NCF’s disciplined approach, in times such as these, we are able to rebalance and sell assets that are relatively expensive and purchase assets that are relatively cheap.
Importantly, as a part of NCF’s Investment Policy, endowment payout amounts are calculated using a 12-quarter average. This averaging has a “smoothing effect” to the amount made available for grants and disbursements from our endowments. Despite the drop in value to your endowment, we are confident the amount made available for grants and disbursements will not drop when the calculations are done for the fiscal year that begins on July 1, 2020. In fact, it will actually increase by a small percentage.
In future years, we will probably see modest drops. But payout drops will not be as large as the drop in the value of the endowment itself. Our endowments will be here and our payouts will remain relatively steady during times when it may be needed the most. If you have concerns or questions about future payouts, please reach out and we will be happy to work with you and answer any questions you might have.
NCF’s staff, board, and investment managers (along with NCF’s Investment Policy) are determined to see our endowments continue serving Nebraska for a really long time…. Make that forever.