Fund Update
Diverse investments ease impact of "R" Word
Consumers might wonder how anyone could doubt it, but in the investment world ... well, you can never be too sure.
Nevertheless, the UNT Foundation’s investment consultant used the ‘R’ word frequently in its spring report: Recession.
U.S. consumers are finding out the hard way that their debt spending is catching up with them, and as they look for ways to save they exacerbate stagnating economic conditions.
With few short-term solutions and a myriad of economic hurdles on the road to recovery, investments are suffering. The UNT Foundation’s investment portfolio has not escaped the economic downturn, though a wisely diverse allocation has enabled it to fare better than its benchmarks.
The Foundation’s investment pool slipped 3.6 percent in the second quarter of fiscal 2007-08, while the benchmark S&P 500/Lehman Aggregate tumbled 6.6 percent. For the second consecutive quarter, both the Foundation pool and its benchmark finished negatively, but the Foundation’s slide has been considerably less slippery.
Chris Adkerson of Hammond Associates, the Foundation’s investment consultant, said that diversification lessens the impact of a globally slowing economy.
“The key to diversification is that you’ll have lower highs and more shallow lows,” he said. “Over time you get very nice, target returns that are smooth.”
To demonstrate, Adkerson pointed to the Foundation pool’s allocation to well-managed hedge funds and real assets like oil, gas and real estate. In the last quarter, those investments countered the impact of an apparent recession and the generally distressed look of credit markets and other investment areas.
| Foundation pool (implemented 1/1/06) |
Benchmark 75/25 S&P 500/ Lehman Aggregate |
|
|---|---|---|
| Over five years | 14.4% | 9.7% |
| Over three years | 9.8% | 5.9% |
| Over the last year | 2.9% | -1.9% |
| Quarter ending 03/31/07 | -3.6% | -6.6% |
| Quarter ending 12/31/07 | -0.2% | -1.8% |
Don Potts, chair of the Foundation board’s investment committee, recognizes the importance of a diverse portfolio in this economic climate.
“Hammond was chosen to assist in guiding the Foundation’s investments after a highly competitive search and selection process,” he said. “To date, we have been very pleased with our decision to hire Hammond.”
Hammond’s report outlines several key factors contributing to the economic downturn. Among them:
- The economy lost more than 200,000 jobs in the first three months of this year. The poor state of household finances could prolong this recession. Consumer spending might remain weak as households move to increase their savings rate.
- In order to ease credit conditions, the Fed cut the Fed Funds target rate by 200 basis points during the quarter, to 2.25 percent. It also essentially opened its discount window to primary dealers, lending more than $37 billion to them during the quarter. While Fed actions have helped ease tension in the credit markets, they have also placed further pressure on the dollar. The trade-weighted dollar declined 4 percent during the quarter. The weak dollar coupled with rising commodity prices has pushed inflation rates to around 4 percent.
- Developed international equities were crushed during the quarter. Investors became less optimistic about the world’s ability to maintain strong growth rates as the U.S. economic situation worsens. Concerns about the impact of a strong yen and euro on Japanese and European exporters likely hurt local currency performance as well.
- In emerging markets, China and India were hammered, declining 24 and 27 percent, respectively. Emerging market valuations remain at elevated levels and could fall the hardest if global growth slows more than expected.
- Hedge funds that have increased directional exposure during the past few years suffered during the first quarter. The ongoing credit crunch should create opportunities for established managers with strong balance sheets.
- A slowing economy and a tighter credit environment could create short-term problems for commercial real estate.
Doug Chadwick, executive director of the Foundation, said the bottom line—distributions to support UNT’s objectives—depends somewhat on the maturity of each account.
“Over longer periods of time, the endowments invested in the Foundation portfolio will accumulate adequate individual reserves to weather normal market fluctuations,” he said. “In the short term, newer endowments will be more susceptible to those fluctuations. Depending on the duration of the negative market cycle, some newer endowments may experience a decrease in funds available for distribution.”
Hammond notes in its report that since World War II, recessions in the United States have lasted roughly 10 and a half months, and that recessions in 1991 and 2000 were shorter.
Adkerson said that if the unemployment rate levels off , consumers could help the recovery, despite the fact that the economy typically slows during a presidential election year.
