NZ endowment and foundation (E&F) funds have all signaled a change in asset allocation ahead as inflation and market volatility dampen return expectations, according to the latest Mercer survey of the sector.
The Mercer NZ findings, following on from a global poll of not-for-profit investors, show 100 per cent of local E&Fs plan to tinker with investment portfolios to combat looming challenges.
“Market and economic volatility is pushing investors to adjust policies and strategy in response,” the Mercer NZ study says.
“New Zealand E&Fs have indicated that they are likely to adjust their approach significantly in the face of reduced returns and poor performance.”
Compared to offshore counterparts, NZ E&Fs – a broad group including charities, community trusts and universities – share a gloomier outlook on inflation risks and the prospect of meeting financial goals.
More than 70 per cent of NZ respondents are worried about the “negative effects” of inflation versus the global average of just 50 per cent.
Similarly, a third of NZ-based E&Fs expect to undershoot financial goals over the next three years – almost double the 19 per cent recorded across the international Mercer survey.
In spite of the downbeat projections, almost 60 per cent of NZ organisations tapped for the study “believe their portfolio is well positioned for extreme market volatility”, about in line with the global result.
Aside from tilting more to offshore equities over the next two years, Australian and NZ respondents plan to allocate more to high-yield credit and emerging market debt compared to the overall sector average.
Australasian not-for-profit investors also show less appetite for cash and alternatives than similar global organisations.
For example, just 21 per cent of Australian or NZ E&Fs said they would increase allocations to private debt over the next two years against the international average of 48 per cent: respondents on both sides of the Tasman are also far less inclined to invest in private real assets and hedge funds.
And the proportion of Australian and NZ groups intending to invest more in private equity fell to just 38 per cent, down from the almost 60 per cent that had increased exposure to the asset class over the previous three years. By contrast, 61 per cent of global not-for-profits intend to up the private equity dose during the next two years; about the same proportion had lifted private equity allocations in the prior three-year period.
Hooman Kaveh, Mercer global chief investment officer, says in the report that with rising inflation and interest rates “we expect a 60/40 bond portfolio to earn significantly less over the next decade than it has over the past 10 years”.
“So now could be a good time for investors in such portfolios to rethink their asset allocations and add some much-needed resilience,” Kaveh said. “We believe the answer lies in exploring other types of asset classes and strategies.”
He said private assets with inflation-hedging properties (including property and infrastructure) and ‘liquid alternatives’ such as “hedge funds, will also have a role to play”.
The Mercer survey also found more than 70 per cent of global respondents intended to increase investments in environmental, social and governance (ESG) strategies over the next year, even as almost 40 per cent expect the move to involve “compromises”.
Of those groups expecting ESG investments to come at a cost, close to 60 per cent said that would come in the form of lower absolute returns.
Only 9 per cent of those surveyed said they anticipated better risk-adjusted returns from ESG strategies.