Most NZ community-based ‘foundation’ funds remain confident of hitting return targets in spite of looming market risks and entrenched low yields, according to the latest Mercer survey of the sector.
The Mercer NZ ‘Endowments and foundations survey’ 2020 – the seventh in the annual series – found only 10 per cent of respondents had lowered their investment return objectives over the 12-month period while the majority remain “comfortable” with forecast portfolio performance settings.
About two-thirds of those surveyed had also maintained current spending levels even as funding sources dried up “putting pressure on their investment portfolios to ‘work harder’”, the Mercer report says.
Close to three-quarters of respondents – a group covering community trusts, religious charities, educational institutions etc – intended to keep grant levels at 4 per cent of investable assets and almost 60 per cent rated “real” portfolio returns as their main investment objective.
But, nonetheless, the endowment and foundation (E&F) sector has been spooked by the COVID-related market disruption in 2020 just over half of those surveyed now rating volatility as the biggest risk.
More than 50 per cent of funds captured in the Mercer survey have now “implemented strategies to protect against downside equity market volatility”, the study says.
The Mercer report, authored by senior consultant David Scobie, says after a decade-long tailwind of strong returns, the sector must turn to face “the challenges of ‘lower for longer’ interest rates, market uncertainty and funding pressures”.
“As the global economy and capital markets continue to rapidly evolve, Mercer recommends all E&Fs review their investment objectives, strategic asset allocation and spending policies to ensure alignment and achievability in the current environment,” the study says.
Many funds may have to broaden their assets horizons by diversifying to “less-constrained strategies” designed to weather market dislocations or benefit from structural trends.
“Alternative investments, such as unlisted property, infrastructure and private equity, can help insulate E&Fs against market volatility, rising geopolitical uncertainty and downside risks,” the paper says.
As well, Mercer suggests the sector could optimise its tax-free status more efficiently while funds also need to incorporate climate change into formal investment policies.
“Despite a challenging environment, the consideration of environmental, social and governance (ESG) factors into investment decisions of E&Fs continues to gain traction,” the report says.
The survey found 62 per cent of respondents had already integrated ESG into “their investment decision making process”.