Remaining nimble in a volatile market

The investment time horizon of many endowments and foundations can be long - even infinite - as they often provide funding in perpetuity to the organizations they support. The economic environment has undergone a significant transformation in recent years and ignoring the shorter-term market backdrop may leave investors exposed. Remaining nimble is necessary for managing risk, and as markets continue to evolve, it also may present an opportunity to generate higher returns not available when only focused on the long term.

The decade leading up to the pandemic was marked by low inflation, historically low interest rates and generally subdued volatility. In this new regime, markets move quickly and may be more complex than ever. On August 5, for example, the Japanese stock market had its worst day in nearly three decades, falling more than 12%.¹ Later that day the S&P 500 followed suit, slumping 3% and bringing its losses to nearly 5% over just three trading sessions. The intense volatility left investors shaken—but then the S&P 500 gained more than 7% in less than two weeks.²

Market fluctuations like these present particular challenges to foundations, family offices and endowments, potentially increasing costs while affecting liquidity and asset allocations. For entities like foundations and endowments, large market sell-offs may threaten portfolio stability and thus the ability to provide stable funding. In addition, the speed and severity of market moves may make it increasingly difficult for institutions to adjust quickly. Yet those that can adapt nimbly to fast-changing market action may have opportunities to boost performance.

The challenges of capturing short-term, tactical opportunities

Institutions’ investment strategies often are built to meet long-term objectives. But focusing exclusively on the long-term may lead organizations to forego tactical adjustments that may capture short-term opportunities. Many institutions are aware of this dynamic. Consider that 87% of respondents to the 2023 BlackRock Global Family Office Survey said short-term volatility is an opportunity for alpha.

Yet institutional portfolios may be somewhat inflexible by design. For example, they may have liquidity constraints due to asset allocations, investments in illiquid alternatives, regulatory restrictions, mission-related limitations or investment policy frameworks. Challenges may also arise with slow-moving, committee-based governance structures that make quick action impossible.

Tactical investing requires constant oversight, technology and access to real-time market information. In-house investment teams may not have the resources to act quickly especially during periods of market volatility when demands from external stakeholders are at their highest.

This lack of agility is not only a missed opportunity, but it can also make portfolios more susceptible to market volatility or major events—like the housing market crash or Covid-19 pandemic—that might have a significant impact on performance, potentially impairing institutions’ ability to fulfill their mandates.

Unlocking outsourced solutions

To navigate changing market dynamics and increasing uncertainty, institutions, especially those with limited investment staff, may opt to engage a manager for tactical asset allocation (TAA) or outsourced chief investment officer (OCIO). Even for well-resourced institutions, allocating to an active portfolio manager or partnering with an OCIO can free up time for strategic priorities by outsourcing portions of the portfolio.

Both TAA managers and an OCIO can partner with institutions to navigate changing market dynamics within their existing structural frameworks. They have access to a breadth of expertise and resources that enable them to provide daily portfolio oversight in all market conditions, something that can be extremely time consuming for many organizations and a drag on resources. They can also act quickly and take advantage of tactical opportunities, something that is structurally impossible for many institutions with governance structures that meet infrequently.

The ability to remain flexible is predicated on having an array of resources readily accessible. Beyond investment resources, partnering with an OCIO may also allow investors to tap into operations and technology resources. Monitoring the interplay between public and private markets and technology that provides a whole portfolio view is critical. BlackRock’s Aladdin® portfolio management platform provides real-time portfolio monitoring, dynamic rebalancing, and compliance capabilities.

In the new economic regime, more dynamic portfolio rebalancing may outperform buy-and-hold strategies to a greater degree than it did prior to the pandemic.³ BlackRock can draw on its tools and expertise to deliver bespoke portfolio solutions, positioning them to make efficient investment decisions, and seize opportunities to generate alpha.

Contact our team today to learn how a partner like BlackRock can help you pursue your goals.