BILL JARVIS: Hello. I'm Bill Jarvis. I'm glad you joined me today, as I make some observations on work that occupies you directly, the governance of your endowments, and propose some steps that you can take as prudent fiduciaries in this new post-pandemic environment. These remarks are drawn from my paper, "Investment Governance for the Post-Pandemic World", which. you can get by reaching out to your advisor. Nearly all of your organizations experienced tremendous stresses during the pandemic period. Closures and furloughs higher costs in the form of salaries, supplies, and rents, ongoing investment in hybrid and remote technology. But many of you are better off than you expected, particularly in balance sheet terms, as a result of things like government support, the very robust investment returns that occurred for many of you in fiscal 2021, and budgetary discipline.

 

So for many of you, a window has opened that may see you through the next 18 months or so. And we would propose that this time can be used productively for things that you had no time for during the pandemic. Strategic planning, resource allocation, and fundraising strategy. These important functions will take place within what we've characterized as a change in regime. which we define as the economic, political, and sometimes social forces that govern what's possible for you as investors. Regimes can last for a surprisingly long time. We've just come to the end of one that started in March 2009 and concluded at the end of 2021. And that regime was characterized by a generally muted or distorted relationship between risk and return in investing, by strong central bank support for equity and residential property markets, by very low inflation, sometimes flirting with deflation, by very low interest rates, frequently negative in real terms and sometimes in nominal terms too, by very low unemployment, by a high degree of global integration, and by the absence of major wars.

 

Now we've entered a regime that's almost the mirror image of that. It's characterized by higher inflation, higher interest rates, the shrinking of central bank balance sheets, and therefore, the shrinking of the money supply, lowish unemployment, but this may change, decreasing global integration, and tragically, a major European conflict. So investment strategies that were rewarded in the previous regime, may not have such success in the current regime, and vice versa. It's easy to diagnose these characteristics of a regime in hindsight. The challenge for you is to discern the regime you're in while it's still developing and prevailing. There are three things that we would propose that you take into this environment in your role as fiduciaries. First, to know where you stand.

 

Second, to understand why you stand where you do, and third, to evaluate where you're going. As I indicated in the introduction, there are three areas we suggest you consider in this environment. So let's start with the first one. First of all, know where you stand. This doesn't call for the kind of jumpy market timing that you hear about on the financial news programs and the press. But rather, it does require that you understand the preferences and risks that you're taking in your portfolio. One way to help understand this is to subject the portfolio to the kind of stress testing that's become very commonplace in the investment management industry. Rather than simply rest content with the familiar portfolio that you have, you should, at least annually, ask your investment advisor or consultant, to run a probabilistic model, sometimes called a Monte Carlo simulation, that can provide insight into the long term, nominal, and real returns, and the risks that may lie unexamined in the portfolio that you have. given certain possible scenarios.

 

This exercise should show you how likely you are to be able to achieve the investment related goals you've set of earning a nominal return that is sufficient to maintain the purchasing power of your endowment after spending, inflation, and costs. You should also run scenario analysis on your portfolio. Some examples of those scenarios might include possible inflation or deflation, changes in interest rates, economic slowdowns, changes in unemployment. The outputs from this exercise should enable you to see how your portfolio could perform in these various situations, where in essence, your strengths and weaknesses lie. So knowing where you stand should allow you to take greater intellectual ownership of the portfolio that you have or perhaps to question, whether changes may be in order. In this segment, I'll cover the second area to consider in this environment. Once you know where you stand, with respect to your organization's endowment portfolio and its content, the second of our three tasks is to know why you stand there. All too often, portfolios are constructed with a view to what other organizations are doing with an eye on commonly used market benchmarks. But each of your organizations is unique and each has its own imperatives, resources, and constraints. So here is where using the same modeling techniques we've described, you and your investment advisor can investigate portfolios that might not necessarily look like those of your peers but may be better suited to your own goals.

 

Also, considering the concept of the governance budget or how much time you have to devote to these tasks, you can make it a practice to devote a portion of each of your four or five meetings a year to examining a particular strategy or asset class within the portfolio. What is it designed to do? How does it function in the portfolio context? Under what circumstances might it succeed or fail? Over time, you and your colleagues on the board or investment committee should be able to assimilate these lessons to the point where you can communicate them effectively not only to each other, but other important constituents. Donors, beneficiaries, stakeholders, employees, the broader community. You'll also want to make this educational process part of the onboarding procedure for new trustees or committee members, so that they understand how we do things here in the investment sense, how we got here, and importantly, why we are here. So knowing where you stand is the first task and knowing why you stand there is the second.

 

After knowing where you stand and why you stand there, the third of our tasks is to know where you're going. Armed with the knowledge, and frankly, self knowledge, that comes from the first two of our tasks, you can now be more active and conscious stewards of your investment process. Rather than simply receiving investment reports for each quarterly meeting, you can use the resources of your investment advisor to ask about the forces that may change the regime or affect your portfolio. For example, short, medium, and longer term economic, political, and social trends that may affect the regime and portfolio. This forces the discussion to be more strategic in nature and it leads to a more conscious ownership and assimilation of the knowledge that becomes available. So to review, discern the characteristics of the regime you're in, and within that regime, know where you stand, know why you stand there, and know where you're going.

 

As we think about these tasks, it will be important to integrate them with your overarching goals for the portfolio of a return that meets or exceeds your spending rate plus inflation, plus costs. Those of you who take these actions will, we would argue, be in a better position to navigate with confidence what I think we all agree, is a very uncertain landscape that lies ahead.