Episcopal Church Foundation Vestry Papers - for leading congregations

More than 15 years ago when my mom passed away, I started a small endowment to fund the upkeep of her plot. This endowment is invested for the long-term to preserve its purchasing power and provide a stable income stream that will ensure my mom’s grave is well taken care of in my lifetime, in her grandchildren’s lifetime, and even beyond. Knowing this brings me great comfort each and every night before I go to sleep.

Church endowment funds serve an endless number of purposes. But they all have one thing in common, they all carry the same objective – to provide a stable funding source while also preserving future purchasing power. And they should be invested for the long-term in a fashion that matches this goal. To achieve this, ECF’s investment manager, State Street Global Advisors, uses an investment approach with three equally important building blocks, Strategic Asset Allocation, Tactical Asset Allocation, and Active Management.

Strategic Asset Allocation. This first pillar is the foundation of our investment approach. State Street invests client portfolios in a diverse set of asset classes – including both equities and fixed income – at varying weights, and it periodically rebalances these multi-asset class portfolios back to the strategic allocations, or to the current tactical positions as explained below. The asset classes and allocations are carefully selected to balance expected returns with expected risk for a portfolio that is intended to deliver a strong risk-adjusted return over the long-term for the endowment. Studies show that over time, approximately 90% of a portfolio’s return variability can be attributed to its Strategic Asset Allocation.

Tactical Asset Allocation. Two additional methods are intended to add further value, or excess return, to our portfolios. One is tactical asset allocation adjustments. State Street makes slight shifts away from the strategic asset allocation – by over- or under-weighting an asset class – to take advantage of an opportunity. Tactical shifts are typically short-term, with the allocation reverting back to the strategic weight once the tactical opportunity disappears.

Tactical shifts can occur between equities and fixed income or among the various sub-asset classes in equities and/or fixed income. For example, an asset allocation can be shifted to include more US large cap stocks or fewer US high-yield bonds if there are shorter-term opportunities. This short-term fine-tuning complements the long-term positioning of endowment portfolios.

Active Management. The other additional method – and our third pillar – is active management, meaning specific investment funds which have managers who actively select investments. This is in contrast to passive management when the managers of funds track an index. These different approaches to investing both play a role in many client portfolios.

Selecting funds with active management is often a balance between fees and returns – in other words, do the returns justify the additional fees often found in actively managed funds? We are acutely aware of this trade-off. And, therefore, our portfolios are only active in a few specific asset classes – the asset classes with the greatest inefficiencies and where managers (on average) have historically outperformed. We also have portfolios with only passively managed funds for clients that prefer that approach alone.

Discover how ECF's comprehensive endowment management approach can help advance your missional goals. Contact us to discuss your investment goals.