Episcopal Church Foundation Vestry Papers - for leading congregations

A healthy diet is a balanced diet that includes a wide variety of foods in appropriate proportions. Each food group serves a different purpose – dairy products provide calcium for strong bones, carbohydrates provide energy, and fruits and vegetables provide vitamins and minerals. A body’s immediate needs may fluctuate, but over time all food groups work together to provide the nutrients that a body needs to function properly.

How does this relate to endowment investing? Like a healthy diet, a healthy long-term investment portfolio contains different types of investments – stocks and bonds, for example – that serve different purposes. At the simplest level, stocks may provide long-term growth despite going up and down in value over the short term. Bonds may provide steady income without necessarily appreciating in value as a company grows. Together, over time, they provide important balance in an investment portfolio.

The choice of asset classes, and the proportion of each one, is the most important decision for long-term investors. Often called the “Strategic Asset Allocation” of a portfolio, this combination of different types of assets in varying weights provides balance. Some assets classes typically have higher returns than others – protein! Some asset classes typically are riskier than others – sugar! But they all play a role in a portfolio.

How do investment managers decide on a portfolio’s Strategic Asset Allocation?

• Long-Term View: For long term investments, such as endowment funds, the strategic asset allocation reflects an investment manager’s expectations over ten years or more for various asset classes, backed up by extensive research and analysis.
• Risk and Return Tradeoff: Asset classes have varying levels of risk and return, and typically there is a trade-off between the two. Higher expected returns generally carry higher levels of risk. The strategic asset allocation of a portfolio seeks to strike a balance, adding assets classes with higher expected returns, balanced out by asset classes that lower portfolio risk levels.
• Diversification: Asset classes also perform differently under various market conditions. Allocating investments across asset classes – with a well-diversified strategic asset allocation – helps reduce overall portfolio volatility. Annualized returns over time may be more consistent, and the likelihood that a single event will dramatically impact overall returns is reduced.

In ECF’s Endowment Management program, a typical long-term portfolio contains 13 asset classes – in varying proportions – that fall broadly under either Equities or Fixed Income. Our portfolio manager, State Street Global Advisors (SSGA), developed this portfolio for investors with long-term goals. As shown in the pie chart above, it contains asset classes diversified across the globe (US and internationally) and by size (large capitalization companies, as well as mid- and small caps). It also includes several types of real assets.

This portfolio is intended to generate needed returns while also limiting risk, or variability in performance. Each asset class is expected to perform differently from the others – SSGA projects some assets classes to have higher returns but with higher risk. Others are expected to be lower risk but provide lower returns. Together, they make up a balanced portfolio.

Shown above are annual performances for major asset classes from 2015 to 2022, arranged with the best performing asset class that year at the top and the worst at the bottom (bottom rows are truncated). In comparison, the red line highlights the performance of ECF’s Active/Passive portfolio with an overall allocation of 60% equities and 40% fixed income. Together, the asset classes in this multi asset class portfolio achieve a better balance of risk and return than any individual asset class.

Moreover, for long-term investors, their selected strategic asset allocation anchors the portfolio in the midst of short-term market fluctuations and helps investment committee members stay on track to meet investment goals over time.

Are you interested in learning more about how our approach to strategic asset allocation can help you meet your investment goals? Please contact us at endowment@ecf.org.