Mercer Offers Focus Tips for E&F Investment Committees

Among tips Mercer suggests is evaluating litigation vulnerability at a time when lawsuits against higher education 403(b) plan sponsors are higher than ever.

As the new year settles in, Mercer has released 10 key tips for endowment and foundation (E&F) investment committees, from how to revisit economic, social and governance (ESG) investing to reframing the tone behind active and passive investing.


“E&F portfolios continue to benefit from strong equity markets, with overseas investments contributing at a greater rate than in most periods since the 2008 financial crisis. Record high equity markets, however, may lull investors into a false sense of comfort. Market dynamics make the persistence of this bull run more fragile,” says Ken Shimberg, U.S. Endowment & Foundations chief investment officer, Mercer. “Concurrently, greater reliance on endowments makes institutions more vulnerable to adverse events. Staff and committees should apply a strategic perspective to governance processes and implementation considerations to ensure they provide the checks and balances necessary to support successful investment execution.”


Other areas of focus suggested for E&F investment committees, included in the Top Ideas for Endowment and Foundation Investment Committees whitepaper, are implementing a “do nothing” strategy, where committees embrace smaller benefits and maintain assets at current weights for future opportunities; evaluating litigation vulnerability at a time when lawsuits against higher education 403(b) plan sponsors are higher than ever—having skyrocketed in the past two years—; and increasing awareness of tax changes, including the latest modifications in tax reform.


Mercer also suggests that to take full advantage of market dislocations, E&F investment committees should review ways that portfolio structure and policy can promote agility in investing to accommodate attractive investment opportunities as they arise. In addition, investment committee and staff processes for reacting to an extraordinary event could be rusty, as the credit crisis was nearly a decade ago, Mercer says. Processes should be reviewed to ensure that they are best suited to current committee dynamics and preferred means of communication. Specific and rules-based protocols should help inform timely decision-making during an adverse event and lessen the behavioral impact that inevitably influence decisions in stressed conditions. Guidelines should reflect the most accurate snapshot of the institution’s risk tolerance.

Mercer says that according to NACUBO data, in the year ending June 2016, endowments with $500 million or less reduced both equities and fixed income in favor of less-liquid strategies. The firm says committees should identify likely demand for capital in the event of a market correction. Institutions may want to establish lines of credit or similar on-demand borrowing, relying on existing banking relationships to negotiate preferential fees and ensure that contracts will be stable through an adverse event.

The full list of Mercer’s tips can be downloaded from here.