Host: Welcome back to the Truist Nonprofit Insights Podcast Series! Thanks for joining us today. Finding the right investment policy for your organization is an ongoing process. As variables shift in the market and your organization’s internal priorities evolve, the investments that will make the most sense for your institution are bound to vary as well. Benchmarks are one of the most useful ways for fiduciaries to determine the most effective policy and how it might evolve over time. Kim Krause, Senior Investment Advisor for Truist Bank’s Foundations and Endowments Specialty Practice, explains the value of benchmarks as a vehicle for evaluating your organization’s financial state.
Kim Krause: Institutions should use benchmarks as a tool for measuring the success of an investment strategy and also to help gauge the progress toward the achievement of the organization’s goals. Benchmarks can serve as a reference point and help fiduciaries to answer the important question of, “How are we doing? How are we doing versus the market, versus our peers, or versus our long-term goals?”
Host: Those long-term goals are important to keep top of mind, even as individual investments experience a range of short-term successes and setbacks.
Krause: It’s very important as fiduciaries to understand that you are long-term investors and oftentimes have a timeframe or a time horizon that is in perpetuity. So to take a long-term approach and evaluate portfolio results over a full market cycle of about five years, it’s really important in that evaluation process.
Host: There are multiple types of benchmarks, each with its own benefits and drawbacks. Krause explains.
Krause: Market indices are very widely used benchmarks that measure the value of a particular market, and there’s a wide variety of indices available to track both equity and fixed income asset classes across market capitalization, across styles and also sectors. Market indices are popular because the data is very widely available and fairly straightforward, but a drawback to market indices is that they’re not available to track some alternative investment strategies, such as hedge funds.
Secondly, peer groups are commonly used benchmarks because they provide another layer of context to index comparisons. We often see organizations use peer group analysis to learn how their investment portfolios of similar organizations are performing and what they may be doing differently. Peer groups can help fiduciaries evaluate how they’re doing relative to their peers regardless of the market environment, but a significant drawback to peer groups is that they suffer from survivor bias, which may lead to an overestimation of the universe performance, as underperforming constituents of the group tend to drop out over time.
And then finally, absolute return benchmarks help to evaluate the progress being made toward an organization’s long-term goals as stated in the investment policy statement. The absolute return target indicates the return that is needed to sustain the organization’s mission in the future and often is stated as CPI plus the spending rate.
Absolute return benchmarks are perhaps most useful for organizations because they focus on meeting the organization’s long-term goals. If those goals are not being met, then relative portfolio performance versus a market benchmark becomes less relevant.
Host: Since each type of benchmark works best for a different type of investment, it can be difficult to know how to evaluate a diversified portfolio. To get a holistic view of your investment mix, Krause recommends using a “blended benchmark.”
Krause: A blended portfolio benchmark that’s comprised of the individual asset classes that is represented in the portfolio can provide the framework for measuring portfolio results relative to the risk-adjusted return objectives that are stated within the investment policy statement. This type of benchmark also helps to track how an investment advisor’s tactical recommendations are adding value to the investment strategy.
Host: When it comes to deciding which benchmark is right for your organization, there are a few key things to consider. Krause explains.
Krause: There are many signs of a good benchmark, and I think a few that I would highlight are that the benchmark is unambiguous, meaning that it is clearly understood by all parties involved in the evaluation of the benchmark. Also, it must be measurable, so the return of the benchmark should be readily calculable and then specified in advance. It’s important that the benchmark is identified ahead of time and that the organization sticks with it over time.
Host: We hope that you enjoyed today’s podcast. For more information, please speak with your Truist relationship manager or advisor or visit us online at Truist.com.
This podcast was brought to you by the Truist Foundations and Endowments Specialty Practice, which has more than a century of experience working with not-for-profit organizations delivering comprehensive investment advisory, administration, planned giving, and trust and fiduciary services to over 700 not-for-profit organizations.
Statements made during the presentation are based on Truist Bank’s beliefs and assumptions made by and information currently available to management. Past performance is no guarantee of future results, neither diversification nor asset allocation ensures a profit or guarantees against a loss. This podcast is not intended to be advice for any particular foundation or endowment. Foundations & Endowments should discuss the strategies in this presentation with their Truist advisor.