The Southeastern Council of Foundations (“SECF”) virtually hosted its 51st annual meeting from November 11-13, 2020. This year’s programming offered one investment-focused session titled, “An Asset Allocator’s Discussion: Strategic Opportunities Amidst a Rapidly Evolving Political and Public Health Landscape.” This session featured two investment professionals from Truist Foundations and Endowments and David Richter from GCM Grosvenor, a global alternative asset manager. GCM Grosvenor was established in 1971 and Richter has been with the firm for 26 years, managing money through seven different crises. During this session, Richter discussed the challenges and opportunities arising in 4Q20 as well as his views looking into 2021. As a family foundation is mandated to distribute at least 5% per annum, what does a long-term investor do to generate a portfolio return in excess of inflation + 5%? Acknowledging his bias given his focus on alternative investments, Richter responded to this question by recommending investors look outside traditional stocks and bonds and incorporate non-traditional investments into their portfolios in order to achieve desired target returns. He validated his recommendation by clarifying that fixed income offers no yield, and in fact has a negative yield after accounting for inflation. Furthermore, the historical non-correlated relationship between stocks and bonds is also stressed and so bonds do not provide the diversification benefits they once did. Correlation is Richter’s biggest fear. In order to assuage this fear, an investor should construct a portfolio comprised of investments with different correlations, so all holdings are not out of favor at any one single point in time. Additionally, Richter warns investors to be careful because he believes now is the time for active equity investing as opposed to passive given high valuations, which provide more room for prices to fall as opposed to increase. In the S&P 500 Index, one in three stocks is down year-to-date, and one in five stocks is down -50% from their peak, supporting Richter’s preference for active over passive. Richter believes we are currently at an inflection point, and active management tends to outperform at inflection points because there is greater performance dispersion providing opportunity for a talented manager to pick winners. Conversely, when dispersion is low, then it’s easy for everyone to identify and own the few best performers. For example, a hedge fund with shorting capabilities went short companies hurt by Covid, like AMC theater (Ticker: AMC), and went long companies that benefitted from Covid, like Zoom (Ticker: ZM), resulting in relative outperformance. Richter specifically manages an absolute return strategy targeting the treasury rate + 5% while incurring less market sensitivity, like 20%. So, if the market dropped -10%, then an absolute return investment would in theory decline only -2%. There is huge dispersion within the hedge fund industry, and so not all investors have the same experience. For instance, in Richter’s opinion, there are 8,000 global hedge funds and only 100 are worth investing in.
