2020 SECF Annual Meeting Summary

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.

Charlotte Affordable Housing Bond

Last week, I cast my vote, and one of the local items I voted on was the 2020 GO Bond, which is the final installment of a four-bond package for the Charlotte community. NC Voters approved the three previous bond installments in 2014, 2016, and 2018. The 2020 bonds are targeting a total issuance of $197,232,000 as detailed below:

  • $50 million of Affordable Housing Bonds seek to increase the supply of reasonably priced housing for low- and moderate-income residents in Charlotte.
  • $44.5 million of Neighborhood Improvement Bonds target Charlotte’s infrastructure needs, such as streets and sidewalks, in order to enhance connectivity throughout the city.
  • $102.732 million of Transportation Bonds pursue improvements in the city’s transport, such as transit access, bridges, trails, sidewalks, and streets.

On August 7, 2019, the foundation purchased a Charlotte housing bond, which was part of the 2018 approved issuance mentioned above. As of October 31, 2020, this bond (+5.79%) was outperforming both the Bloomberg Barclays US Aggregate Bond Index (+5.41%) and Bloomberg Barclays Municipal 1 – 10 Year Blend Index (+2.78%) since inception. We classify the foundation’s Charlotte housing bond as a Mission-Related Investment provided it aligns specifically with one of the foundation’s three focus areas, Vibrant Communities. This bond has generated a positive financial return for the foundation, while also relatively outperforming, and thus has grown the corpus of the foundation, further enhancing grantmaking abilities. Additionally, buy owning this bond, the foundation is realizing the positive non-financial return of contributing to Charlotte’s affordable housing efforts.

The logistics of purchasing this bond were straightforward as we utilized an existing Fixed Income manager for the foundation to buy the bond at a compelling price. The bond is custodied at one of the foundation’s main custodians, Fidelity, allowing for seamless performance reporting. Pending the approval of the 2020 bonds, the foundation will likely purchase additional housing bonds from this new issuance next year.