There’s no question that the last several months have been anything but business as usual for most membership associations, and that the path through and beyond this crisis will likely look very different than what led us here.

For those associations with investment portfolios, even while global stocks have rebounded almost as rapidly as they plummeted back in March, myriad immediate and long-term risks have led investment committees to re-examine their overall investment program.

Three issues are at the top of many committees’ priority lists:

• Near- and long-term market expectations
• How to calibrate allocation and spending
• Aligning investments with mission and members

Below we discuss an association struggling with these issues, and a framework for enhancing their investment program for the months and years ahead.

The Past Is Not Always Prologue

We recently met with an association’s finance and investment committee seeking advice as they face declining membership and conference revenues during this uncertain period. In prior years, they have not had to spend from their long-horizon investment portfolio, but now they want to know what spending amount is prudent looking ahead. Their investment policy statement allows for 60 percent global stocks and 40 percent taxable bonds, with spending at the board’s discretion, and they are hoping to spend 6 percent annually while maintaining the portfolio’s inflation-adjusted value. 

If past were prologue, that 6 percent spend would not be a problem.

  

 

Over the past decade, a 60/40 stock-bond allocation enjoyed annualized returns of 8.5 percent. A tax-exempt investor could have spent 6.7 percent, and, in this period of unusually low inflation and steadily positive returns, would have maintained their inflation-adjusted value.

 

Our median forecast returns for the same asset allocation over the next 10 years tell a different story.

 

Looking ahead, with median expected inflation slightly higher and returns markedly lower across asset classes, this same portfolio mix is expected to deliver median annualized returns of 5.6 percent. After expected inflation of 2.2 percent, our recommendation to the committee is to significantly trim their expectations to a spending rate of 3.4 percent of the year-end asset value of the portfolio. The balance of the gap they’re seeking to narrow—approximately 3.3 percent of their portfolio’s value—will come instead from some combination of allocation adjustment to slightly increase equity exposure, expense reduction, and fundraising. 

 

Membership Matters

The challenges facing this association are a direct result of the financial pain felt by its members and the broader economic fallout from COVID-19. With less discretionary income for programming and support of its members, this finance and investment committee also asked us for advice as to how they might leverage and align other resources with their mission to support the success and wellness of their members.

Fortunately, opportunities abound for better aligning the investment portfolio with the well-being of this association’s membership by incorporating environmental, social, and governance (ESG) factors into its investment criteria. Further, a decade ago, fiduciaries wondered, “Will considering ESG investments violate my fiduciary duty?” Today, that question has been turned on its head. Decision-makers now ask, “Will I breach my fiduciary duty by not investing responsibly?”

This is an ideal moment for this committee to bolster fiduciary oversight while exploring opportunities to better reflect its mission and membership through the investment portfolio.

Silver Linings

While a crisis was the catalyst for this committee’s convening, our engagement resulted in an updated investment policy statement and spending policy, a process for utilizing forecast analyses in the future to inform allocation and spending, and the alignment of the association’s investments with its purpose: to support the health and well-being of its membership. As fiduciaries, they are now in a far better position to weather a range of economic and capital markets environments while continuing to serve their members.