Endowments Ride Out Election Uncertainty

Managers chose not to hedge against candidates even as markets fluctuated during the campaign.

November 9, 2016
 
University of Texas System
UTIMCO and other endowment managers did not change their investment strategies during the election this year.

The University of Texas Investment Management Co. did its homework heading into the presidential election, studying the last 16 national elections and their effects on financial markets.

Then it decided not to hedge against any outcome.

“Because there is so much uncertainty, it is hard to know what to judge,” said Mark Warner, the interim CEO and chief investment officer at UTIMCO. “We just decided, while it is an important thing and will have market impacts and we’re all keenly attuned to it, direct action on our part was not something we felt was necessary at this point.”

UTIMCO manages about $37 billion in assets, including the Permanent University Fund, an endowment fund valued at $17.9 billion. That and other funds give the University of Texas System the third-largest endowment in the country.

That’s a lot of purchasing power, and Warner said Wall Street trading desks were happy to offer ideas for hedging against election-related risks. But UTIMCO decided that historical precedent and the current situation didn’t merit such a move. It also decided against planning different investment strategies if Republican Donald Trump or Democrat Hillary Clinton won the White House, or if houses of Congress changed hands.

It turns out many other university endowment managers also chose not to change strategies because of the election this year, according to investment advisers. The lack of strategic change is noteworthy in a year in which Trump was viewed as introducing a high level of unpredictability into politics. The candidate’s ideas about policies affecting trade, immigration, taxes and the Federal Reserve could all have a major impact on markets going forward. And an impact on markets means an impact on endowment investments.

Many saw the presidential race as affecting investment performance in its closing weeks. Commentators noted drops in markets in the week after Federal Bureau of Investigation Director James Comey said his agency was examining a batch of newly discovered emails from Clinton’s time as secretary of state, a move seen as cutting into her chances to win the presidency.

The Chicago Board Options Exchange Volatility Index subsequently climbed. Then markets jumped Monday and the volatility index dropped after Comey said a review had found no evidence Clinton should face charges over the emails.

And last night, as Donald Trump's surprisingly strong election-night performance built, financial markets tanked worldwide. Futures for the Dow Jones industrial average were down 4 percent, or 700 points, just after midnight. Stocks fell by 2 percent in Asia and the value of the Mexican peso tumbled.

That’s not a reflection of investors’ political preference so much as it reflects their view of Clinton as the status quo candidate and Trump as the unpredictable change agent, according to experts. Markets are generally unsettled by uncertainty, so investors became more concerned about the economy's performance as the likelihood of a Trump victory seemed to rise.

A recent white paper from the global consulting firm Mercer put it as follows:

“A Clinton victory would likely be neutral for equity markets, particularly since the market has largely priced in this outcome,” it said. “A victory for Trump would create volatility and downside risk due to uncertainty over his policies.”

The white paper went on to list sources of market uncertainty associated with a Trump victory, including the fact that he has heavily criticized the closely watched Federal Reserve and its chairwoman, Janet Yellen. Another source of uncertainty was that Trump has called for repealing and replacing the Affordable Care Act but has mentioned few details on his proposed replacement.

Ultimately, though, the Mercer paper cautioned against overreacting to the election.

“Investors should avoid making portfolio changes based primarily on potential election outcomes, as it’s difficult to predict how the market might respond,” it said.

Many of those who advise endowments feel the same way. Christopher Moore is managing partner and chief investment officer at Massey Quick, an investment consulting firm that works with endowments.

"The endowment is a long-term vehicle, and I think making short-term moves around risk management is generally regretted in the long term," he said.

Moore has not heard anything specific from clients who may be preparing different investment strategies based on the election’s results. Investors are likely to scrutinize sectors like health care, defense spending and infrastructure after the election, he said.

But the endowment community remains more concerned with meeting their target returns, Moore said.

"I think the endowment community, quite frankly, is more worried about how they're going to hit their 8 percent bogey with rates as low as they are and with bond and equity markets having appreciated substantially over the last nine years," he said.

Some endowment managers have held off on investing new cash in the run-up to the presidential election, said Kristin M. Reynolds, a partner at the Boston-based investment-consulting firm NEPC. Colleges and universities often see a large amount of cash flowing in as campuses come alive in September and October. Some institutions haven’t been investing that money the way they would in a normal year.

“I think they kept it in cash,” Reynolds said. “If it was going to be a longer period of time, I think they would have invested it, but I think they said, ‘I’d rather ride out volatility in cash than be in the market.’”

Tuesday’s election simply wasn’t the most important long-term issue for endowments, Reynolds said. Upcoming Federal Reserve decisions regarding raising interest rates will be something endowment managers will be watching, however.

Reynolds has only heard of one endowment that has taken major steps based on election worries. One person at a conference of 150 she recently attended shared such plans, she said, although she did not name the institution represented.

“They said they barbelled their inflation hedges and they bought gold and metals,” she said. “Metals for the inflation side and the strength of the U.S. dollar, and gold for lack of confidence in currency globally -- and that was to hedge either candidate, quite honestly.”

The electoral uncertainty comes at an inconvenient time for endowments. The last two years have generally been filled with flat or negative endowment performances, with many of the country’s largest endowments posting negative returns this year. That’s critical for endowments and the amount of money they send to universities, because endowment spending draws are typically determined by a three-year rolling average.

“I think endowments are generally positioned for the longer term, to withstand the volatility,” Reynolds said. “But I think just like any investor behavioral action, people are really worried about the short term. There are more conversations about it, but I don’t see anybody really changing their positions because of it.”

Much of UTIMCO’s money is managed by external firms, which could have decided to make their own investment changes based on the election, said Warner, the interim CEO. Such moves wouldn’t represent a broad change in endowment investment strategy, however.

UTIMCO has been noted for buying gold in the past. It continues to hold gold as a currency diversifier but has not significantly changed its holdings of the precious metal, which currently sit at just under 3 percent of the $37 billion portfolio.

Any large changes will have to come after election season ends and the winner’s possible policy changes become clearer, Warner said.

“Even if you knew who was going to get elected, it’s really unclear where the theoretical stops and the policy begins,” Warner said. “As investors, we tend not to like to bet on outcomes. What we really like to do is look at fundamentals.”

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