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Against a complex backdrop of an overall expansionary bias and continued historically accommodative monetary and fiscal policy on one hand and sharply rising inflation rates pressing policymakers to rein in the pace of accommodation on the other, risk-based asset classes and categories generated elevated total returns in 2021. The concluding quarter of the year presented risk-seeking investors with notably strong returns, despite the initiation of quantitative easing tapering by the Federal Reserve in November.
The U.S. Conference of Catholic Bishops (USCCB) approved an expanded version of the existing socially responsible investment guidelines during their November 2021 General Assembly. The changes to the USCCB’s responsive investing guidelines are considerable and will have meaningful implications going forward as Catholic investors seek to align their investments with the most recent teachings of the Catholic Church.
Investors were faced with the renewed prospect of a COVID-19 variant-induced economic slowdown in November, as the Omicron strain began spreading toward the end of the month. Consequently, those sectors with elevated economic sensitivity, such as commodities, emerging market equities, and other pro-cyclical corners of the marketplace, witnessed increased downside volatility on the month.
Private debt as an asset class was borne from the ashes of the Great Financial Crisis (GFC) of 2007–2008. During that period, publicly traded corporate debt traded at historically wide spreads. As took place in response to the GFC, the massive stimulus programs aimed at combating the volatility caused by COVID-19 have caused spreads for bank loans and high yield bonds to tighten materially, leading to wide illiquidity premiums for private lenders of both junior and senior capital.
October offered risk-seeking investors handsome gains, with notably strong total returns generated across domestic equities and real assets—a continuation of the prevailing theme of the trailing 18 months. At their meeting in early November, the Federal Reserve (Fed) confirmed the widely anticipated tapering in the pace of their monthly asset purchases, set to begin in November. This represents a pivotal shift in the public sector’s influence on the return to a more self-sustaining economic recovery.
Diversity, Equity, and Inclusion (DEI) has become a headline topic for nearly every industry. Asset owners are increasingly paying more attention to racial and gender equity in the context of who is managing their investments. Consequently, asset owners are also considering how they can have an impact in underrepresented communities through their investment portfolios. This piece will walk through the implementation steps—whether your organization is considering DEI for the entire portfolio, as a specific percentage of the portfolio, as a silo, or as an impact solution.
Historically, September ranks as the worst-performing month for equity markets. September 2021 was no exception, as it was the S&P 500 Index’s worst-performing month since the height of the pandemic in March 2020. Equity returns over the quarter were mixed, with September erasing much of the quarter’s prior gains. Volatility was fueled by choppy incoming economic data and reduced economic growth projections with continued elevated inflation, signaling stagflation risk.
A key pillar of support bolstering the strong performance across risk assets since spring 2020 is on the verge of being gradually removed in the coming months, as the Fed prepares to taper the pace of their asset purchases. Both realized inflation rates and positive inflation surprises increased substantially since the outbreak of COVID-19. U.S. job openings have also increased.
Over the past 30+ years FEG has been in business, we have been fortunate to work on behalf of some amazing endowments and foundations. As such, we have developed a unique view of what the “endowment model” means, how it should be executed, and how it will evolve. One overarching advantage endowments have over other pools of capital is a long time horizon. Endowments defy the two certainties in life: death and taxes. This provides the luxury to think and invest for the long term, which can be expressed in different ways via portfolio construction. Given the debate over the efficacy of the endowment model, we felt compelled to articulate what it means to us and where we see “the puck going,” as it were, in hockey terms.
The Fed’s annual Jackson Hole Economic Symposium, held in a virtual setting in late-August due to the COVID-19 Delta variant, reaffirmed the Fed’s plans as communicated in their July 27-28 meeting minutes to begin tapering the pace of monthly asset purchases by the end of the year, provided the ongoing progress seen on both the employment and inflation fronts is sustained. Specific to the Fed’s inflation mandate, which has been informally relaxed in recent quarters to provide the Fed with added policy flexibility, numerous data points corroborate the need for a scaling-back of the Fed’s current ultra accommodative stance.
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