Investment Performance
Q3 2024 Report
Thank you for choosing Seattle Foundation as your partner in philanthropy. We know that you share our commitment to creating a region of shared prosperity, belonging, and justice. We appreciate your confidence in us to manage your assets in service of a greater goal: fostering a community where everyone can thrive. We are pleased to share these results from Q3 and we welcome any questions or feedback.
Market Conditions
Capital markets rose in the latest quarter, with the S&P 500 up 5.9%, the S&P 500 Equal Weight Index up 9.6%, and the MSCI EAFE and MSCI Emerging Markets indices rising 7.3% and 8.9%, respectively. Not to be left behind, the Bloomberg Aggregate Index advanced 5.2%. And if that wasn’t enough, consider the 12-month gains through September 30.
Equity market returns are ultimately driven by two forces: corporate results (as it relates to generating cash/earnings for shareholders) and the attitude of market participants (which determines how much optimism or pessimism is attached to future earnings/cash generation).
| S&P 500 | +36.4% |
| S&P Equal Weight | +28.8% |
| MSCI EAFE | +25.4% |
| MSCI EM | +26.5% |
| Bloomberg Aggregate | +11.6% |
Today, considerable optimism is reflected in a small number of very large U.S. businesses, which in turn has led to unusual levels of concentration within the S&P 500 and rarely seen valuation levels.1 This observation arose in a recent discussion with a very experienced and successful investor, who noted that it was odd today to see such high valuations at a time of so much uncertainty and risk.
Such a situation has significant long-term implications for anyone responsible for deploying capital; it also illustrates the difference between clear and present versus pernicious risks, with markets having a long history of exaggerating the impact of the former while failing to fully appreciate the latter. With the caveat that we believe the most important risks and opportunities are frequently the ones the consensus has not considered, below is a quick summary of the items that, today, fit the two risk categories.
Clear and Present Risks
- Geopolitics – Half of the world’s population have elected or will be electing new leaders
in 2024, with the U.S. presidential election of particular significance; increasing levels of
conflict; and trade wars (to name a few). - Fiscal Policy – The U.S. budget deficit is extraordinarily large and seems to be heading
to ever higher levels. This is particularly noteworthy at a time of low unemployment. Is
there a limit to how much debt the U.S. government can assume? And to what extent
can significant levels of borrowing crowd out other investments when capital is less
plentiful? This is arguably both a clear and present risk, as budget-deficit figures receive
plenty of attention, while also being pernicious, as there has historically been little in the
way of a meaningful implication from these considerations.
Pernicious Risks
- Inflation – Bond markets seem to have concluded that this has been contained; history
and logic suggest a strong probability this is not the case. - Monetary Policy – While the U.S. Federal Reserve has begun to move short-term rates
lower, it also continues to reduce the size of its balance sheet. Many investors have
little in the way of relevant experience investing at a time when capital is becoming
increasingly scarce. - Overconfidence – The number of industry professionals we run into who are worried about major and durable price declines and are
willing to express that view has become very, very small, as rose-colored optimism regarding the profit potential of AI has quieted
serious debate. In fact, this is a key reason why the risk of underperforming benchmarks has decisively risen above concerns related to
preserving long-term purchasing power or mitigating the risk of large losses.
We understand why many would prefer to disregard these risks and others, as each represents a major challenge with no easy answers Stewards of long-term capital have the luxury of disregarding some of these, as their near-term impact far exceeds their long-term implications. Ironically, clear and present concerns tend to fall into this category; for example, the above analysis, provided by JP Morgan, suggests that geopolitical risks have limited to no impact on long-term returns. Opportunities The good news is that capital markets have a wonderful ability to persistently serve up opportunities. In fact, our earlier statement regarding high valuations primarily applies to capitalization-weighted indices that include U.S. large-cap stocks, such as the S&P 500 or MSCI ACWI, not the broader opportunity set.
Whereas we have serious concerns about how some securities are being priced in such a complex period, many corners of the market exhibit risks that are likely being exaggerated. Not surprisingly, these are the areas reflecting a combination of negative performance trends and a relatively narrow focus on present risks. This implication is threefold:
- Availability of Inexpensive Stocks – Despite the optimism embedded in many of the largest and most successful U.S. companies, a far larger universe of choices exists across the quality spectrum. While controversies and downside scenarios will always exist, many businesses offer high expected returns, as they generate significant levels of cash as a percentage of their enterprise value. Critically, future returns for this group are far more heavily influenced by its financial performance than on ever-changing and volatile investor sentiment.
- Rising Market Inefficiency – Conventional wisdom suggests a weakening opportunity set for longer-term fundamental investors amid the rise of highly sophisticated trading models. In essence, how can a human investment team compete with AI, machine learning, etc.? Yet, while fundamental investing has become more difficult, that does not mean it’s obsolete; the explanation for some of the extraordinary opportunities present today can be found in the fact that the short-term direction of prices will always be interrupted by the vacillating and non-linear fortunes of particular companies. There is little evidence (nor much motivation) for short-term-oriented quantitative approaches to capture this; our view is that they actually make these shifts more rewarding for disciplined investors.
- Diversification – Despite the fact that this idea led to a Nobel prize, many investors apparently do not care that concentration equals risk, even though such positioning is clearly at odds with the complexities of the world. This shift away from meaningful diversification has been a source of frustration for those committed to the concept, but it has also directly contributed to the extraordinary opportunities that can be found outside the more generic or consensus-based approaches that have become so popular. Effectively, an opportunity currently exists to capitalize on the specific risk/reward qualities available while at the same time benefiting from the time-tested risk mitigating benefits that holistic diversification offers despite recent trends.
The net result of all of this is that the Foundation has a choice to make. We can elect to conform to the prevailing market narrative—that today’s concentration does not in fact correlate to higher risk given the dominance of the current leaders—or we can allow history to be our guide and look outside what is working now or has been over the last decade. With the latter mindset, we can adopt the view that change is perhaps the only constant and remain committed to simple ideas such as staying diversified, looking for asymmetric return opportunities, and building portfolios that can achieve long-term objectives—portfolios that do not accept the idea that current trends will persist indefinitely. An exceptionally wise investor recently wrote, “We continue to believe that there’s an objective truth that lies out in the world, not in our heads or in the heads of others. Long-term investing isn’t a popularity contest. In the end, truth will out.” In the end, the choice is clear: follow the crowd or forge a path that endures. Our advice is to choose the latter.
Portfolios
The Balanced Pool is the Seattle Foundation’s primary investment pool and is actively managed to deliver returns at 5% plus CPI over a long-term horizon. It maintains a diversified portfolio that includes exposure to global equity markets, alternative investments, and more conservative asset classes such as U.S. Fixed Income. Over the last 10 years, the Balanced Pool has gained 6.1% per annum. The Pool fell 0.1% in the second quarter and registered a 9.3% gain in the last 12 months. The portfolio’s forward returns tend to be highly correlated to complexity of an investment climate—greater challenges translate to higher returns.
In addition to our Balanced Pool, we offer other investment options to meet our fundholders’ needs. Our Socially Responsible Pool, designed to meet ESG (Environmental, Social, and Governance) requirements while also providing competitive economic returns, gained 1.5% for the quarter. Our Intermediate-Term Pool, designed to meet the expectations of donors with a grantmaking horizon in the 2-7-year range, gained 1.2%. The Foundation also manages a Short-Term Pool for donors with very short grantmaking horizons. This pool is intended to preserve capital as best as possible; it gained 1.2% for the quarter. Lastly, the Foundation offers an Index Pool, which is all passive, and a Growth Pool. These pools gained 1.6% and 1.3% in the quarter, respectively.
We are thankful for the opportunity to support you in creating powerful, rewarding philanthropy to make King County a stronger, more vibrant community for all. We welcome your questions and comments about Seattle Foundation.
Sincerely,
Joseph Boateng
Chair of Investment Committee