If some financial soothsayer could have told Eric Cauble a few months back that his organizations investments would lose 10% of their value before Election Day, the chief operating officer at the Medical Group Management Association would have been shocked.
But this is late 2008, and things are different. Given the broader dynamics of the market, I think were comfortable, said Cauble, whose organization is among untold numbers of not-for-profit associations watching their portfolios dwindle and deciding whether to stay the course, rebalance funds or pull out.
Financial advisers, for their part, were urging calm and even advising some clients that this could be the best time to rebalance target investments through infusions of undervalued stocks.
Certainly its been a challenging time. When you look at clients equity portfolios, there are significant double-digit losses, said Christine Bradford, a senior consultant with financial consultancy Evaluation Associates. The greatest risk at this point is that an organization takes too much risk off the table and holds on to too much cash.
Like many associations, MGMA officials are glad they dont rely on their investment portfolios to fund everyday operations, which decreases the pressure to have liquidity in their investment funds.
Although officials at several associations would not disclose the exact details of their financial picture, they acknowledged their investments were subject to the same downward pressures as those seen at MGMA.
Were taking a hit just like everyone else, said Richard Wade, spokesman for the American Hospital Association. But this thing is moving so fast that anything I give out could be inaccurate by next week.
At MGMA the value of the investment portfolio dropped about 9.8% in the three months that ended Sept. 30, leaving the association with $7.7 million invested in public securities. We havent received anything yet for October, which was a roller coaster. The Dow Jones ended about 15% down on the month, so Im assuming our portfolio will probably show a similar impact, Cauble said.
The American College of Healthcare Executives saw a 12% drop in its portfolio as of Sept. 30, 5 percentage points of which came between July 1 and Sept. 30, President and Chief Executive Officer Thomas Dolan said. The organizations fund fared better than the stock market because ACHEs portfolio is composed of only 70% stocks.
The Dow Jones industrial average fell about 18% this year through Sept. 30 and was down more than 35% as of Nov. 14.
Although its tough to watch a double-digit percentage vanish out of an investment portfolio, it wont affect the overall operations outside of things that would have been done otherwise in dismal economic times. Were being very fiscally conscientious as we go into 2009, Dolan said. Were normally cautious, but were being even more cautious.
At most organizations with sizable portfolios, the ideal mix of investments is spelled out in board policies that also include minimum thresholds for the various types of investments. In market conditions like those seen recently, it would not be uncommon for value changes to exceed what investment policies were designed to handle.
Were in the worst equity market that weve seen certainly since World War II, and maybe in the last 100 years, said Ahmed Farruk, a partner with investment consulting firm Olcott Consulting Group.
Yet he and other observers were urging directors to take a deep breath before making large changes. Most organizations realize these funds are for the long term and maybe the worst of what were going to see is behind us, Farruk said. Our advice is, in the next three to six months it will continue to be volatile. But in three to five years we believe the equity markets will be higher.
At the MGMA, Cauble said officials are insulated from pressures to change their investment policieswhich call for a portfolio heavy in stocksby not relying on investment income for operations. That decision is the result of a realization that mixing investment returns and operating revenue could place control of the organization out of its own hands and cripple directors ability to make long-term judgments. Adjusting our operations based on a bad market results in short-term decisionmaking, Cauble said.
Wade said the AHAs investments have done well enough in the past few years to prevent any cutbacks in services for the time being. If conditions in the overall economy worsen to the point where operations are affected, common measures such as cutting back on staff travel could take place, he said.
Bradford and Farruk said theyre telling some clients that the time could be right to rebalance the portfolio because stocks have shrunk in value to the point that they dont make up the percentage of the fund envisioned in the investment policy.
That means convincing sometimes jittery boards of directors to buy more stocks in a teetering economy.
When you have such a precipitous loss, theres alarm, Bradford said. You cant predict where the bottom is. But its really about having the discipline not to panic, and always going back to that target you have.