Investment Performance
Q1 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 Q1 and we welcome any questions or feedback.
Market Conditions
The first quarter of 2024 provided yet another period of strong, seemingly risk-free gains, with the S&P 500 rising 10.6% for the quarter alongside the MSCI ACWI Index’s advance of 8.2%. Once again, U.S. large-capitalization growth stocks led the way, further cementing the impression that this group can be relied upon to produce market-leading returns and provide a strong hedge against difficult economic and geopolitical conditions.
If all of this wasn’t good enough, the S&P 500’s worst intra-quarter decline was a mere 1.7%; if this figure were to hold, it would be the smallest decline in over 80 years and a rare situation in which equities experienced an intra-year decline less than that of U.S. treasuries.
Considering the past, present, and future for markets, we find ourselves regularly thinking about the concept of complacency. Merriam Webster defines the term as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies.” Despite the clearly negative connotation, the word does not generally strike overt fear into those who hear it—therein lies its true power as it is among the most dangerous of the behavioral tendencies that lead to poor/mediocre long-term outcomes
Interestingly, like trust, complacency takes time to build and entrench itself, but it can dissipate in moments. Its manifestation within markets today is quite typical and atypically dangerous given the broad appeal of the securities that underpin this cycle.
| 10-Year Cumulative Return | |
| S&P 500 | +230.5% (+12.7% per year) |
| Russell Top 200 Growth | +380.9% (+17.0% per year) |
| Russell Top 50 Technology | +673.5% (+22.7% per year) |
One can draw a straight line from strong outcomes to overconfidence to complacency. Today, this trajectory has the potential to be unusually pronounced, as a direct correlation has existed between simple/inexpensive investment strategies and exceptional success.
To illustrate, for the 10 years ending December 2023, a 70% S&P 500/30% Bloomberg Aggregate portfolio generated a 9.1% annualized return, outperforming the median endowment and foundation by more than 3% per year and ranking in the top 1% of participants. Depending on one’s perspective, this is either a stunning outcome or entirely expected; either way, it’s self-evident that the latter perspective was rare to non-existent across the E&F community for a good part of the last decade.
Yet, this has clearly changed, as many investors now allocate capital heavily to index funds such as the S&P 500 or MSCI All Country World Index. While most do not expect returns that exceed virtually all endowments and foundations, they do expect both top results and an outcome that supports their missions
Is this fundamentally sound, or reactionary? While we won’t definitively know the answer for another seven to 10 years, we can wonder if such a strategy will continue to prove as successful as it has been for the past 10 years. Never say never of course, although prudent investing should be based on probabilities and the fundamental factors that drive long-term returns. Perhaps the most important and reliable of these factors is human nature.
Why didn’t the Foundation and other nonprofits simply allocate to the 70% S&P 500/30% Bloomberg Aggregate portfolio a decade ago? Wasn’t a universally known, simple, two-fund portfolio focused on our home markets an obvious choice?
One reason is that such a portfolio rarely achieves the types of results we have seen of late. In fact, this same 70/30 mix had a very weak long-term track record a decade ago. For the 10-year periods as of year-end 2009, 2010, 2011, and 2012, such a portfolio ranked in the bottom quartile of the E&F universe and generated low-single-digit annualized returns. Exactly a decade ago (year-end 2013), the 70/30 portfolio snuck into the top half of the E&F universe, but still only delivered 6.8% per year.
Not only was today’s popular index blend a poor performer, but its extended inability to support spending policies naturally drove capital elsewhere.
To be clear, we are not suggesting that overly complex, expensive strategies are inherently superior to a straightforward index blend; in fact, there is little doubt that the opposite is true. What we are saying is little to no logic exists behind the idea that a commoditized index strategy should rank in the top 1% of the E&F universe while generating a 9.1% annualized return. Essentially, it was incorrect in 2013 to see the index as a perennial loser; it is equally wrong today to see it as a perennial winner.
Generating mission-supporting returns over multi-decade periods is difficult and each investment strategy must be designed with this in mind. Complexity may contribute to the solution, but only when executed with great respect for the challenging set of hurdles that must be overcome—of far greater importance is recognizing the behavioral traps that investors must actively work to avoid.
The Foundation’s investment strategy is designed to embrace diversification, contrarian thinking all with a constant focus on generating returns that support the philanthropic goals of its fundholders.
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 6.5% per annum. The Pool gained 4.1% in the first quarter and registered a 14.0% 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 5.4% 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 2.3%. The Foundation also manages a Short-Term Pool for donors with very short grantmaking horizons. This pool, intended to preserve capital as best as possible, gained 1.2% for the quarter. Lastly, the Foundation offers an Index Pool, which is all passive, and a Growth Pool. These pools gained 5.2% and 5.6% 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