Investment Performance
Q4 2023 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 Q4 and we welcome any questions or feedback.
Market Conditions
2023 proved to be a very profitable year for most public market investors as shown in the chart at right. A pessimistic mindset following 2022’s losses was clearly the wrong perspective for the year ahead. Should we be similarly suspicious of any optimism born from 2023’s gains?
Due to the simple fact that the Foundation bases investment decisions on rigor, history, and patience to produce a high probability of longer-term success, engaging in the admittedly attention-grabbing matters of near-term market-direction speculation has never been of interest. To be blunt, we do not favor forecasts where our odds of success are at best the same as a coin toss.
One way to think about recent gains is to attempt to identify those that reflect a justifiable (i.e., durable) adjustment in price. In other words, does this increase reflect a correction of a prior discrepancy between price and fundamental value? Or does the increase merely reflect growing optimism for the future and/or investor willingness to pay an ever-increasing premium for a perception of comfort and safety?
| Calendar 2023 | |
| Russell Top 200 Growth | 46.6% |
| S&P 500 | 26.3% |
| Russell Top 200 Value | 10.6% |
| MSCI All Country World | 22.2% |
| Russell 2000 | 16.9% |
| Bloomberg High Yield | 13.4% |
| MSCI EAFE | 18.2% |
| MSCI EM | 9.8% |
| Bloomberg Aggregate | 5.5% |
| MSCI China | -11.2% |
| Bloomberg Commodity | -7.9% |
| Consumer Prices | 3.3% |
Take the Magnificent 7.1 On an equally weighted basis, this group posted a stunning 107.0% return for the year, while the return was 75.7% on a capitalization-weighted basis. Presently, we have earnings data through September 2023 which amounted to just under a 19% one-year growth rate while expected earnings growth for the next 12 months is approximately 25% on an equally weighted basis. Simply put, regardless of which of these figures we use, multiple expansion (i.e., optimism for the future) defined the story of last year. This is true because price increases substantially exceeded earnings growth.
Why is optimism a dangerous foundation for investment decisions? Unfortunately, despite the positive connotation commonly attached to such an outlook, reality rarely matches hope—subsequent results are predictably disappointing as future outcomes fail to live up to lofty expectations.
Ultimately, this is a tale of two markets. On one hand, we have the Magnificent 7 priced at nearly 40x trailing earnings—this is the ultimate “what can go wrong?” valuation. On the other, we have scores of beaten-down stocks both inside and outside the U.S. trading at what seem to be exceptionally low valuations.
On balance, we continue to believe that monetary policy is on a slow yet undoubtedly erratic path towards normalization thanks to higher structural inflation. This introduces many less familiar but well-documented risks that investors will have to face whether they like it or not. Given that everyone, including us, lack foresight into the future, the primary factor worth considering is the strong tendency of low valuations to create a wider array of scenarios in which equities produce acceptable returns. This very reliable force will likely provide the fuel for strong future returns at the Foundation.
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 6.3% per annum. The Pool gained 8.0% in the fourth quarter and registered a 15.7% 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 9.6% 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 6.6%. 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; gained 1.6% for the quarter. Lastly, the Foundation offers an Index pool, which is all passive and a Growth Pool. These pools gained 8.7% and 9.2% 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