Hello everyone, and welcome back to The Institutional Beat podcast, where we cover interesting and relevant topics for our institutional investors. My name is Grace Xiang and I will be your host for today's episode. Now, for many years, endowment and foundation investors saw their biggest challenge was just earning steady, long-term returns. Then the last few years came and said, what if we added a global pandemic, inflation rate hikes, geopolitical chaos, and on top of that, let's increase the disbursement quota just to make things more exciting.

And so to help our listeners unpack what our clients have been dealing with and answer some of the burning questions a lot of investors have been asking. I invited my colleague Andrew Sweeney to join me for today's conversation. Andrew is managing director and a seasoned portfolio manager on the PH&N Institutional team, and I really wanted him to join me today because not only is he an industry veteran, he's also sat in a lot of different seats over the years – as a board member, as a portfolio manager, and in plenty of rooms where he asked and answered lots of tough questions through many different market environments.

Welcome, Andrew. It's so great to have you here today.

Thanks, Grace. I'm excited to be here. I think we've got a great, super interesting topic to talk about.

That's wonderful. And, Andrew, you've been working with non-profit organizations for a long time. And like I just shared with our listeners, you have been on boards, investment committees, and you've also managed these portfolios and helped our clients navigate some pretty challenging market environments. And now, I'm just curious, what are some of the recurring themes and concerns that have been raised at these meetings in the last few years?

Because it's felt a little bit like investors went from asking, “How do we grow the portfolio?” to “Is everything broken?”

Yeah, Grace, it's a really great question. We've seen a whole range of issues over the last four or five years. I think most recently we've seen questions around active manager performance, where active managers have struggled to beat indices. This started really in global equity markets, but in the last year or 18 months has spread to include the Canadian equity market.

And clients are asking questions, or investors are asking questions about, “Well, why would I own active if active managers are going to underperform? And so, that's been an issue that I think investors have really struggled with in the most recent years. I'd say the other question we get is around private market allocations.

And so, if we go back to 2022, I think that helped set the context in 2022. We saw, and it seems like it was a long time ago, but it really wasn't that long ago, that was a period where both stocks and bonds declined. And it was really tough for people's portfolios. And so, one of the things that investors looked at at that time was did they have alternatives that could reduce the downside risk.

And remember, 2022 – it was a time when people talked about the death of the 60/40 portfolio. And so, we saw lots of investors increase their allocation to private markets during that market environment. We saw things like private equity, allocations to private debt became very popular. But now, as we're in 2026, what we're finding is that there are some challenges in the private debt market that have been sort of well discussed in markets, related to some of the loans and the fact that there's been gating of a number of funds.

And so, that push into private markets to give additional diversification four years ago has now created a problem where issues around liquidity in client portfolios can be quite challenging. So there's always going to be something. Today it's primarily around active management of public markets and, then secondarily, this issue around liquidity that we see in our illiquidity related to private markets.

But tomorrow will be something else; there will always be some issue that will come to the fore. It will never be an easy ride, I suspect.

Yeah, that's right. And that's really insightful, Andrew. And I definitely want to dive into some of those today. And it definitely sounds like a lot of organizations are grappling with some very fundamental questions about their portfolios. And we know that their job is definitely not getting any easier while trying to balance their immediate needs with their long-term goals.

When the markets keep experiencing the kind of mood swings with that we've been seeing lately, and of course, speaking of navigating complex challenges, you were a speaker at a couple of endowment and foundation conferences recently, and when I was chatting with clients who attended these events, it sounded like something that really resonated with the audience.

In your presentation was this discussion around risk, and in the world of investing, we usually talk about risk as market volatility. And, you know, basically how much our charts look like my three-year old's drawing, especially in the recent months. But for non-profit investors, we know that risk is actually a lot more nuanced than that. So can you just expand on that a little bit for our listeners?

Yeah, I think this question around risk is such an interesting one in that we in the investment industry really distill risk down into a couple of numbers, predominantly, volatility, which is the standard deviation of returns. And we also look at, say, the drawdown or downside risk, which the actuaries even have a cool name for it.

They call it, you know, CVaR95. And so for us, risk really is one of those two numbers. But if we stand back and think about a foundation and what is risk to them, well, those two risks are real risks to them. But risk is much broader than that. It's really a multifaceted perspective.

And I'd say risk to a foundation often relates to risk of failing their mission. And so one of the things we see with foundations is that they've got to distribute their funding needs, whether that be health care related or social related or maybe education related. They're funding those needs. But there's a risk that – can they fund those needs during a downturn? Do they have the things that will affect their reputational risk or their ability, like a funding shortfall? And so the reality is that risk to these organizations is quite broad. And I use the word multifaceted earlier, but I think that's a really good way of describing it. And so sometimes there's this sort of mismatch where in our world risk is really about those two metrics that we model out that really sort of fall out of modern portfolio theory.

But risk to a foundation is actually broader and much more nuanced. And so it sometimes creates a very interesting conversation because all of these different risks can have an impact on an organization. And really, where the investment industry is really focused on a much narrower range of risks and sometimes loses the context of some of the elements that are really, really important to these organizations.

Yeah, absolutely. And I think that's such an important distinction because, like you said, right? For these organizations, risk isn't just about, you know, losing money on paper. There's a lot of that real world impact. And now you mentioned liquidity risk earlier, and we know that this one has definitely been top of mind for a lot of our clients.

And we've seen that non-profit investors have been meaningfully increasing their allocation to private market strategies like real estate, infrastructure, private equity, and so forth. Like you mentioned earlier, just for that additional yield and stability. And of course, a lot of these strategies do tend to model very well in a portfolio optimization exercise. But I think the lesson over the last few years really was that, you know what these models don't capture is a very real risk of having capital tied up when these organizations need it most.

So can you just talk a little bit about that and also how do you think investors should balance the need for stable returns and their liquidity considerations?

Yeah. The question around liquidity is really an important one. And again, it's one of those elements that doesn't necessarily fall out of the risk metrics around volatility and downside risk. And yet it is a real risk. And sometimes I think investors don't put as much weight on illiquidity risk as much, primarily because it's harder to measure than the other elements.

It's not that it's less important, it's just harder to measure. It doesn't sort of mathematically pop out of a formula. So, as I mentioned at the outset, one of the things we saw really starting in the last decade and accelerating with what happened in 2022, is this adoption of capturing an illiquidity premium. And it's the premium that's been around for years and years and years, and it's actually quite a reliable risk premium for investors with a long time horizon to capture.

So those investors that have very long time horizons have often invested in things like private equity, real estate, infrastructure, and then, more recently, in private debt. All of those asset classes have some really positive attributes, one of which is that you typically have gotten paid for taking on illiquidity. But as I always remind people, illiquidity is a bug, not a feature.

It's not something you want. It's something that, if you've got a long time horizon and if you get paid for it, it's an attractive risk premium for you to take on. But the reality is that I think people underestimate the risk side of it. And we're really seeing that today. And we see this with some very large endowments in the U.S. where they're significantly above 50% invested in illiquid securities.

So private equity, hedge funds, real estate infrastructure – those sorts of things. And yet they're actually finding that the environment has changed and they need liquidity. And so we're seeing them forced to do things like sell secondary positions of private equity or trying to effectively get liquidity and having to leave some money on the table.

So I think that it's this interesting balancing act where I think it's important that long-term investors look at this particular risk premium. It's a great diversifier. It's quite additive to your portfolio. But I think people need to be very careful about how much illiquidity they take on, because the reality is, it isn't a free lunch.

It is a risk that you're taking that you need to be compensated for. And I think sometimes people underestimate what their liquidity needs are until they find out in a very difficult market environment that, my goodness, I need that liquidity and I don't have it. And so it's one of those things I think people need to think about in advance and put a fair amount of weight on it, rather than just not worrying about it and kind of hoping that things are going to be okay or just assuming that they're going to get the liquidity they need at any given time, which is not how markets typically work when there's any kind of market event.

Yeah, that's such a practical framework, Andrew. So, it sounds like it's all about being proactive rather than reactive when it comes to managing their private market exposure and, especially, tying that in with their funding needs. And now I think this actually ties into something quite fascinating that you mentioned a couple times at the last two conferences that we attended.

And that is a concept of the performance paradox, where we have the median annual return for the average portfolio being 15% in the year 2025, according to the latest Canadian Endowment and Foundation survey, which sounds pretty impressive to me. But now we're hearing that there's actually increased scrutiny and dissatisfaction from boards and donors. So can you just help me understand why that is? Because it doesn't really make a lot of sense to me.

Yeah, I love this concept of this performance paradox where organizations and even individuals, I think, fall into the same boat – they're meeting their investment objective. And most people set out an investment objective of beating inflation by a certain amount. In a foundation, it's often thinking about the funding rate, the disbursement rate they have from the CRA, plus a level for inflation, plus maybe a bit of a cushion.

So they've got a target rate of return. And when markets are strong, they're exceeding it in some cases by a pretty wide margin. And so you throw out the number that the average foundation or median foundation in 2025 was up something like 15 percentage points. Well no one has an investment objective of achieving 15%. I think it might be typical that people would be looking for 7 or 8 over a long term.

So they're well, well ahead of their benchmark. And yet because they’re lagging public market benchmarks, people get are frustrated with their performance. And so we see these situations where you've met your investment objective, but people aren't happy. And so we hear it from donors who say, “Well, why would I donate my money to you? I'm going to do even better, and I'll donate it to you later. I'll leave it in stocks. And you know, I'm going to do better than you.”  We get questions. We see this all the time where board members are asking questions of the investment committee or of managers about, like, why aren't you doing better?

And so you've got this sort of great irony that organizations are achieving their mission. So the investment portfolio is doing exactly what it's designed to do in terms of achieving the mission of the organization. But it might be lagging public market benchmarks – creating the challenges. And so one of the conversations we often have is this issue of communication with your donors, with your stakeholders, that these foundations are very clear in terms of what they're doing and what they're not doing.

And I think communications are really, really important element of this to make sure people understand that, listen, the foundation might not have the most aggressive portfolio because they want to preserve capital in a downturn. Well, that means they're likely to lag during a really, really strong market. But that doesn't mean that the portfolio is not working.

And so, I'd say that communication is the one thing you can do. But the challenge with these sorts of things is this falls into the same issue that individual investors have. And it's, I guess, what the kids call FOMO. It is fear of missing out that your portfolio is doing well. But when you look over at your neighbors, they're doing even better.

And I think it's really important to go back to first principles of what investment objective are we trying to achieve, and is our portfolio doing what we've designed it to do? And in many cases, foundation portfolios are designed to be on the defensive side to make sure they can protect during a downturn, as opposed to being the highest performing portfolio in a really strong market.

So it's a fascinating paradox where you'd think everybody would be happy. But, you know, the portfolio is doing well, and yet nobody's smiling.

Now, you definitely touched on a few very important issues here, Andrew. And I think, you know, how should a non-profit investor define success is really that million-dollar question these days. And I really like the way you framed the concept, because it really puts the mission at the center of everything, instead of, you know, just chasing market performance and trying to beat some sort of a conceptual benchmark.

And now, when we actually think about achieving some of the goals you just talked about, I think one of the key decisions non-profits face is how to structure their investment approach. And we've lived through a couple of years of really tough environment for active managers, especially those who use a bottom-up fundamental approach. And this is also one of the challenges that you touched on earlier.

So how should our clients think about the role of active management and how should they evaluate their active managers? Because this question keeps coming up over and over during our investment committee meetings.

Yeah, the question on active managers is a really difficult one for clients and for foundations and endowments to really grapple with. So as you said, we've been through an environment of late where it's been about as difficult for active managers as we've seen in the last 25 years. And in fact, it harkens back to, in my mind, a lot to what we saw during the tech bubble back in 1999 and 2000, where many of the same, arguments were made about the death of active and why can't active managers keep up? And at that time, I think active managers that stuck to their disciplines, that continued doing what they'd always done, were ultimately vindicated and outperformed quite significantly over – I think of the early years of the 2000s – were sort of the golden period where active management, which had been given up for dead in, say, 99’ and 2000, then went on and performed really, really well for quite a long period of time – a number of years. I think it  goes back to some of the elements of my answer to the previous question about this performance paradox. And so I think asset owners or foundations really need to think about what it is they're trying to achieve in terms of their portfolio – what they want that portfolio to do.

And so we often see they need to own equities because equities are often one of the larger sources of return over the long term for a portfolio. So they're a pretty important building block. But a portfolio that's maybe structured, say, as a low-volatility portfolio or as a quality portfolio – that portfolio, by its very nature, is likely to lag during really strong markets. And so it's a recognition of what is the role of a certain manager or strategy within your portfolio, ensuring that that manager is doing what you've asked them to do, what you've hired them to do, and they're not really deviating in terms of their disciplines or drifting in terms of their style.

And I think it's a recognition that markets are relatively efficient, so it's not easy to outperform. But over time, across most asset classes and most equity – including most equity asset classes – active managers have been able to outperform. But it's got to be through a full cycle. And I think the challenge today is that markets have gone straight up over the last few years.

And that has been really difficult for active managers. But I think if we find ourselves in any sort of pullback or cyclical downturn, I think you're going to find that active managers are likely to do much better. And I think investors or foundations that stay the course with active management are going to be rewarded for their patience.

But I'd say that markets in the last – particularly, you know, even the last six months – have really tested people's patience and their intestinal fortitude to stay the course with the active managers that they've potentially hired in earlier times.

That's really helpful guidance, Andrew. And I think it's also a good reminder to our listeners that it's not just about, you know, trying to beat the market, but there are lots of other very important considerations like, you know, downside protection, risk management, and just avoiding that permanent impairment of capital, especially for foundation investors. Just because, you know, a lot of these organizations – they aren't just investing for today.

They're really investing to support their missions for, you know, 50, 60 years from now. And of course, that balancing act has only become harder. And I mean, just think about everything non-profit investors have had to navigate recently. You mentioned earlier, that you know, bonds and equities were both negative back in 2022, which is not that long ago.

And so everything we learned about diversification was essentially broken. And, you know, that was the same year when inflation hit, I think 8.4%. And on top of that, the disbursement quota went from 3.5% to 5%, which really fundamentally changed the math for these organizations. Now, so if these investors need to preserve their purchasing power, grow their portfolio, and cover their expenses they're really looking at, you know, that return target of at least 7 to 8%. And I think that's a pretty tall order in today's world of high valuations and uncertainty. So, Andrew, what is your advice for solving the asset allocation puzzle just to help these investors meet their objectives?

The two things you flagged, I think are so important – is that increase in the disbursement quota from 3.5 to 5% really changes the calculus for a foundation. And then the experience that we had in 2022, the combination of very poor markets and high inflation at the same time. So those two elements, I think, were a bit of a wake-up call for foundations as they sort of work their way through.

So the numbers you've thrown around of this 7 to 8% – realistically, that's what you do need to achieve if you think of 5% disbursement quota, maybe a long-term inflation rate of 2 to 2.5%, and then maybe a little bit of a cushion, and you do end up in that 7 to 8% range. So how does an investor or a foundation go about building a portfolio that's going to achieve that goal?

Well, I think you really need to go through the whole toolbox and look at all of the available asset classes that might help you achieve. I think the second element is to not necessarily look at backward-looking returns, but think about forward-looking returns. So backward-looking returns – equities have done fantastic, and bonds have been not particularly helpful.

But on a forward-looking basis, I think fixed income can actually play a fairly important role, as bond yields have risen to a point where now there is some yield. Unlike what we saw pre-COVID and during COVID, when I think at one point there were $15 trillion worth of bonds that had negative yields, we now see that yields around the world – whether it's Canadian government bonds, U.S. Treasury bonds, or bonds from other G7 nations – all have a reasonable amount of yield.

So I think fixed income is your starting point. You're going to need more return than those can offer. They're not going to get you 7 or 8%. But if you start to layer on different types of credit strategies, and so one of the things we've seen quite a bit in Canada are things like multi-asset credit, which is really a basket of different global credit strategies all in one – those can get you returns that are going to be helpful. I think private markets play an important role. And so we've talked earlier about private equity and private debt. But I think infrastructure and real estate can potentially generate pretty good returns from here. Real estate is one where it's been a struggle for the last five years.

So the backward looking returns are great, but that sets up much better forward-looking returns. And then the last element is getting returns from the equity markets. Because even if equity markets in general are expensive, any investment portfolio is going to need exposure to public equities in order to generate those returns. I'd say when capital market assumptions that say we, or many others, would run, you'd see that U.S. equities – because they've done so well – don't really have among the lower end of returns.

But there are many opportunities and things like Canadian equities, European equities, and in particular emerging market equities. And so I think what matters is that the way to solve this riddle or this conundrum of getting appropriate levels return within a reasonable amount of risk just requires the creative use of a broad range of asset classes, where your portfolio is exposed to a number of different risk premiums. So not only equity markets and fixed income, but credit and some illiquidity premiums across different private asset classes, and really build out a balanced portfolio that's exposed to a wide range of asset classes. And I think, given our view of the world, that 7 to 8% return is doable for someone who's got some creativity and the willingness to explore a wide range of asset classes.

Yeah. Andrew, I think this really reminds me of the client conversation that you and I had together very recently where, you know, we walk through their portfolio, asset mix, and optimization exercise. And we mentioned that it's not about building a portfolio that would have performed best over the last decade, but really making sure that the client can achieve their objectives on a going-forward basis.

So I really like how you set out this framework for tackling this very important question, because it really sets up these organizations for success for the very long term. But, you know, even when organizations get the asset allocation piece right, there is yet another layer of complexity they have to manage. And, you know, complexity is definitely the theme of today.

And these non-profit organizations – they have a tough job to do. We know that not only do they have to  balance their financial objectives, they also have to answer to multiple stakeholders. And this is the concept of communication that you mentioned earlier, like having to explain the results to the boards, their committees, and their donors.

And sometimes I feel like, you know, explaining investment results can definitely feel like, you know, judging a chef, maybe one bite at a time where, you know, nobody really cares about how great your recipe is when the market serves a bad quarter. So definitely getting that communication piece right is pretty critical. And so what advice would you give these organizations about balancing transparency, about tough market environment and investment results with maintaining that stakeholder confidence?

Yeah. The issue of communication, which we touched on earlier, is a really, really important element. And it's particularly important for not-for-profits or endowments and foundations, where you've got a pretty broad range of stakeholders, donors, board members, members of the community, and the like. I think one of the key elements is that the real value of an investment committee's value-added is not how they do necessarily in an up market, it's how you perform in a down market, because that's when really the test is – can you achieve your mission, as we described earlier, in a downturn? Because the reality is that the needs that the organization is funding are not likely to decline in a downturn, whether it's health care, education, or social elements.

And so in order to be in the situation that these organizations can thrive through those downturns or survive those downturns – is how do you build the portfolio during the upturn? And then how do you make sure that you can keep stay the course on that portfolio? And so that's really where the communication element comes in. And so I think it's important that boards, investment committees clearly articulate what the investment strategy is – that they can clearly articulate the kinds of markets it would do well, the kinds of markets it won't necessarily do as well.

And often that means it's that nominal returns will be quite strong in an up market, but they might not necessarily track the public market indices or benchmarks that we've seen. So this goes back to that managing this performance paradox that we touched on earlier. I know that for investment managers, one of the really key elements of that communication with their clients, with these boards and investment committees is something like a report card or a dashboard and really breaking down the different elements.

And so you might have a green check mark that the organization is meeting or exceeding its investment objective – so that 7 to 8% target that they're looking at. So when you're up 15 you get a big green check mark. And then you might have, you know, yellow check marks for things that are kind of working, but on the margin and honestly, there's going to be some red X’s.

And that might be the active manager performance where active managers are lagging during a very strong market. But I think that the communication and the communication of what expectations – what are reasonable expectations – is a really, really important element to keep people onside and make sure that they understand. Now, the flip side, as you mentioned, transparency is – I think managers will often provide performance on a fund-by-fund basis.

And I think that's important for an investment committee or a group that's providing oversight to understand. But with the stakeholders, sometimes that might be a focus on the ingredients in a recipe rather than the results of the recipe. And so I think there's this balancing act of not wanting to withhold information, but really it's the total portfolio performance.

And are the various pieces of the portfolio doing what they're designed to do is sometimes more important than how each piece is doing, because what often happens is people will zero in and get laser-focused on one element and kind of miss the forest in the tree. So it's an ongoing challenge. It's not likely one that's going to go away.

And today, I'd say the biggest challenge is people worried that portfolios are not keeping up in a strong market. But if we end up in a 2022 situation, the questions are going to do a 180, and they're going to revolve around, “Well, are we able to fund the distributions, that we need to do? Are we able to fulfill our mission?”

And so I think that concept – that the goalposts sometimes will get moved on an investment committee – is one that you, you know, it's maybe not fair, but it is the world that we live in. And I think it's an ongoing challenge. And the best way to deal with it is just to find that right level of communication and be quite transparent, but be careful about not going down rabbit holes where your board and your stakeholders may get lost on a single strategy and spend all of their time there rather than thinking about the overall portfolio.

And that's such great advice, Andrew. I think our listeners will really appreciate that. Thanks again for your time. We really appreciate you being here today. And also, thank you to our listeners out there. We hope this conversation helped unpack some of the tough issues we've been thinking about lately. And thanks again for tuning in, and we hope you'll join us again next time.

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