Noted Investment Strategist Counsels Conservative, Yet Broader Strategies For Foundations
Reported by Mike Gallagher, CMF Editorial Consultant, from the Tuesday, October 11, 9am session
The U.S. economy is moving forward at a frustratingly slow pace and foundations’ investment advisors should be looking to protect their organizations’ assets through conservative, yet broader strategies, counsels John Augustine, chief investment strategist at Fifth Third Bank.
Augustine says the future of investment returns for foundations mirrors that of their for-profit counterparts and both are tied to whether or not the nation is headed back into a recession.
“And that largely depends on whether there will be an uptick in consumer spending which accounts for more than 70 percent of U.S. economic activity,” he notes.
Augustine shared his investment and economic outlook at the 39th annual conference of the Council of Michigan Foundations (CMF) held recently in Kalamazoo. He was joined by George A. Erickcek, senior regional analyst of the W.E. Upjohn Institute who offered his insight of how Michigan is expected to fare in the coming months.
Michigan financial institutions and corporations – like those around the U.S. – are hoarding money at record rates…”and this impacts the investment returns of your foundations,” warns Augustine.
“Corporations have been building up cash reserves and even banks are leaving money sit in Federal Reserve deposits,” he says. “Cash savings represent dollars that aren’t being spent on equipment, expansions and other investments that could create jobs. A weak investment rate is keeping economic growth weak.”
Michigan nonprofit investment advisors should take note of his top five predictions for the remainder of the year and throughout 2012, says Augustine, adding they are shared with many of the top corporate and banking investment strategists in the nation.
Augustine’s predictions include:
- U.S. economic growth in the 3% range due to twin monetary and fiscal policy accommodation
- Continuation of economic rebuilding should equal continuation of investment portfolio rebuilding
- Stocks have potential for a double-digit return next year; bonds’ 30-year bull market recedes
- The federal government continues to step back from economic and business influence
- U.S. risks reside around commodity prices, treasury yields, housing and regulatory overhang; global risks continue around Chinese growth and Germany’s reaction to supporting European debt.
Foundation leaders also have to keep a close eye on the continual, ongoing battle between elected officials and their critics who are clashing over whether the government or individual business should lead the economy forward, says Augustine.
“In general, Democrats want government to create jobs by investing in roads, bridges and worker training,” the Fifth Third chief strategist says. “Republicans say relaxed government regulation would allow businesses to grow, creating jobs without billing taxpayers.
“And here’s the problem I have and you have as foundation investment officers or advisors: the next general election – in November 2012 – will be a referendum on the jobs issue and people are reluctant to commit their money before they know the results.
“I worry, as should you, that all that money is going to stay on the sidelines until then,” he adds. “That’s going to make all our investment strategies and efforts difficult.
The current hair-pulling, soaring-and-diving stock market is causing everyone severe angst and will continue, he predicts, as bankers, corporate leaders, foundations, economic strategists and others try to understand just what is going to happen, not just in the U.S., but overseas as well.
“All I can tell you is to hold on to your hats as the ride is going to be bumpy,” he says.
Augustine’s best advice for foundations?
“We’re pointing our clients toward some broad investment strategies that include focusing on cash yields from stock dividends, corporate bonds and mutual funds,” he advises. “Real assets, which include gold, commodities and real estate are also investment vehicles that should be looked at closely.”
While Augustine warns against putting too much of one’s investments in gold as the record price ranges are now receding, he says it is still at this time a good hedge to help balance out foundations’ investment portfolios.
The W.E. Upjohn Institute’s Erickcek says he agrees with many of Augustine’s “underlying economic premises and concerns” as he researches issues of regional economic development, including tax policy, economic and fiscal impacts, program evaluations and economic development strategies and analyses.
While he offers no investment advice to foundations “as that is not my area of expertise,” he says the economic factors in the state that he is watching will have a direct impact on how those investments perform.
Erickcek says that while the automotive industry recovery is moving ahead, Michigan’s housing sector still continues to suffer. “Home sales are increasing, but home prices are not recovering at the same pace.”
The depths of the Great Recession (2007-2009) can still be seen today when viewed in light of the current slow job recovery rate Michigan is facing, he notes.
“For Michigan – and America – to get back to the same labor market as we had before 2008 will take time,” says Erickcek, adding that it might take until mid-2016 before the nation’s economy recovers all the jobs lost in the economic downturn.
Michigan has other tough issues it needs to deal with as well, he points out, including the need to rebuild its failing infrastructure of roads and bridges, the widening educational divide between affluent and poor school districts, the best-and-brightest Michigan graduates taking their knowledge and skills to other states, and finding ways to bring new, 21st century industries to the Great Lakes State.
“While recessions sometimes do generate what I call ‘accidental entrepreneurs’ – and some of them become very successful – nevertheless, hard times are simply hard times for all businesses large and small,” says Erickcek
As for foundations and their investment strategies, Erickcek says he still believes Michigan is a good place to bet on, albeit conservatively, until the state – and the nation – builds its economic strength back.
“I see 2012 being a good year,” he says, adding he expects to see slow, modest increases in employment as the economy digs out of the Great Recession.
“But we went through the wringer in this recession, warns Erickcek. “So we will be growing at a rate that is the same as our productivity gains and that means no large job growth.
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