Investment committees most often use benchmarks to measure portfolio performance, which Pruit says is too simplistic.

“We think the most appropriate big-picture benchmark is an allocation-weighted correction of the underlying strategy, that way you can measure and consider the basic asset allocation that you’re following,” Pruit says. “The basic allocation is the best expression of what an investment committee is attempting to achieve, they should be critical of the underlying performance of their benchmark, not just how it compares to the performance of their investment portfolio.”

In 2016, most endowments and foundations are considering factors beyond return when deciding how to allocate their assets, according to Mercer.

Pruit says that socially responsible and other forms of investing that consider environmental, social and/or governance factors give committees a broader opportunity to align their goals with their organization.

“It’s more constructive to take a positive view of the opportunities that ESG investing offers as a practice,” Pruit says. “It should be more than just screening out the ‘bad players’ like fossil-fuel industries.”

Mercer’s analysis warns endowments and foundations that ESG factors like climate change may impact their long-term returns, so investment committees should consider adopting a strategic asset allocation that incorporates risks and opportunities presented by ESG factors.

“We think it’s important that you take into account the viability and sustainability of businesses over a long time period,” Pruit says. “Not just resource sustainability, but sustainability in light of a changing regulatory environment, we’ve reached a point where that’s going to be an important factor for long-term investing.”

Interest rate risk also vexes long-term investors like endowments and foundations. Loose monetary policy has some investment committees questioning their asset allocation, Mercer says.

“If all central banks were moving in the same direction, we’d have momentum in one direction or another,” Pruit says. “Divergence has raised volatility in the short term. Anytime things seem like they aren’t going to be as rosy, the questions from investment committees start coming -- it’s all normal and common.”

Mercer also recommends that investment committees perform a governance "fire drill," crash-testing their response to market downturns to determine if they need to meet to address declines as they happen and to build consensus on how portfolios will be rebalanced in such an event.

“We’ve had two major downturns in the last 15 years. I don’t think you need to envision conditions that dire, but I’m a believer that the real risk is never the volatility or the drawdown or the performance of the active manager, but the investor’s reaction,” Pruit says. “We build strategic portfolios because we know that the market is eventually going to go down, and we also have these fire drills. As a kid, you have fire drills in school so if something actually happens, you’re prepared, not panicked. We think it’s a good exercise for investment committees, too.”

Mercer is a subsidiary of Marsh & McLennan Companies that works with more than 250 non-profit clients.

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