Investing Tribal Nation assets in an uncertain market

Patrick Bender, Senior Portfolio Strategist, KeyBank Native American Financial Services, April 2022

<p>Investing Tribal Nation assets in an uncertain market</p>

Investment returns over the past three calendar years (2019–2021) have been among some of the strongest on record. However, as we turned the page to 2022, many headwinds became apparent such as increasing geopolitical tensions, rising interest rates, and historically high equity valuations. This has led to large gyrations in investment markets that tend to unnerve market participants.

Financial security is a critical pillar to support a Tribe’s Sovereignty. A crucial resource available to support this pillar is a disciplined, risk-focused investment program. Maintaining a disciplined approach is a challenge in settled times, but today’s environment raises concerns to even higher levels. As Tribal Leadership and Members pay even more attention to how geopolitical and economic conditions cause fluctuations in asset values, they may begin to question the wisdom of their present investment strategies.

Tribes that have built a documented process for their investment program with a communication plan that outlines the purpose and expected volatility of the investment strategies employed have better long-term success. That success can be measured by long–term investment performance as well as the confidence that Tribal Leadership and Members have during volatile market periods.

 

Financial security is a critical pillar to support a Tribe’s Sovereignty. A crucial resource available to support this pillar is a disciplined, risk-focused investment program.

 

– Patrick Bender

Geopolitical impacts on financial markets

First and foremost, the human impact and widespread destruction of the war in Ukraine rightly makes finance a secondary concern and our hearts go out to Ukrainian people.

To provide confidence that long–term strategies work well over time, Forbes recently looked at nearly 30 episodes of geopolitical conflict since World War II. The magazine found that one week following the outbreak of a conflict, stocks were higher only 41% of the time. One month later, however, stocks were higher nearly two-thirds of the time and one year after the onset of a conflict, stocks were higher 83% of the time. No one knows how the Ukraine situation will evolve or how long it might last. However, history has demonstrated that those who remain patient and focused on investment fundamentals will ultimately be rewarded.

Low interest rate environment and fixed income investing

Today’s environment of low interest rates creates challenges for investors looking for adequate returns through bonds. While allocations to fixed income investments still provide diversification benefits in a balanced portfolio, they are under pressure from the higher levels of fiscal and monetary stimulus which have led to increasing inflationary pressures and falling bond prices. The resulting low or even negative returns for fixed income investments need to be understood for their important role and chosen thoughtfully.

While fixed income is an essential element of preservation within the context of a total portfolio, many investors today are focusing on investment-grade, credit-oriented sectors over Treasuries and government debt. They are also exploring alternatives to fixed income as part of a diversified portfolio. During times of higher inflation, real assets frequently outpace other asset classes.

41%

Amount of the time stocks were higher one week after the outbreak of a geopolitical conflict

83%

Percentage stocks were higher one year after the onset of a conflict

Equity markets, uncertainty, and volatility

The U.S. stock market soared to record highs in 2021 on the back of vaccinations and the fiscal and monetary stimulus, while low discount rates and borrowing costs helped fuel the equity market rally. Moving forward, investors may find it tougher to generate the stock market returns seen recently.

The Fed is moving away from crisis level accommodation as the economy moderates from a hot recovery. This monetary and economic transition is manifesting itself in significant industry rotation within the market. Opportunities in equities exist, although there is the ever-present prospect of higher volatility.

Balancing performance and safety in your Tribe’s investment policy

With these three headwinds to navigate and meeting the challenges of investing in today’s financial markets, many Tribes are creating/refreshing their investment policy statements (IPS). The IPS serves as a strategic guide for implementing an investment strategy that meets the Nation’s goals and risk-return standards. A highly customized document, your Tribe’s IPS should express your philosophy of investing and be centered on your Tribe’s unique goals, risk tolerance, and situation.

Reviewing your IPS regularly to determine if it needs to be updated is highly recommended. Spending needs evolve and the outlook for investment markets may indicate a modification in asset allocation policy is required, as new investment alternatives may offer advantages.

The IPS may be a good document to make available to Tribal Members, both to inform them of the discipline and purpose of the investment program, but also as a financial literacy tool that Members can use to learn about the investment process.

Modeling possible outcomes and creating/updating your IPS

By using statistical models to evaluate future potential outcomes, your investment advisor plays a significant role in helping you create/revisit your investment strategy. The models aggregate hundreds of potential investments outcomes to help leaders draw conclusions and find the right portfolio mix for each pool of investments under its oversight. The mix selected from this modeling is the foundation for your IPS asset allocation policy, which provides the best opportunity for your Nation to achieve its investment goals and spending needs.

 

The U.S. stock market soared to record highs in 2021 on the back of vaccinations and the fiscal and monetary stimulus, while low discount rates and borrowing costs helped fuel the equity market rally. Moving forward, investors may find it tougher to generate the stock market returns seen recently.

 

– Patrick Bender

 

The Tribe’s investment strategy may have an assortment of needs ranging from the short term to the long-term, and you will need a process that enables you to monitor success. Establishing performance objectives will help clarify when action may be needed to resolve underperformance issues.

Investment cycles pause or even end when economic expansions are maturing and are met by an external shock (a pandemic, a geopolitical event, a natural disaster). Despite a pandemic, and now a geopolitical event, corporate fundamentals remain quite healthy and the economy continues to grow (albeit at a moderating pace). In sum, while markets are focused elsewhere, we believe stocks remain the preferred asset class of choice for growing and compounding one’s financial security, and as such, we encourage investors to remain focused on fundamentals and remain invested for the long run.

For more suggestions and strategies to navigate the current market climate, contact your KeyBank Native American Financial Services expert:

Ryan Bumrungkittikul

  • Director

    Native American Financial Services

Terence E. O’Farrell

  • Managing Director

    Native American Financial Services

Ben Rechkemmer

  • Managing Director

    Native American Financial Services

Patrick Bender

  • Senior Portfolio Strategist

    Native American Financial Services

Jeff Wortley

  • National Director of Consulting

    Native American Financial Services

Key Private Bank is part of KeyBank National Association. Opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

KeyBank is Member FDIC.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

Connect With Us

  • Social Share Icon
  • Social Share Icon
  • Social Share Icon

Find an Expert