Investing Tribal Nation assets in today’s uncertain market

Jeff Wortley, Director of Trust and Investment Strategy, KeyBank Native American Financial Services, November 2021

Investing Tribal Nation assets in today’s uncertain market

In managing your Tribe’s investments, you have always had to address the issue of how to optimize the potential for returns with the desire to manage risk. It’s a challenge in the most settled times, but today’s environment raises concerns to even higher levels and Tribal Leadership and Members are paying more attention and have opinions that need to be accounted for.

Low Interest Rate Environment and Fixed Income Investing

Today’s interest rate environment creates challenges for investors looking for adequate returns through bonds. Allocations in a portfolio to fixed income still provide diversification benefits, but low rates reduce the yield derived from bonds. Further, high levels of fiscal and monetary stimulus such as those used to address the pandemic’s economic damage can lead to increasing inflationary pressures and falling bond prices, resulting in low or even negative returns for fixed income investments.

While fixed income will continue to be an essential element of preservation within the context of a total portfolio, many investors today are emphasizing investment-grade, credit-oriented sectors over Treasuries and government debt. They are also exploring alternatives to fixed income: As part of a diversified portfolio, an allocation to real assets - real estate, TIPS, commodities, and infrastructure - provides a reasonable opportunity. During times of higher inflation, real assets frequently increase relative to other asset classes such as stocks or bonds. In addition, when the Federal Reserve (Fed) returns to a more normalized monetary policy, it will eventually raise interest rates, which can be detrimental to stock and bond returns.

Equity Markets, Uncertainty, and Volatility

The U.S. stock market has soared to record highs in 2021 on the back of accelerating coronavirus vaccinations and the aforementioned massive fiscal and monetary stimulus. In contrast, low discount rates and low borrowing costs helped fuel the equity market rally. However, investors may now find it tougher to generate the kind of stock market returns seen recently.

In the second half of the year, the Fed is likely to move away from a crisis level of accommodation as the economy moderates from a hot recovery. This monetary and economic transition is manifesting itself in the significant sector and industry rotation within the market. Inflation, the timing, and pace of monetary policy tapering and asset purchases by the Fed, future tax and spending measures, and the course of the Delta variant present additional uncertainties for investors. In short, opportunities in equities exist, although there is the ever-present prospect of higher volatility and downside risk.

Balancing Performance and Safety in Your Tribe’s Investment Policy

To help meet the challenges of investing in today’s financial market, many tribes are creating or refreshing their investment policy statements.

The investment policy statement (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.

Even if you already have an IPS, reviewing it regularly to determine if it needs to be updated is a must. Spending requirements may change as needs evolve, the outlook for investing may indicate a modification in asset allocation policy is required, and new investment alternatives may offer advantages in the future.

Modeling Possible Outcomes and Creating/Updating Your IPS

By using statistical models to evaluate future scenarios and potential outcomes, your investment advisor can play a significant role in helping you create or revisit your investment strategy. The models aggregate hundreds of potential investments to help leaders draw conclusions about possible outcomes and find the right portfolio mix for each pool of investment 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 goals and spending needs.

The conversation between you and your investment advisor then moves to designating target allocations to each asset class, with allowable ranges around the targets. The ranges within an overall strategic asset mix allow for tactical adjustments to take advantage of market conditions. Similar targets and ranges may be specified for subclasses such as small-cap equity as a subcategory of domestic equity. Appropriate metrics for measuring and evaluating risk are also established as part of the strategy, along with a process for rebalancing portfolios to target allocations when the portfolio mix moves outside established boundaries.

The next step involves establishing overall performance and risk objectives that reflect general spending needs and the relationships of those needs to critical factors, such as inflation. While the IPS should list all permissible asset classes in which the portfolio may be invested, some asset classes may not be always used. For each asset class and subclass, you and your advisor can agree upon appropriate performance benchmarks.

The Tribe’s IPS should define an evaluation horizon for the achievement of performance objectives. Your 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. Even for objectives that stretch out over years, it’s crucial to establish a minimum time horizon to achieve performance objectives that will help clarify when action may be needed to resolve underperformance issues.

In general, it’s a good idea to establish a regular schedule for reviewing your IPS to ensure that it reflects your priorities and circumstances. A process for refreshing the IPS as Tribal circumstances or market conditions change should be identified and can be built into the IPS itself.


For more suggestions and strategies to navigate the current market climate, visit key.com/nativeamerican, or contact Jeff Wortley at jeff_wortley@keybank.com

Investments products are:

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

Opinions, projections, or recommendations contained herein are subject to change without notice and not intended as individual investment advice.

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