Balancing Risks


Asset Allocation at Life Planning Communities can be a tricky exercise. Unlike a charitable foundation, the core mission of a life planning community involves running a business, with emphasis on financing, marketing, facility management and many other crucial functions. The enterprise risk that is at the core of most life planning communities is, in essence, an equity risk.

Interestingly, comparisons to higher education are useful, although these comparisons are most relevant towards the lower end of the college and university spectrum.  At the higher end (i.e. Ivy Leagues and other “elites”), these institutions are more focused on crafting perfectly balanced classes than on filling seats as the current gargantuan endowments ensure stability. But smaller institutions of higher learning face many of the same enterprise risk issues that Life Planning Communities do. Declining enrollments, demographics, deferred maintenance and land management issues have conspired to pinch smaller institutions at the same time as managing their investment portfolios has become more challenging (i.e. lower return assumptions).

For institutions like Life Planning Communities and small colleges and universities, investment portfolios provide important ongoing support and ballast for future success.  For this reason, investment portfolios should be managed in a way that is integrated with the operations of the organization. What exactly does that mean?  Look at your balance sheet. The largest number is the value of the plant, property and equipment. The next largest number is often cash and investments. This is your portfolio of assets, and plant property and equipment is an equity asset! More to the point, it is a real estate equity asset. Equity has elements of both risk and return. Ask yourself, “Am I considering how my enterprise risk interacts with my investment portfolio risk in portfolio construction?”  Well, what happens to the enterprise when the stock market swoons or crashes? Is there an impact? What happens when interest rates go to zero? How about when interest rates return to “normal”? In fact, that there is a correlation between the risk in the portfolio and the risk in the enterprise.

Portfolio theory tells us that diversification is a key to investing prudently. As your grandmother used to tell you, “Don’t put all your eggs in one basket”! An asset class provides diversification when it has historically had a low correlation to traditional risk benchmarks such as the S&P 500. We categorize asset classes into four basic groups:

  • Equity
  • Fixed income
  • Real Assets
  • Diversifying Strategies

Among our 4 asset class categories, equity caries the highest level of risk. Prudent portfolio construction employs fixed income, real assets and diversifying strategies (alternative investments) to buffer that risk.

If you are the “Harvard” of Life Planning Communities, the risk/reward profile of your enterprise equity is very favorable and as a result, your time horizon for investment is very long. This long time horizon allows for a greater degree of flexibility in managing portfolio risk. For entities with a less favorable equity risk/reward profile, the time horizon is shorter which results in a need to try to balance the   enterprise and portfolio risks. Diversification is how we balance those risks.

The assets on your balance sheet have elements of the “Real Assets” category and also have elements of “Equity” because of the bottom line orientation. As you construct the investment portfolio, these elements should be carefully considered.  In diversifying, Life Planning Communities should recognize the real estate and equity risk that is embedded in its business model when considering overall risk parameters. This may result in some underweighting to the “Real Assets” category.  The fixed income category, long a dependable diversifier, has lost some of its buffering qualities, in that interest rates are still at a historically low level and appear to be on an upward trajectory. Diversifying strategies, then, deserve a close look. The team at Solaris has decades of experience in evaluating this potentially rewarding marketplace and its role in complex portfolios. Please let us know if we can help your organization navigate these waters.

About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Procyon Partners as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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