Many investors are bracing for prolonged market instability and beefing up their cash reserves, including selling off private assets on the secondary markets. But allocators with ample liquidity are taking advantage of the volatility to make opportunistic investments.
Brooke Jones, chief investment officer at Bryn Mawr, says only the permanent impairment of capital is a risk, not short-term stock fluctuations.
“If you've got the liquidity and can use it prudently, then volatility is your friend,” Jones told Institutional Investor.
Volatile markets can offer up sought-after stocks at attractive valuations. After all, it’s hard for any investor or active manager to find good opportunities when the market is simply rising.
Like many endowments, Bryn Mawr has high allocations to stocks and private equity — 71 percent — which add to the portfolio’s volatility. Since the Pennsylvania-based liberal arts college’s $1.3 billion endowment is healthy enough to take advantage of whipsawing markets, Jones and her team have trimmed gains from the endowment's U.S. growth-linked equity holdings — and U.S. assets overall — while adding to less richly valued foreign stocks and niche credit strategies.
The Allocator’s Choice Award finalist noted that the moves are small ones.
Jones isn’t the only allocator championing the “prudent” embrace of volatility. Joseph Eppers, Selective Insurance’s investment chief, also told II: “I like the volatility. It gives us the opportunity to add risk and get paid for it.” However, Eppers — also an ACA finalist — noted that insurance is a highly regulated industry and Selective’s appetite for risk is very low, with only 10 percent of its portfolio allocated to risk assets — and the rest in high-quality bonds.
Jones says risk management is connected to liquidity planning and believes it can be a good time to buy in stressed markets because company fundamentals determine a stock’s long-term value.
Michael Rosen, founder and CIO of Angeles Investments, agrees. He told II that corporate fundamentals have historically driven markets, and believes that “expectations for corporate profits remain positive,” regardless of who is in the White House.
With the federal government implementing tariffs and other disruptive economic policies, more American investors may need to incorporate macro into their research process. Jones said she had never understood why people working in the financial markets treat macroeconomic and company analysis as different things. They’re “kissing cousins” where “you can’t get one right without the other.”
Companies are bound to their home nations’ regulatory environments and economic health. “And until Bitcoin changes that, they’re getting paid in various currencies,” Jones added.
For years, Americans have enjoyed the “tremendous privilege” of living in a country with “a strong and consistent rule of law, positive business policies and phenomenal independent macroeconomic technocratic management,” making it easy to dismiss macro’s role in company-level analysis.
But as instability and uncertainty continue to grow, that privilege may be put to the test.
U.S. investors have long defaulted to a “buy the dip” approach when stocks are down, since the country’s economy has historically remained strong enough for individual company fundamentals to recover and the US dollar to remain strong. However, Jones noted that engaging in such a strategy in countries with worsening macro environments “can make you lose money.” This can include emerging markets or in advanced economies that close borders, change deal terms with counterparties, undermine their central bank’s independence, consider dirty floats, or start printing money.
This goes for active managers as well — Jones calls it naïve to buy into a manager every time its total return is depressed.
Jones’ investment team is mindful of taking equity risk off the table when markets are stretched. The team did this in the summer of 2021 when they took money out of growth equities. While no one knew when markets would correct, the endowment was well positioned in the run-up to that correction because they had sold off some holdings that had fallen out of favor. They also had enough dry powder to keep committing to private markets.
So in January 2022, Jones and her four-person team added to equities all through the following summer and put new money into credit without losing the ability to invest in private markets. Because the endowment was not “over [their] skis with liquidity,” she says. While the exact expression of the trade may look a bit different now, Jones said the investment team will be “doing something similar” in the current environment.
Jones warned that volatility would not be your friend if you don’t have the liquidity, and “would be a false friend if you didn’t have the underpinnings of fundamentals.” This is why Bryn Mawr’s endowment team pays close attention to what its managers hold and why they hold it. “Finding partners matters. Finding aligned talent is powerful and rare,” she said.
