A Message from Verger, March 20, 2020: Managing Through Volatility

As we monitor the impact of COVID-19 on the world markets and economy, Verger remains committed to our philosophy and proactive efforts to create an all-weather, antifragile portfolio. While others will be reactionary, Verger will continue to follow our disciplined approach and risk management framework. Our goal is to provide our clients with the downside protection and volatility mitigation they need, while taking advantage of the opportunity presented by the current market dislocation.  While we remain steadfast in our strategy, we want our clients and friends of Verger to remain informed as the situation continues to evolve.

These are unfamiliar times, but Verger was created to provide non-profit institutions with a source of stability in an unstable world.  This strategy can’t be built overnight, and over the past several years it has meant making disciplined decisions that did not always appear correct in the short term.  Now, in the face of severe market volatility, we are reminded why our work is so important. Protect, Perform, Provide is Verger’s mantra, and while each word is intentional, Protect comes first for a reason.  The institutions we have the privilege to serve are not only focused on the needs of today, but also on sustaining the needs for generations to come.  At Verger we remain focused on the long-term, but we also understand the danger posed by a significant disruption to a non-profit’s portfolio in the near term.  Thus, it is imperative to provide our clients with a smoother path so they may achieve their long-term objectives.

While we did not anticipate a global pandemic, Verger’s portfolio was designed to withstand market dislocations regardless of the catalyst.  We remain cautious given the market’s fragility and have maintained a lower beta to the broader markets. Our team has incorporated strategies that will not only provide downside protection but also enable us to benefit from volatility and the repricing of market assets.

• The sell-off in real assets (represented by the Alerian MLP index down over 60% and the MSCI US REIT index down over 35% as of March 19, 2020) presents an attractive opportunity and we have a number of managers with dry powder sorting through the distress in many of the commodity segments, including energy.
  
  
• Within long-short equity, we are seeing some managers selectively increase net exposure, focusing on companies with balance sheets and business models that will position them to emerge from a severe downturn stronger than before.
  
  
• As credit spreads widen, we see the potential for future allocations to distressed debt, including municipal bonds.
  
  
• We continue to analyze opportunities within the U.S. public equity markets, particularly in smaller capitalization stocks.
  
  
• Our proactive portfolio hedging strategy is performing as expected as we monetize positions, providing ample liquidity for client needs and dry powder to allocate to opportunities that emerge from market dislocations.

With the S&P down over 25% as of March 19, 2020, firmly in bear territory, volatility is likely to remain elevated.  Correlation is to be expected in times of higher volatility and we have seen most equity markets move in lock step.  Longer term, it is important to focus on higher quality, sustainable businesses that have the wherewithal and ability to make it through the crisis and come out stronger on the other side.  Investors should take advantage of the opportunity to add exposure to these businesses while prices are attractive.  Additionally, this crisis has and will continue to expose stress and balance sheet weakness within the market.  Daily mark to market price fluctuations can be painful, but permanent loss of capital is worse.  Thus, it is important to identify and avoid vulnerable businesses and, where appropriate, short those with weak or highly levered balance sheets that make them susceptible to significant operational disruptions or bankruptcy.

The timeline of events moving forward is unclear and, while the circumstances differ from 2008-2009, the global economic slowdown as a result of COVID-19 could easily transition into a global recession.  Our team is proactively preparing for all possible outcomes, regularly assessing our portfolio and remaining in frequent contact with our managers.  It is our hope that with your confidence in our stewardship of your investment portfolios, your organizations can focus on the needs of your businesses, staffs, and stakeholders.

As we confer with our network of managers, clients, and advisors, we would like to offer the following perspective and advice:

• Resist the urge to change course: In the midst of a panic, our instincts drive us to want to take action, but the most prudent action is often to stay the course.
  
  
• Revisit your organizational objectives: It has always been Verger’s view that investment decisions for non-profit organizations should be driven by your specific institution’s mission, needs, and objectives – not the market environment.  As you evaluate the impacts of COVID-19 on your institution, it is important to identify whether those needs – operational expenses, liquidity and spending needs, risk tolerance – have changed.
  
  
• Lean on your constituents: There are many people who want to help, and, therefore, providing them with an outlet can benefit both your organization and your connection with your community of constituents.  Identify where there may be staff that can be redeployed to facets of your business that require the most attention during this time.  Leverage the experience and expertise of board members as you strategically navigate the current environment.  Engage your donors and ask for assistance and support.
  
  
• Communicate, communicate, communicate: Social distancing asks that we physically distance ourselves from one another, but we must continue to seek ways to come together.  Remain in constant communication with your constituents, not only providing updates regarding the implications of the current events for the organization, but also simply checking in as the changing social environment likely feels unsettling to many.  It is important for people to remember we are going through this together.

It goes without saying that the current events are unprecedented.  Like many of you, our team members, families, and friends are battling with the uncertainty and concern brought on by the spread of COVID-19 as it disrupts daily life in our homes and communities.  This pandemic impacts the entire global community as it takes its toll on financial markets, schools, businesses, and governments.  Our thoughts are with you as we all navigate and adjust to this crisis together.  We will come out of this stronger, smarter, and better prepared.  In the meantime, be safe and know that we are committed to keeping the lines of communication open.  Should you have additional questions, please contact Patrick Decker (215.510.0381, pdecker@vergercapital.com) or Wesley Carroccio (610.659.9168, wcarroccio@vergercapital.com).

On behalf of the Verger team,

Jim Dunn

Chief Executive & Investment Officer

The information provided here is for general informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security or a guarantee of future results. This article also does not constitute an offer to sell or a solicitation of an offer to buy interests in any particular security, including interests in any Verger Capital Management investment vehicle. This article may include “forward-looking statements,” such as information about possible or assumed investment returns or general economic conditions. Actual results may differ materially from the information included in this article and no information in this article will be updated to reflect actual results or changes in expectations.