Despite a strong fourth quarter, which saw every category finish in positive territory for the quarter, it only served to blunt the damage already done earlier in 2022.
For the year fixed income finished the year down -13%. Equities, or stocks, ranged from being down -14% to -20.4%. Real Estate was down -25.2%.
This was the rare and unique year that saw both stocks and bonds down by over 10% in the same year — something that last happened in the late 1960s.
In fact, the only year of worse performance by both stocks and bonds in the same year was in 1890. Think about everything that has happened in U.S. history over the last 132 years.
Skillful management of church investments limited damage done
For the year, the entire portfolio of FUMF Funds — the Foundation’s investment funds available to churches and related agencies — combined was down by -13.2%. That’s actually a very good return despite the pain of seeing a negative number for the year. If you look at the breakdown above, we had the same return as if the entire portfolio was in bonds for the whole year.
That wasn’t the case, obviously. So, what happened?
Managers with our investment consultant, CAPTRUST, did well limiting the damage that could have happened. That’s what we expect them to do.
Diversification didn’t help in the short-term
What about diversification? Isn’t that suppose to help in these circumstances?
Yes, normally, it would. But 2022 was the year diversification failed. Above is a chart of different combinations of investment pools ranging from 100% in fixed over to 100% in equities. The dark bars are the rolling 12-month averages for each category going back to 1976.
As you can see, the more conservative investors were in structure going into 2022, the worse they got punished. In fact, the first three mixes were outside the worst performance in the previous 45 years.
While most advisors suggest a mix of 60% equity and 40% fixed to be optimal exposure, this ratio during 2022 performed in the bottom 20% of yearly performances over the last 45 years at -15.8%. Our combined portfolio was only down -13.2%.
The performance of each of the Foundation’s investment funds is summarized below.
Aggressive rate hikes create a strong foundation
Where do we go from here?
The Federal Reserve has been the most aggressive — again, going back more than 50 years — in both the size of jumps and the speed at which they are raising rates starting last summer.
This has inverted the interest rate yield curve and created a lot of volatility in the markets, but it had to be done.
For much of the last decade, investors have coped with a near-zero risk-free rate. Central banks made it expensive to maintain a conservative portfolio.
Consequently, investors with return requirements were forced to accept higher risk. Despite near-term challenges, these policy actions should create a stronger foundation to support the next decade of investing.
The new year has started out strong, and despite more volatility for longer than originally hoped, we are positioning our funds to expect strong returns over the next several years and beyond.
View the complete FUMF Funds performance data for Q4
Learn more about the Foundation’s investment funds for churches and related agencies
Craske is the Foundation’s vice president of loans and investments.