Commitment to Fiduciary Responsibility: Reflecting and Evolving for Our Ministry Partners
As we continue through the first quarter of 2025, we want to reiterate the Florida United Methodist Foundation’s unwavering commitment to serving as a trusted fiduciary for our ministry partners. Our role is not just to manage investment funds, but to actively ensure that every dollar entrusted to us is working as hard as it can to secure long-term financial strength for our churches and the ministries they support.
One of the most vital aspects of our fiduciary duty is our constant evaluation of our investment strategies. We hold ourselves accountable for assessing what’s working well and what might not be meeting our expectations. This ongoing reflection ensures that we are always making decisions that are in the best interest of our ministry partners and their long-term financial health.
In the fourth quarter of 2024, our Investment Committee took a significant step in this direction by making the decision to adjust our asset allocations. Specifically, we chose to eliminate liquid alternatives from our portfolio. This decision was not made lightly, but it reflects our commitment to optimizing the way we manage our funds. We continue to operate under an Investment Policy Statement that mandates all holdings be entirely liquid, which has led us to prioritize more flexible and efficient strategies over less liquid, fixed alternatives.
This change is not only designed to reduce unnecessary fees but also provides us with the opportunity to explore investment options that can perform at a higher level—options that are strategically focused on securing financial strength for our churches over the long term. By making this adjustment, we are positioning ourselves to provide more sustainable and impactful results for the ministries we serve.
We remain steadfast in our role as fiduciary, constantly refining and improving our strategies to benefit our ministry partners and ensure that their investment funds are aligned with the mission and future of their ministries. We look forward to sharing more updates with you throughout 2025 as we continue to evolve in the pursuit of excellence in service.
Navigating Market Volatility with Confidence
Market fluctuations are a natural part of investing, and while recent volatility may cause uncertainty, it also presents opportunities. Historically, periods of market turbulence have been followed by recovery and growth, reinforcing the importance of long-term perspective and disciplined investment strategies.
At the Florida United Methodist Foundation, we encourage our partners to remain focused on their financial goals rather than short-term market movements. Diversification, patience, and a well balanced investment approach help navigate these cycles with confidence. Our commitment remains steadfast in providing prudent stewardship and trusted guidance, ensuring that your investments align with your church or organization’s mission and long-term vision.
If you have any concerns or wish to discuss your investment strategy, we’re here to support and empower you. Together, we can turn uncertainty into opportunity.
ECONOMIC OUTLOOK
The Federal Reserve’s easing cycle may be short lived. Positively trending economic growth and a steady labor market led the central bank to caution investors that the pace of future interest rate cuts may be slower than expected. With the timing and impact of the new administration’s policy initiatives currently unknown, a cautious, data-dependent approach in 2025 may be warranted. The forward path of monetary policy remains unsettled, but the economic backdrop is generally favorable with multiple factors pointing to continued growth.
HEADWINDS
All Eyes Still on the Fed
- While the Fed has lowered expectations for additional rate cuts, investors remain focused on each new economic data release for signs of monetary policy clarity.
Policy Pressures
- The goal of tariffs and immigration reform is to promote national interests. However, these policies could be disruptive to business operations and result in wage inflation and higher input costs.
Fiscal Decisions
- While looming deadlines are likely to be extended and the Treasury may provide temporary liquidity, this year will be filled with budget and debt-ceiling debates. Headline risk around this process will be notable.
Housing Market Frozen
- The housing market remains stuck as elevated interest rates keep affordability at multi-decade lows.
TAILWINDS
Pro-Growth Policy Initiatives
- With the first rate cut, the economy has transitioned from an extended rate pause to an easing cycle. Fed officials are focused on preserving economic growth while maintaining a strong labor market.
Broader Profitability Potential
- The Magnificent Seven stocks continue to enjoy robust profits and cash flow. Yet smaller companies have struggled amid high interest rates. Now, slightly lower rates and pro-domestic business initiatives create the potential for smaller corporations to improve earnings and foster investment.
Promise of Productivity Gains
- Artificial intelligence adoption and related infrastructure investment continue. Small productivity steps have been achieved but larger outcomes will be necessary to accelerate economic growth.
CAPITAL MARKET ASSUMPTIONS (CMAs):
CMA changes tend to be incremental. Institutional investors benefit from a long-term perspective. This year, a moderate decrease in fixed income return expectations amid a falling interest rate environment leads to a decrease in expected returns for most traditional portfolios. Simultaneously, this easing sets the stage for attractive growth opportunities in alternative asset classes. Investors should consider the many roles that alternative assets play to determine their place in a modern portfolio. Note that CMAs provide an input for strategic asset allocation decisions, but modest annual changes should not upend long-term investment policies. Investors should balance slightly lower expected fixed income returns against the roles this asset class can serve in a portfolio. Your CAPTRUST financial advisor can help you contextualize your investment strategy, goals, and objectives within the current market outlook.
1 Non-traditional assets are modeled as 25% private real assets, 25% opportunistic real estate, and 50% private credit.
Considerations in Alternatives
- Higher interest rates created headwinds for most alternative investments throughout 2024, driving down asset valuations and deterring growth. As the Fed continues its easing path, valuations begin to look more attractive with expanded opportunities for growth.
- Low volatility alternatives, which bear a high sensitivity to interest rate changes, have been revised slightly downward but still offer an attractive diversification benefit to risk-sensitive investment committees.
- We expect private credit, real assets, real estate, and private equity will benefit from a lower interest rate environment, offering attractive returns and diversification benefits for portfolios with larger risk appetites. For comparison, the traditional 60/40 portfolio projects a 6.19% return over a 7- to 10-year time horizon.
IS THERE A LANDING ON THE HORIZON?
Investors have been debating the forward path of interest rates for two full years now. At the beginning of 2024, many agreed that monetary policy easing was the likely outcome. Yet circumstances have once again changed. Continued economic growth, a sturdy labor market, and potential policy changes from the administration have left the future of Fed rate cuts uncertain.
Market expectations for fed funds rate cuts moderated significantly over the final quarter of 2024. Rates were lowered by 1 percent over the past three Fed meetings, ending the year at 4.25-4.50 percent. Fed Chair Jerome Powell continues to stress the Fed’s dependence on data before making future changes. With the economy continuing to show signs of strength and the impact of the new administration’s policy changes yet unknown, this stance is now more important than ever.
Sources: Federal Reserve Bank of St. Louis, CME FedWatch Tool, CAPTRUST research
TACKLING DEBT THROUGH GROWTH
Most agree the country’s current fiscal path is unsustainable. While multiple approaches could improve our nation’s balance sheet, the least disruptive and most powerful is economic growth. At 1.2 times the country’s gross domestic product (GDP), the U.S. federal debt level is now higher than ever before, comparable only to what it was after World War II.
Takeaway
At the end of the Second World War, U.S. debt levels caused widespread panic. Many questioned how the country would survive. The solution was economic growth. Despite debt continuing to grow at nearly 4 percent annually between 1947 and 1981, GDP grew faster. As a result, the debt-to-GDP ratio declined from 1.2x to 0.3x. Individuals cannot outgrow debt because personal debt comes due. The same is not true for nations. Ongoing economic growth perpetually services a nation’s debt. While economic growth is a simple concept, achieving it will not be easy. It requires robust technology to drive enhanced productivity-fueled growth. Failure would result in austerity and inflation, a combination that could carry a significant price for the federal economy and for Americans’ quality of life.
Sources: U.S. Bureau of Labor Statistics, CAPTRUST research. Data as of 9.30.2024.
DOMESTIC EQUITIES BOOSTED BY POLITICAL LANDSCAPE
Political and monetary policy crosscurrents drove volatility in the final quarter of 2024. In the U.S., a clean election outcome provided a mid-quarter boost while tariff rhetoric and divergent monetary policy proved to be headwinds for foreign equities. Sentiment continued to favor the U.S., though a more hawkish Federal Reserve disrupted momentum in December. While high interest rates remain a hurdle for many sectors, U.S. mega-cap growth stocks continue to rise.
- Investor sentiment shifted in favor of domestic equities on strong relative fundamentals with a clear preference for mega-cap growth stocks.
- Bonds yields mostly rose as the market anticipated a slower pace of rate cuts with economic growth and inflation still above expectations.
- Commodities saw modest losses and soft global demand. The strength of the dollar contributed.
- Real estate, which faced challenges all year, was constrained by the increase in interest rates.
- International markets struggled against one of the best years for the U.S. dollar in nearly a decade. Weak relative growth from the EU was also an additional headwind.
Asset class returns are represented by the following indexes: Bloomberg U.S. Aggregate Bond Index (U.S. bonds), S&P 500 Index (U.S. large-cap stocks), Russell 2000® (U.S. small-cap stocks), MSCI EAFE Index (international developed market stocks), MSCI Emerging Market Index (emerging market stocks), Dow Jones U.S. Real Estate Index (real estate), and Bloomberg Commodity Index (commodities).