Navigating the Storm: On Divestment, Engagement, and Major Market Events

Our top priority remains the protection and growth of the capital that supports your mission and impact.

We have spent many years investing in systems and data and have built strong relationships with many of the world’s most talented investors, allowing us to assimilate new variables quickly and proactively within our risk-assessment framework. This plays an integral role in our day-to-day work but takes on outsized importance during particularly volatile times.

In step with innovation and progress, our world is marked by the near-constant turmoil of shifting fault lines and the resultant complexity. We are committed to assisting you in making investment decisions that will allow your organization to continue to execute its mission in perpetuity. It is our overriding goal, our raison d’etre, to help you realize your mission, accounting for the complications that can arise from investing in a world that is becoming more connected by the minute, while ensuring that your capital is positioned to do an ultimate good and generate a return able to support your vision for future generations.

It is critically important to remember our approach is heavily influenced by the goal of preserving or enhancing the impact of client portfolios in the decades ahead. That translates to a philosophy that does not in and of itself seek to predict or react to events.  Durable investment success is fundamentally built on having an edge—ours is a long-time horizon, extensive and successful experience constructing portfolios, and access to top-quality investors; it is not about predicting what will happen in Israel, Gaza, Ukraine, China, with COVID-19, etc.  

That said, we continuously remain on top of any and all possible risks and developments. As witnessed repeatedly through time, markets will react in ways that reflect the logical implications of change while ultimately over-reacting and failing to account for the nuances that ultimately matter most for portfolios of individual companies.  

In essence, the key to surviving and potentially thriving in a complex time is maintaining one’s discipline around first principles. 

Crisis and Opportunity

We recognize that it is reasonable for major newsworthy events to cause fear and uncertainty in people, including most investors. After all, these events typically expose some sort of major issue, without a plan or timeline for how and when it will be solved. In most cases, these events, even if not necessarily instigated by an issue in the capital markets, can lead to significant market uncertainty, volatility, and often times downturns.

However, even though we may in the moment feel that such an event, as it initially unfolds, is somehow different from all others or definitive, the truth is that (a) “epoch-defining” events unfortunately do occur relatively frequently (see Exhibit below) and (b) the markets eventually not only rebound but also continue to rise.

The key to ensuring investment success in the face of major news and market stresses is to either have the preternatural ability to predict events others are unable to anticipate—which we believe is impossible to do on a consistent basis—or to capitalize on the divergence between market price and fundamental value, with the necessary patience and long-term outlook to wait as this divergence attenuates. The latter comprises the core of our advice to clients and is executed through diversified exposure to exceptional investors consumed with the demanding task of properly valuing businesses.  While human nature drives most of us to become defensive in the face of heightened risk and uncertainty, outsized and often asymmetric opportunities are created in such moments, as capital markets deliver returns commensurate with the risks taken.  It is for this reason that we advise our clients from a broader asset-allocation perspective not only to avoid de-risking during periods of market uncertainty and fear, but to lean in as much as possible, adding capital through simple, disciplined rebalancing to strategic asset-allocation targets.

Of course, rebalancing to broad asset-allocation targets during a market crisis is easier said than done. Our clients must consider a host of factors as they determine to which manager they should rebalance:

• Liquidity constraints and needs—given managers differ in terms of investment and redemption periods, and certainly during times of market stress, liquidity needs may be heightened.
• Organizational risks to underlying managers, which may have occurred as a result of the event.
• Return expectations by manager, based on performance differentials and different risk/return expectations.

Given that the liquidity constraints and needs will vary widely by client and situation, there is no single rule by which we guide our clients; however, we would maintain that liquidity does come with a cost and the tradeoff for assuming some illiquidity is the likelihood of greater returns. The second and third considerations are among the core areas of focus of our investment team at all times, but even more so during periods of market stress. These periods often give our team a chance to either shore up or potentially even strengthen our conviction in these managers, as we have learned that manager “stars” shine brightest when the markets are darkest; they also allow us to gain a better sense of the relative risk and return expectations across managers vis-à-vis one another. The most typical outcome from our discussions with managers during these periods is that it would prove wise to hold, or in some cases add to positions whose prices have declined to an extreme degree, although of course any such decision must be made with a comprehensive assessment of any risks that may be realized, with the dispassion and discipline that generally define successful long-term investments.

Achieving Impact

Among the important changes underway in the investment world is a shift towards a greater appreciation of the material long-term risks assumed by countries, companies, and industries that do great harm to our planet and communities.  While somewhat open-ended labels such as “ESG” (environmental, social, and governance issues) are generally used to describe this shift, the issues involved are quite complex.

The world is far more complicated than the marquee news, and knowing the right move is sometimes not as clear cut as it may seem, particularly concerning reverberations as they shift more than one remove away from the event itself.  Do we make a distinction between the Russian, Israeli, or Palestinian people and their governments?  Do we think differently about companies domiciled in these areas that are not controlled by the government and contribute positively to the lives of the average citizen?  Does divestment have any impact, or would remaining a shareholder more effectively drive change?  These are not easy questions.  Like all investment decisions, they must be made with imperfect information and based on the perspective of each client.   

• Passive vs. Active Values Alignment

The greatest impact on an issue is achieved when the problem is solved. Before deciding to divest, have we made every effort to address and potentially solve the problem? This approach aligns with the belief that staying engaged as active shareholders can drive more meaningful change than simply walking away.

• Scale of Impact from Divestment

The primary goal of divestment is to increase the cost of capital for a business, organization, or industry. However, if only a small number of investors choose to divest, will it achieve the desired effect? Additionally, recognizing that entities are on a spectrum concerning different impact issues, could there be more to gain by moving the entity further along this spectrum towards better outcomes? If no insurmountable values-alignment issues exist, is divestment the best fiduciary decision for the portfolio’s performance, considering all factors that impact the entity when addressing the issue in question? 

• Alienating Possible Agents of Change

When evaluating the issues, could the target entity be a helpful or even necessary agent of change? By divesting, do we risk alienating those who could be pivotal in driving positive transformation? Engaging with companies provides an opportunity to influence their practices and policies, potentially leading to more substantial and lasting improvements than divestment could achieve.

Conclusion

Navigating major market events and the complexities of engagement and divestment is a challenging journey for any investor, especially for institutions who are deeply committed to their values and missions. We understand the stress and concerns that come with making these difficult decisions. For example, while divestment can be a powerful statement and sometimes necessary, it often doesn't achieve the level of change we hope for in isolation.

Engagement, on the other hand, offers an opportunity to remain involved and potentially drive significant improvements from within. However, we recognize that this path is not without its own set of challenges and frustrations. At Crewcial, our goal is to support our clients by providing comprehensive data and thoughtful guidance, helping them weigh the pros and cons of each approach. 

We believe that a balanced and informed strategy, considering both engagement and divestment, tailored to the specific circumstances and values of each client, can lead to the most effective outcomes. We are committed to walking alongside our clients in this journey, offering understanding, empathy, and expertise as they navigate these important decisions. Together, we can strive towards a more sustainable and just future.

Investment advisory services are offered by Crewcial Partners, LLC, a Securities and Exchange Commission Registered Investment Advisor.  Opinions expressed are as of the current date and subject to change without notice, and information may be obtained from third-party sources we believe are reliable. Crewcial Partners, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. This commentary is for informational purposes only and has not been tailored to suit any individual.  Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. 

This commentary contains certain forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.