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Newsletter  14/04/2015

Charities can take advantage of the long view!

When considering the asset allocation and performance of their investment portfolios, charity executives and trustees should be clear on what they are trying to achieve with their investment portfolios and focus on this ahead of short term relative investment performance and investment risk.

While accepting that all charities are different and have their own requirements, for many charities their aim is to maintain their capital base in real terms for future generations and to fund their purposes in the short term. Of course the cost of funding their purposes will rise in line with inflation and so income generated from portfolios needs to increase in absolute terms over time.  The main implication of this is that trustees should take more risk in their portfolios. This is because if trustees view it as reasonable to use between 3% and 5% of the portfolio value per annum to fund their immediate commitments they will need a portfolio structured to achieve that sort of return in real terms and this inevitably takes them in to riskier assets.  However in failing to take that level of investment risk while continuing to fund annual commitments at the levels above trustees take the more existential risk of their capital base eroding in real terms over time and this has never been more apparent than in current markets.

This is because with cash yields negligible and likely to remain so for the foreseeable future and government bond yields almost guaranteed to lock investors into a real loss if held for anything other than short term tactical reasons these assets should have no place in endowment portfolios at this time.  Charities could benefit from investing a higher proportion of their funds in more volatile asset classes such as equities, corporate bonds, high yield debt and property. 

Charities could benefit from investing a higher proportion of their funds in more volatile asset classes such as equities, corporate bonds, high yield debt and property. 

The opportunities for those prepared to take this risk are significant.   For example, in the UK equity market, large, global companies with strong brands and balance sheets paying attractive and growing dividends can be bought on reasonable valuations.  Increasingly they will be seen as safe places to invest, safer perhaps even than government bond markets whilst also offering an inflation hedge.  GlaxoSmithkline, BT, Diageo and Compass Group, all fulfil these criteria. 

Yield used to be the preserve of UK equities. However, reasonable income yields (much higher than yields on cash or gilts) are available in many international companies. Charity portfolios looking for a reasonable level of income generation do not need to confine their portfolios to the UK.

As an alternative to cash or gilts charities could consider infrastructure.  Secondary stage projects (built and let long term to the Government and other public bodies) offer predictable, government backed, long term cash flows, which are partially index linked. Funds investing in infrastructure and quoted on the London Stock Exchange are yielding over 5% compared to the ten year gilt yield of 2.4%.  Commercial property if held through a well diversified portfolio offers similar advantages of long term predictable returns with an income that should keep pace with inflation.  There are also numerous niche areas of debt markets such as high yield, asset backed securities and floating rate instruments where returns are likely to be much more attractive than gilts or cash and these areas are now being made available to investors through well diversified and well managed fund structures.

The long term nature of Charity investment offers them the advantage over many investors of being able to take an extremely long term view.

The long term nature of Charity investment offers them the advantage over many investors of being able to take an extremely long term view.  Charities which take that view should be able continue their good works for many years to come fail to do so and they risk their very existence.

Marcus Brooks
Director and Head of Charities

David Appleton

Newsletter  21/06/2017

A day in the life of...David Appleton

No two days are the same for anyone working at the front line of investment decisions. This article is a brief and personal account of a full and varied day that brings many challenges for Investment Director David Appleton...not least from his daughter, Lily...

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Newsletter  05/05/2017

Happy Birthday ISA!

Individual Savings Accounts (ISAs) celebrate their 30th Birthday in the tax year 2017-18 with a major increase in the allowance to £20,000 per annum.

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