In this guest blog, Cazenove Capital outline what charities with investments need to be thinking about right now. Opinions are the author’s own.
Charities will be an undisputable source of support over the coming months as the cost-of-living crisis takes hold. Amongst the chaos and angst, the sector should demonstrate how it can collaborate, mobilise, and help those who need it most – much like during the pandemic.
Many charities are already facing up to increasing costs and even greater demand for their services. Where can the extra income to fill this shortfall come from?
Investment markets, often seen as forecasters for the future state of the economy, are volatile, reacting sharply to inflation expectations, consequent implications for interest rates, changes to government policy and lacklustre expectations for growth next year. This can make it uncomfortable for charity boards with investment portfolios to make funding decisions, with even less predictability than usual in terms of expected returns. Is now the right time to be taking extra money from your charity’s portfolios, or should you sit tight and stick to the long-term plan?
We anticipate that there will be important and difficult decisions to be made and urge charities to consider the options carefully in relation to their particular circumstances. You need to understand the implications and seek advice from your investment managers if necessary.
Long term objectives
Many long-term charity investors have objectives that link their annual spending rate to inflation – thereby reflecting their ‘real life’ objective to meet the needs of today’s beneficiaries whilst preserving the real value and spending power of their assets for the future. In our experience, most long-term charity investors target a total return of CPI+3-4% per year on average, over a 5 – 10 year period. This reflects the desire to withdraw around 3-4% each year and maintain the real value of the assets over time. You can read more about our research into sustainable spending rates here.
These objectives should always be seen as long-term targets, rather than something to achieve year-in year-out. In years like this one for example, where CPI inflation is 9.9% at the time of writing and total returns from global equities and UK government bonds are negative over the past 12 months, achieving CPI+3-4% is just not possible. But over the past few years, it has been entirely achievable. So, to meet targets such as CPI+3-4% over the long term, history has taught us that it is important to stay invested and be disciplined, so the good years can make up for the tricky ones.
Is now the time to sell?
If you’re a long-term charity investor trying to cope with additional demand for your support, you may be asking if now is the time to look to your investment portfolio. Here are three options that we believe your board should consider, along with potential implications for investment returns:
1. Stick to the long-term investment strategy
- Don’t withdraw any additional money above the agreed long term sustainable spending rate (3-4% in the example above).
- Review other areas instead, in light of the crisis, such as reprioritising grants and cutting costs elsewhere.
- This is unlikely to affect your chances of meeting your investment objectives over the long term.
2. Agree an additional withdrawal
- This may be appealing if your beneficiaries are acutely affected by the cost-of-living crisis. If your purpose is to support vulnerable people, then you may be responding to unprecedented need.
- You could analyse how much you’ve withdrawn on average over the past five years (or longer), to see if this is above or below the agreed spending rate. If the total is below, there may be a case to withdraw any surplus return above inflation over the period and ‘reset’ the CPI+X% objective. Your investment managers should be able to help with the calculation if required.
- You should note however that you will then have a smaller investment portfolio, which may have implications for the sustainable level of expenditure and available support for beneficiaries in the future.
- We would recommend keeping an active dialogue with your investment managers on spending plans. It is helpful if they are able to offer investment advice and can advise on timings and help manage any proposed withdrawals.
3. Take out a loan
- During the pandemic, we had a few charity clients who wanted to increase their spending at short notice but didn’t want to sell assets after the sharp market sell-off we saw in March 2020. In some instances, we offered short term loans, secured against their portfolios, so they were still invested when the rapid bounce-back in equity markets came.
- Boards should carefully consider if this is appropriate in their circumstances, recognising that the cost of borrowing is going up.
There is no right or wrong answer to whether now is the right time to withdraw assets from your investment portfolio. Our advice is for charities to consider the options above in relation to their specific circumstances and clearly document any decisions and rationale, so that boards in the future will understand why the decision was taken.
Cazenove Capital is the largest manager of charitable assets in the UK. They offer investment advice alongside discretionary investment management and their Charity Responsible Multi-Asset Fund has been awarded 5 stars for risk and return as well as 5 globes for sustainability from Morningstar.
There is a session on the Cost of Living Crisis and how charities can respond at Cazenove Capital’s upcoming Charity Investment Forum on 17th November.
Please get in touch with email@example.com if you’d like to discuss your charity’s investments and how Cazenove Capital might be able to help.
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