A sure foundation?
January 2009
Finances in the grant-making sector are looking somewhat shaky on closer inspection, says Paul Palmer...
The world of grant-making trusts still remains shrouded in secrecy when compared to the wider charity fundraising sector. The late Luke Fitzherbert’s[i] commentaries expanded our knowledge but studies over the last ten years by Leat and Anhier point out the grant-making sector still remains a mystery to many – in particular where its money comes from and how it is spent?[ii]
The latest Charity Market Monitor[iii] devotes a whole chapter to what is a distinct charity subsector with a rich set of data. This article draws out the main financial findings of that data and provides a series of reflections on the subsector of grant-making and implications for the wider charity sector as it enters into a recession. We conclude by suggesting that the hopes of many UK charities – who believe that the grant-making trusts will come to their aid – are misplaced.
The scale of grant-maker expenditure
In macroeconomic terms, the charitable expenditure of the 300 largest grant-makers is some £2.6bn which, in comparison with statutory funding, comes to 25 per cent of the amount given to the sector by statutory sources. Income distribution by grant-making trusts is therefore large but way behind the government in sheer size of financial contribution. However, the importance of grant-making trusts is far more important than just financial size. There is a perception that independent grant-makers are radical social experiment funders. While some grant-makers do fund some experimental social projects for example, the Tudor Trust’s funding of reading books by fathers in prisons, this perception is not substantiated when measured in financial terms. The largest single source of grant-making funding by the top 20 funds goes to medical and scientific research primarily in the universities. Of equal importance is the other perception of these funds as ‘free funds’ outside of the state and also not subject to vagaries of public fundraising taste. In one sense the funds of grant-makers are said to be the ‘equity’ of the sector with the difference being that such funds instead of making a dividend payment, make a mission return.
The data this year removes the often cited claim that the Wellcome Trust is the largest grant-maker. This position is actually occupied by the Big Lottery Fund (BLF) which, at £392m, outstrips it by some £33m (see figure 1).
Of course, this raises the question as to whether the government influence over the BLF means it can be claimed to be an independent grant-maker, but such political and policy discussions are outside the remit of this article. As currently constituted, the BLF is a member of the Association of Charitable Foundations and occupies a fuzzy position between public and truly independent grant-making charities. The size of BLF and Wellcome is, however, an important fact. Together they give away £751m – the next 18 biggest grant-makers combined give around £150m below that figure, at just over £600m which, in part, is inflated by Gatsby, the third largest grant-maker. This foundation has decided to have a finite life and expend its funds, making some £117m available – twice as much as the fourth largest grant-maker.
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Future funding and distribution trends
There are therefore some short and long-term ominous signs for grant-making distribution. In the short term, the decision to divert funds from the BLF to the Olympics until at least 2012 is bound to have an impact. The decision of Lord Sainsbury to expend the Gatsby endowment will mean that, while for the next few years grant-making will receive a boost, in the long term another very large independent grant-maker will be removed. There is no evidence yet from the ‘new UK billionaires’ that a replacement for Lord Sainsbury will come forward. The US has at least had the benefit of individuals like Bill Gates and Warren Buffet.
There are also further ominous signs as to whether grant-making in the medium term will be maintained by the top 20. Ranked 12th and 14th respectively, the Lloyds TSB Foundation and the Northern Rock Foundation will see grant-making decline in future years as profitability falls at Lloyds TSB, while Northern Rock will distribute £15m a year guaranteed only for the next three years.
Three other grant-makers in the top 20 list will surprise readers who believed the majority of grant-makers have large investment holdings. Ranked at fourth, ninth and 16th are: Comic Relief, BBC Children in Need and Muslim Aid. These can be described as ‘conduit charities’ because they raise funds very effectively and distribute them quite quickly. On this issue of investment management, with the exception of Wellcome, once we take out the BLF, Gatsby, the two bank foundations and these three conduit charities, the financial asset size of the ‘independent grant-making’ charities is actually quite small with total funds under £40bn. The financial basis for the majority of grant-making by the top 20 is subject to short-term income from the public and not, as is popularly believed, based in longterm investments. This picture does not materially change when the top 300 grant-making trusts are reviewed as a whole. With a total income of some £3,196m, 32 per cent of this figure comes from investment, while voluntary income makes up the largest item at 58 per cent. Far from the popular perception of grant-making charities being the equity finance source of the charity sector, instead the grant-making subsector in many ways constitutes a competitor for public donations.
Investment performance
A report by the Institute of Philanthropy early in 2008 was critical of the investment performance of the grant¬making sector. Return on investments from the top 300 grant-making trusts would support these findings. From investment funds of nearly £30bn, the returns were some 3.5 per cent which, at the time of writing, was identical to investing all the funds in cash in a high street bank. This very poor investment return raises inevitable questions about the financial investment management ability of the grant-making trusts. We can only speculate as to the reasons for this collective poor performance. These could include:
- A hangover from former investment restrictions under the Trustee investment Act 196.[iv]
- Cultural issues, for example perceptions of charity and particular individual liability or ‘the ship not going down on my watch’ abound in the sector.
- A perception that the sector rarely seeks competitive tenders, reviews investment managers or seeks independent advice.
- Charities balancing the needs of beneficiaries today, or those in the future, inevitably seek a cautious investment strategy.
- Many of the trustees on investment committees and the staff that support them may not be up to the job.
- Perhaps the performance of some of the investment managers working in the sector is not all that it could be?
Whatever the reasons, the facts in this case are clear. Investment management by UK grant-making trusts is not delivering what it could be when compared with their US equivalents or to other investors in the UK and we need to find out what lies at the bottom of this.
The answer to this question is vitally important, particularly in a recession when charity resources will be stretched and there are strong indications of a drop in voluntary income. In the US, private foundations are required under tax law to pay out at least 5 per cent of the value of their endowment each year. If this was applied in the UK it would mean that, as a whole, some £500m of extra funds could have been available to distribute as grants. In a period when the charity sector and its effectiveness are under scrutiny, it can only be a matter of time before some difficult questions are put to the grant-making world on its investment performance and whether conservative investment strategies of seeking a 3 per cent return are morally justifiable, a notable exception being the Wellcome Trust which seeks to generate a 6 per cent return.
The Charity SORP based upon ‘fund accounting’ principles was never designed to provide the comparative management accounting data used in the private sector (see Pesh Framjee's article, Complexities of predestination). Equally, financial reporting treatment is still inconsistent, with over half of the 300 largest grant-making trusts with investments not disclosing separate management costs. Of course it may well be that these trusts are undertaking all the investment services themselves and using traditional stock-broking firms on an execution-only basis. If this is the case then it may well explain the poor investment management performance of the grant-making sector. Certainly the modest 0.3 per cent real growth after inflation increase in charity assets, in the recent period of stock market growth, does not bode well for the future.
Outlook for grant-making values
This pessimistic picture is not helped by the positive finding that the value of grant-making increased by 10 per cent, because this growth is in part accounted for by the distribution policy of the Gatsby foundation and the success of the ‘conduit charities’ such as Muslim Aid. However, after accounting for these irregularities there was still a real increase of 7 per cent.So the issue raising its head is: if charities were able to increase their giving during good times, what are they going to do in the current adverse economic climate? Indeed if history provides any lessons then investmentholding grant-makers should now be buying equities which are at historic lows in valuation and moving out of cash following rate reductions. However, while this may be a prudent and far sighted investment decision endorsed by the world’s most successful investor – the ‘Sage of Omaha’ himself, Warren Buffet – it would also mean that grant-makers would have less funds to distribute at a time of greatest need.
While informative, financial statistics and figures taken in isolation over one year are best understood if placed within trends. Beginning in the early 1980s, the farsighted decision by the then head of the Charities Aid Foundation, Michael Brophy, set the trend of gathering longitudinal data on the grant-makers. Charity Market Monitor provides new and more detailed recent two and five-year trends on investment and voluntary income, expenditure and funds.
It can be seen from figure 2 that in the 2002/03 periods, there was some flatlining followed by steady growth. The 2002/03 period reflected the fall in the stock exchange at this time which correlated to fewer grants andvoluntary income. Interestingly, during this period, voluntary income held up but then fell in the following year before also recovering.
The current forecast recession will be very different to the stock market fall of 2002/03. However, both will share weak markets so what, if anything can we conclude? Probably not much more for now than the likelihood grant-making trusts will cut their expenditure further thus compounding the sector’s current wind chill factor.
[i] Founder and director of the Directory of Social Change who died in 2007
[ii] For example Diana Leat’s Just Change, downloadable from www.acf.org.uk
[iii] Charity Market Monitor 2008: Volume 2: Grant-makers and Corporate Donors, published by CaritasData
[iv] The limited investment power of trustees permitted under The Trustee Investment Act 1961 was replaced with a wider general power under the Trustee Act 2000.
Author: Paul Palmer
Paul Palmer is professor of voluntary sector management and charities course director at the Cass Business School. He also acts as independent charities consultant to UBS Wealth Management
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