Best advice?
March 2008
Cathy Pharoah and Mark Pincher analyse the top charity investors and their investment manager choices...
These are nervous times for charity finance managers. With the commercial property and housing markets weakened by the lending squeeze, poor retail figures, and GDP growth predicted to slow to 1.5 to 3 perc ent in 2008, UK charity finance is more than likely to take a hit. The real question is how much. A recent report has claimed that charity funds closed a healthy 6 percent up at the end of 2007 (State Street Investment Analysis, Jan 2008), following a return of confidence and greater bullishness in investment after the doldrums of the early part of the decade. But in fact the final 2007 quarter results were actually quite poor. New figures have confirmed much slower growth in the US economy and amidst increasing fears of recession there is mounting evidence of serious further bank losses (Citigroup and Merrill Lynch being the most recent casualties). Many will be wondering what will happen to charity investments in 2008.
At such times it is particularly important that financial management is in good hands. The escalating value of charity assets over the last two decades has led to increasing use of blue chip investment management. Top charity clients are highly sought after. Based on new research, this article identifies market trends in the firms chosen by the UK’s top 100 wealthiest charities, and charity sub-sectors to manage their finances. It ranks the firms with most clients in this top charity group, and the range of sub-sectors they cover.
Benchmarking and expectations
Charities are under significant pressure to achieve the best results with any funds they invest. In many cases making the right investment decisions is not just about responsibility to donors, but a straightforward question of having the means to achieve the mission. So getting proper financial advice is key for trustee boards making investment decisions, but how can they know if they are getting the best recommendations? One important start to assessing performance is to understand the financial dynamics within your particular charity sub-sector, to make sure that you are measuring like with like and have realistic expectations. How differently do the main charity sub-sectors perform?
To explore this, further comparison of trends in the major sub-sectors which compose the £45 bn total funds figure for the top 100 charities was carried out (see our article, 'The Myth of the big players'). The total fund values of the top grant makers increased by almost £8.5bn (28 per cent) between 2001 and 2006, but the analysis revealed that there was wide variation in the scale and growth of asset values in the different charity sub-sectors, as figure 1 illustrates.
Figure 1 Comparative growth in sub-sector asset values 2001-2006
The growth in the total funds value of the large endowed grant makers was four times that of the major operating and fundraising charities. While some of this variation is inherent in the characteristics of different charity sub-sectors, it is important to consider whether differences in financial management might be a factor. So who is managing the funds of the various sub-sectors, and does management vary by sub-sector?
Choice of firms by sub-sector
The Trustee Act 2000 made the preparation of written guidance on investment policy, a ‘policy statement’, a legal requirement for trustees before they can delegate any of their investment functions to agents (s.15, Trustee Act 2000). In practice, investment functions are generally in fact the most commonly delegated functions, indicating that finance is an area in which sector most feels the need for external expertise. The Charity Commission states in its operational guidance (OG 86 C2) that ‘A charity's policy statement …….. clarifies the responsibilities and the extent of the authority of the investment managers appointed by the trustees. A charity's policy statement provides a written framework for a charity's investment strategy and should contain the principles that will govern the detail of the investment decisions taken by the investment manager. The investment manager's investment decisions must be taken within the parameters of operation set out in the policy statement.’
Choices are likely to be a function of a number of factors, including the specific complex requirements of individual organisations, experience of and contacts in the market-place, charity appetite for change and risk, firm’s performance track record and specialised policies and expertise in areas such SRI. Some sub-sector specialisation in the selection of financial advice and management firms might be expected, but research on the firms providing services to the largest charities suggested that is not the case to any great extent.
In fact around 62 different financial firms provided services to the largest 100 charities, of which 34 had one client only from this group. Many of the top charities have several different firms dealing with their various financial management needs. This diversity may indicate that the finances of individual large charities are unique and complex, necessitating individually tailored choices of provider, and that this is more significant than any characteristics they might share with others in their sub-sector. Or is it a case of the sector hedging its bets?
Only 18 of the firms were recorded as having charity clients in more than one sub-sector. BlackRock topped the table for number of sub-sectors served, with clients reported in all six sub-sectors, as figure 2 shows. They were followed by Barclays Global Investors Limited, who reported clients in five of the sub-sectors.
Figure 2: Main financial adviser firms to charity sub-sectors of top 100
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Name of firm
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Clients in sub-sectors
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Arts
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Churches
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Fund-raisers
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Grant-makers
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Hospitals
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Operating
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BlackRock
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Barclays Global Investors Limited
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Capital International Limited
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Sarasin Chiswell
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UBS AG
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Schroders Charities
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CCLA Investment Management Limited
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HSBC Investments (UK) Ltd
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JPMorgan Asset Management
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Newton Investment Management Limited
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Cazenove Capital Management
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Aberdeen Asset Managers
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Collins Stewart Ltd
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Hewitt Bacon & Woodrow
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Insight Investment Management (Global) Ltd
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Martin Currie Investment Management
Limited
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Rensburg Sheppards Investment
Management Limited
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State Street Global Advisers
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Number of clients in 100 largest charities
Not surprisingly, with a presence in all sub-sectors, BlackRock also had the highest number of clients amongst the top 100 charities by total funds in 2006, closely followed by UBS AG (see figure 3). However, number of clients was not directly related to number of sub-sectors served. For example, Schroders Charities and Newton Investment Management Limited had high numbers of clients across three sectors.
Figure 3 shows the wide spread of providers used by this group of charities, with only 29 firms having two clients or more in this group. It seems that in selecting their financial advisers and managers, the big charities exercise their right to choose from a wide range of providers.
Figure 3: Main financial adviser firms to top 100 charities by total funds
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Name of firm
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Number of clients in top 100 by total funds
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BlackRock
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14
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UBS AG
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12
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Barclays Global Investors Limited
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10
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Schroders Charities
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10
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Newton Investment Management Limited
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9
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JPMorgan Asset Management
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8
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Sarasin Chiswell
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7
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Capital International Limited
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6
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Cazenove Capital Management
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6
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Aberdeen Asset Managers
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5
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Rensburg Sheppards Investment Management Limited
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5
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Martin Currie Investment Management Limited
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4
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CCLA Investment Management Limited
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3
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Goldman Sachs International Limited
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3
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HSBC Investments (UK) Ltd
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3
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Marathon Asset Management Limited
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3
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Payden & Rygel Global Ltd
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3
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Barclays Private Bank Limited
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2
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Collins Stewart Ltd
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2
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Fidelity Investments Limited
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2
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Hewitt Bacon & Woodrow
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2
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Insight Investment Management (Global) Ltd
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2
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Liontrust Asset Management PLC
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2
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Morgan Stanley Investment Management
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2
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Morley Fund Management
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2
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PIMCO Europe Ltd.
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2
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RCM
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2
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State Street Global Advisers
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2
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AXA Investment Managers
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2
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Getting the right investment advice
Where investment management is delegated, trustees still have the right to intervene in investment policy if they feel there is a need. They may revise their choice of provider. One of the areas where active investment management involvement by trustees has particularly been recommended, for example, is in ethical investment. The UK Social Investment Forum (UKSIF) takes the view that good green and ethical investment needs active fund management, by both managers and their clients, and is a normal element of more expensive active fund management approaches.
The 2000 investment guidelines, along with the desire to achieve the best possible return on investments, including ethical considerations, mean that getting the right investment advice is now a vital part of managing a charity’s money and good charity management. It also means that charities need to have the right skill set on their board of trustees, including someone with investment experience. One example of a charity with its sights set on high performance and whose total funds were noted to have five-year growth in listed investment values of around 29% in real terms is Guy’s and St Thomas, who have just appointed Elroy Dimson, BGI Professor of Investment Management at the London Business School to their Investment Committee (see also Watson Wyatt/Dimson, European Foundations, Feb 2007 for a comparison of investments of top European and US foundations).
But even experienced boards can also value external advisers. They are under just as much pressure as inexperienced ones to demonstrate that they have exercised due diligence, particularly in the wake of the Trustee Act. And while there seems little sub-sector provider specialisation amongst the largest charities in use of financial management firms, it is clearly important to the sector that the investment firms they use have a charity specialisation. A wide choice of firms with charity expertise is now available, and some also run seminars and provide guidance specifically aimed at improving trustees’ understanding of investment issues.
High quality investment advice needs to be placed in the context of a clear understanding of the sector, the ways in which charities operate and the prime importance of a charity’s mission above everything else it does. In a boom financial climate, a charity may be able to evade difficult choices between, for example, financial or social gains, spending out or strengthening reserves when deciding how to use funds because income streams are enabling full pursuit of the mission. But when the economy is contracting, harder choices may have to be made, and that is when it is particularly important to have appropriate charity financial advice. Moreover, advice has to be tailored to the particular needs and expectations within individual charities, and the charity sub-sector within which they are operating. As the next section shows, a lot is at stake.
Top charities by value of investments
The challenge faced by individual charities in relation to good investment management can be gauged by looking at the investment values of the top charities. Figure 4 sets out the top 25 charities by value of investments.
Figure 4: Top 25 Charities by value of investments 2002-2006 (£m)
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2006
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2002
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Wellcome Trust
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13,939.9
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8646.0
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Church Commissioners for England
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3503.6
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2959.6
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Garfield Weston Foundation
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3488.3
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2163.8
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Allchurches Trust Ltd
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1515.4
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Leverhulme Trust
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1240.0
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1051.7
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Esmée Fairbairn Foundation
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878.8
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553.2
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National Trust
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841.1
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630.9
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Henry Smith Charity
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730.6
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498.3
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Health Foundation
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671.4
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437.9
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Paul Hamlyn Foundation
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480.0
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Wolfson Foundation
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479.9
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684.6
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Guy's & St Thomas' Charity
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451.0
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392.7
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Gatsby Charitable Foundation
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386.6
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496.8
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Children's Investment Fund Foundation
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355.2
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Bridge House Trust
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315.8
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257.8
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Tudor Trust
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311.8
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320.4
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Society of Jesus Trust of 1929 for Roman Catholic Purposes
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309.5
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247.0
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Christ's Hospital
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304.1
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200.5
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Khodorkovsky Foundation
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299.5
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Joseph Rowntree Foundation
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273.3
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170.0
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Robertson Trust
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258.3
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231.7
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Nuffield Foundation
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256.3
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169.4
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National Fund
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251.2
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190.0
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Royal National Lifeboat Institution
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250.9
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232.2
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Rank Foundation Limited
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233.3
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160.1
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TOTAL
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32,026.9
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20,694.5
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These 25 held investments worth £32 billion in 2006. This represented a fairly robust average real-terms 7.5 percent per annum growth over the five-year period from 2001, with a top-of-the-range real-terms value of 9 percent in some charities.
Income as percent of investments
After excluding the few operating or non-endowed organizations in the table whose income comes from diverse streams, the remaining charities held £30 billion of investments and had an average income of £1.4 billion income. This income represents an average 4.6 percent of investment value, lying within a range from 14 percent to 1.8 percent. This is somewhat below the 6 percent for the year quoted above. The majority can be seen to lie between 2 to 6 percent (see figure 5). Without more detailed data on investment type and return, these results need to be taken as indicative only. However, they do suggest there may be some variation in performance of investments which is worth further exploration.
Figure 5 Income as percentage of assets among 25 largest charities (by investments)
Prepare for change
The current volatility of the financial environment is likely to affect investment choices and raise familiar issues about the appropriate levels of diversity and risk-taking in the investment portfolio. Trustees’ confidence in experimenting with the wider powers of investment available after the Trustees Investment Act became law in 2001 took a knock when 9/11 and the collapse of the dot.com boom undermined the markets. Following this, rising confidence brought about greater diversity of investments and more risk-taking emerged, particularly in relation to higher-risk, higher-reward hedge funds (see JP Morgan Fleming, Annual Investment Survey 2004).
Today’s economic climate may strengthen the hands of trustees with more conservative investment views again, and should certainly be prompting trustees and their advisers to review the split between different types of investment in their portfolio. Figure 6 below shows the current distribution of the charity investments of the 100 wealthiest charities across different asset classes. Just 5 percent of the total funds of this group were in cash, a low proportion indicating that most funds are invested for a higher return. But those with the 6 percent of investment in property may well be wondering whether they should move some of their funds, if they can.
It has now become clear that the wider investment powers granted to charity trustees in 2000 came too late to enable charities to benefit from the kinds of stock market growth seen in the late ‘90s and which led to a huge increase in the value of some charitable trusts’ assets. Nonetheless the last two to three years has seen the emergence of some strong returns, as reported in the first paragraph of this article. Some will argue that charities need to hold their nerve in the current financial context, as stock market investments are for the long-term and historic trends generally indicate good returns over this timeframe. Charities, however, are ever mindful of their obligations to their beneficiaries, and will need to decide which types of investments best achieve this.
There is also likely to be a knock-on effect on other activities: some charities will increase their fundraising efforts to try to cover any investment income shortfall, while some will reduce expenditure. In the current climate many will be reviewing their investments, and recognising just how much a part of good investment management involves ongoing portfolio monitoring. Such reviews may be both a threat and a challenge to charities’ financial advisers, and it will be interesting to re-assess the pattern of employment of financial advisers at the end of 2008 which so far looks set to be at best a period of financial volatility, and at worst one of recession.
Author: Mark Pincher
Mark Pincher is data editor and development manager for Caritas Data.
Author: Cathy Pharoah
Cathy Pharoah is co-director of the ESRC Research Centre for Charitable Giving and Philanthropy (CGAP) at Cass Business School.
www.cass.city.ac.uk/philanthropy
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