Hidden assets and liabilities
December 2007
Cathy Pharoah looks at new CaritasData research by Mark Pincher on the sector's assets and finds there is little cause for complacency...
The voluntary sector’s role as guardian of major national assets goes strangely unnoticed compared with the huge wave of public and government interest in sector service provision. Yet it has a large and growing role in looking after important national assets. Furthermore, the scale and scope of the assets now held by the voluntary sector means that it is increasingly sensitive to trends in the wider economy. The most important first step towards protecting sector assets is identifying what they are. This article ranks the top 100 charities by total fund values (see figure 5 ), and analyses the value of different types of assets and investments along with comparative growth trends over the five-year period from 2001/02 -2005/06. How far does this evidence suggest hat policy-makers need to take more account of the impacts of decisions on the sector’s financial health and the unforeseen fall-out on the sector from wider economic events?
Pricy or priceless?
The total funds of the 100 top charities by assets were worth a chunky £45bn in 2006. This means that they represent about 50 per cent of the total asset value of the voluntary sector, and are a dominant league. In fact, over half of their asset value is accounted for by just ten organisations, totalling £26,889m (see figure 5)
Any assessment of the value of the assets protected by the sector, however, needs to acknowledge that their real value goes way beyond the financial figures. The organisations included in top ten illustrate the complex mix of very different and important assets now looked after within the voluntary sector. The Wellcome Trust’s assets underpin vital biomedical science and health care development at national (and international levels). The National Trust (NT) looks after priceless (see below) national historic and cultural assets, as do the Church Commissioners who also provide for 18 per cent of English churches’ total running costs.
Increasingly national assets are being transferred into the sector for their management. For example, the National Museum of Science and Industry (NMSI) was run by government till 1984 when it became an arms-length agency incorporating several different national collections and museums and was recognised as an exempt charity by HMRC.
Different asset profiles
Around four-fifths of the value of the assets of the top 100 charities in figure 5 is represented by investments; while tangible and intangible fixed assets including buildings represented around £9bn in 2005/06. For some organisations tangible fixed assets represent the bulk of their total funds value, such as the NMSI at 98 per cent, Kew Gardens and the Royal Opera House.
The scale and breadth of the sector’s diverse assets can be illustrated by profiling the top charities by different kinds of assets. These range from financial investments to large-scale social housing stock, highly specialised and technical medical equipment and listed buildings such as the British Library with all its fixtures and fittings.
Figure 1: Investment v. tangible fixed assets
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Top 5 charities by investment assets £m
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Top 5 charities by tangible fixed assets £m
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1
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Wellcome Trust
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£13,941m
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Church Commissioners for England
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£1,280m
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2
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Church Commissioners for England
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£3,504m
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Peabody Trust
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£531m
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3
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Weston [Garfield] Foundation
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£3,488m
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The British Library
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£522m
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4
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Allchurches Trust Ltd
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£1,516m
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Nuffield Hospitals
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£468m
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5
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Leverhulme Trust [The]
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£1,245m
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Wellcome Trust
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£458m
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Trends in asset values
How is the sector managing its assets? A look at the five-year trends indicates that the value of the total funds of the top 100 charities by assets (see figure 5) grew by a real-terms 22 per cent over the period. This represents a relatively modest average of just over 4 per cent per annum, which does not do justice to the overall performance of their investments.
Investments grew by a real 34 per cent, just under 7 per cent per annum, which is a good growth figure outstripping the 31 per cent growth in the FTSE 100 value over the same period. It is particularly good considering the dip in funds value in 2002/03, resulting from the falls in financial markets after 9/11 and the end of the dot.com boom (see figure 2).
The value of total tangible fixed assets grew by 17 per cent and within this the value of the buildings occupied or used by charities for service delivery grew by only 11 per cent over the same five-year period. This latter figure seems rather low given that property prices have been rising at an average of 11 per cent per annum for the last decade. It may reflect out-of-date valuation figures as it is not mandatory for charities to have the buildings they use re-valued, and many only do so every five years.
A hidden heritage?
The issue of valuing heritage assets highlights the challenges of understanding the voluntary sector’s assets. Heritage assets amongst the top 100 charities were recorded to a total value of £161m. Given the extensive historic assets of many of the major arts, culture and conservation charities, it’s tempting to think the general public would find this an unconvincingly low figure. Only seven out of the 100 charities recorded heritage assets, namely assets held re pursuit of preservation or conservation objectives. (SORP, 2005) The highest heritage assets were recorded by the National Gallery at £55m, followed by the Royal Society at £46m. The National Trust commented in its 2005/06 annual report that its heritage assets could not be capitalised for the purposes of its financial statements because this would 'result in a distorted view of the Trusts’s financial position…. Such assets are not ‘assets’ in the normal sense, as any value placed on them would be more than offset by the liability for maintaining them in perpetuity.’
The buildings concerned are insured for reinstatement at a value of £5.4bn. There was little recording of heritage assets before 2004/05, and it remains to be seen how useful this category is to charities. It is very difficult if not impossible to place a valuation of many of the historic assets which are integral to a charity’s work but also of immense heritage value to the nation.
Breakdown of investments
The top 100 charities by assets had an aggregate investment portfolio of £39bn in 2005/06. As figure 3below shows, around two-thirds of this consisted of listed investments (66 per cent) and unlisted at 18 per cent. However, if Garfield Weston (lying in third place), whose investments are largely unlisted, is removed from the figures, just 9 per cent of investments are in unlisted companies.
Over a five- year period listed investments showed real-terms growth of 18 per cent, while growth in unlisted investments was 70 per cent. Much of this growth was due to a more than doubling of Garfield Weston Foundation’s investment of the majority of its investments in the unquoted Whittington Investments Limited holding company over the five-year period, and to a one-third increase in Wellcome Trust’s unquoted investments. These figures show the significant effect which a few large players can have on generic charity statistics and the need for caution in interpretation.
Investment in property only showed an average real-terms 3 per cent growth per annum between 2001/02 and 2005/06, again a rather low rate compared with the 11 per cent national growth rate in property prices per annum over the last decade quoted earlier. The low figure is partly related to the small part which property plays in the overall investment portfolio, and also to the fact that the value of such investments fell between 2001/02 and 2002/03, and did not begin to show real growth until 2004/05.
Programme related investments (PRI), that is investments made for charitable purposes as well as financial purposes, need to be recorded as a separate category within the SORP. In spite of the considerable interest in PRI as a potentially significant way for foundations to support social enterprise activities aiming at both financial and social returns, the evidence suggests only a few are putting their toe in the water. Over the five-year period around £9.5m in PRI was made by the top 100, including investments made by the RSPCA, Wellcome, Northern Rock and Esmee Fairbairn. Wellcome’s 2005/06 PRI consisted of investment in thirteen early stage companies to carry out biomedical research projects. But it seems as though the sector is showing limited pioneering spirit in this area, in spite of Geraldine Peacock’s ongoing encouragement from both inside and outside the Charity Commission to consider applying more of their reserves to PRI[i].
Figure 3: Comparative growth investment assets (5 years)
Reserves
Almost one-third of the total funds of the top 100 by assets represented endowment funds. Worth £14.6bn, they showed real-terms growth of 19 per cent over the five –year period from 2001/02 -2005/0, a modest average of almost 4 per cent per annum.
The balance of funds is shown in figure 4 below. Not surprisingly in a sample of large charities of this nature, well over half of the funds were found to be unrestricted (57 per cent), providing the trustees with a reasonable level of freedom. Many of the organisations whose unrestricted funds represented well under half of their total funds were the major arts and cultural organisations, and trusts whose funds were largely endowed. Reserves were worth around £20bn, which would cover about 36 months of expenditure. This paints a picture of strength by no means typical of the sector and is down to the presence of many large foundations in the sample, with a high level of funds and lower expenditure/fund ratios compared with operating charities.
These reserves represent about 56 per cent of the sector’s total reserves, estimated at around £36bn by the Charity Commission. Debates about the justice and effectiveness of the level of reserves held by a tiny proportion of large charities are likely to continue. Peacock’s view was that more of these reserves could be used to invest in the sector itself. However, the Commission also recognises that reserves policies need to be developed individually by each charity, taking into consideration its own mission, risks and obligations. The complexity of the assets and responsibilities of large sector organisations mean there is no simplistic answer to this.
Little cause for complacency
This research on the voluntary sector’s major assets and asset-holders reveals the important links between the sector’s financial health and the health of the wider economy. While the general growth trends in the funds of the top 100 UK charities by assets do not show cause for alarm, they do not provide any cause for complacency either. Total funds have seen modest growth, as have some of the investment streams, and many of the sector’s assets are fixed, heavy with liabilities, complex to value and extremely difficult to dispose of. For charities such as the Church Commissioners, an additional duty of care is the need to ensure that appropriate ethical values are embedded in their investment policies.
Recent hits
The sector can be dramatically affected by trends in both private and public sectors, some of which are controllable and some of which are unforeseen. Recent hits include the Northern Rock Foundation’s work in the North East, a region of high deprivations, which has been put at risk by wider banking and lending trends and possibly a lack of appropriate investor protections.
The Camelot Foundation will have to close a year earlier than expected because of Camelot’s revenue problems. Personal income tax reductions announced this year mean that the sector may lose up to £100m in Gift Aid tax reclaim when the new regime begins, and further sums each year after that. The investment income of the many large endowed foundations suffered a severe downward trend when the capital markets showed strain in the early part of this decade. The total fund values of the top 100 set out in this article fell by £743m in real terms between 2001/02 and 2002/03; a drop of around 2b per cent. Company giving, modest at the best of times, showed little growth during the same economic downturn. For foundations the changes to Advanced Corporation Tax (ACT) brought significant losses, which have had to be made up over the last few years.
At the same time, the sector’s role in protecting and growing many important national assets is growing, and significant ones are being transferred into the sector. Public service delivery policy has seen recent asset transfers range from the very large national agencies such as NMSI to whole areas of local community and primary health care services and small community buildings. The sudden expansion in the sector’s scale recorded in the Charity Commission figures is in large part due to transfers into the sector, and not growth from the inside.
The National Trust drew vivid attention to the implications of some of these issues vivid in its response to the recent Heritage White Paper. It stated
‘The cost of maintaining and managing heritage assets is becoming a major concern and challenge. Four out of five of the Trust’s properties operate at a loss and our current backlog of maintenance work amounts to more than £200m , over and above our short term and regular maintenance costs. More widely, English Heritage estimates the total amount needed to bring all the buildings on the buildings at risk register into a good state of repair to be over £400 million, whilst the cost of caring for England’s listed places of worship is £925m over the next five years.’
Liabilities in asset clothing?
How far will the new community assets constitute liabilities? Several community groups are, with good reason, very wary of taking them on. And it is not only finances which can be put at risk by external events. The services, social, cultural and intellectual capital which the sector supports may also be at risk. It is essential that the voluntary sector’s increased liabilities and risks are acknowledged and that government ensures that sector impact is assessed as a matter of routine in policy assessment.
This article is the first of a new CaritasData Trends Series to be published in each issue of Caritas magazine.
[i] The Magic Roundabout: how charities can make their money go further, an introductory guide to programme related investment
Geraldine Peacock et al, 2003
Downloadable from www.bdb-law.co.uk
[i] The Magic Roundabout: how charities can make their money go further, an introductory guide to programme related investment
Geraldine Peacock et al, 2003
Downloadable from www.bdb-law.co.uk
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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