Fund Management

Managing Charity Interests In A Perfect Storm - Investment Views

Jackie Bennion Deputy Editor 21 July 2020

Managing Charity Interests In A Perfect Storm - Investment Views

The pandemic has cast new light on the saying that charity begins at home. Here we talk about how the investment landscape looks with some of the UK wealth managers who look after the interests of charities.

Those in wealth management advising charities say that COVID-19 has created the perfect storm for charities that have come to depend on giving when the government and local authorities have withdrawn funding over the years. The pandemic has hit the sector on several fronts. Income has dried up, demand for services has surged, and vital fundraising events have been put on hold. The London Marathon raised a record £66 million ($83.8 million) for UK charities last year but like other marquee events this year has evaporated. Estimates put losses for the sector at £4.3 billion for the second quarter of 2020.

James Hambro & Partners is one among several firms with a charity business. The largest is Cazenove Capital which became part of Schroders when the two merged charity operations several years ago. Its charity team looks after £9 billion on behalf of roughly 1,500 charities, endowments and foundations, Cazenove told this service. Brewin Dolphin and Investec are others with large charity businesses.

“The vast majority of charities in the UK exist hand to mouth and it really matters what they are generating month to month from grants and individual contributions,"  said James Hambro's Patrick Trueman on a recent call about how firms are advising clients through this period. He joined the boutique back in May to manage investment portfolios for charities, private clients and trusts.  A comparatively small number of charities are lucky enough to have an endowment and these are the ones generally on wealth managers' books.

Those in the top-tier include Cancer Research, Christ Church Oxford and Wellcome Trust that are able to attract high-profile boards and operational talent from a range of private sector areas. There is a big gap then to the next tier which tends to comprise charities holding between £10 million and £50 million in assets that can be tied up in the building they occupy or ownership of surrounding land.

“Where there is money there is an added sense of responsibility among trustees to ensure that the organisation doesn’t put a foot wrong. Such as thinking about who is on the investment committee, who is managing our assets, and are we doing the right thing with them?” Trueman said.

The firm typically represents charities in the £1 million to £50 million range of investable assets. Beyond that, charities tend to take a more institutional approach, often employing an investment consulting firm, who will then farm out individual parts of their portfolio to different institutional managers.

“We took the view that as the crisis started unfolding that the level of risk was really ramping up. We acted in concert and we did raise cash, which has been up to 20 per cent for charity portfolios. We definitely took risk off the table and felt it was the right thing to do," Trueman said.

Opening up the valuations of charities at the end of the first quarter made for some sobering reading, he admits, and it has been much harder to find those counterbalancing assets to offset equity risk.

A recent survey by the Institute of Fundraising, NCVO, and Charity Finance Group found that public support through donations and legacies has dropped by 14 per cent this year but that trading income has fallen 72 per cent, seen in charity shops up and down the country remaining closed.

The sector was dealt another income blow when many of the UK’s largest listed companies announced dividend cuts for the next 12 months.

“It’s fine when you are doing three and a half or four per cent without much of a sweat but when everyone is cutting their dividends, and that’s income you have been relying on, it can be a significant hit,” Trueman said.

"Organisations that rely on fundraising events for income, and those that have been unable to operate in lockdown have felt real pressure on their finances," said Kate Rogers, co-head of charities at Cazenove. The firm says many clients already feeling the impact on their own activities. Charities are expecting income to decline by around 50 per cent but service costs to rise by about 43 per cent this year. "The problem is compounded by a simultaneous drop in investment income," she said.

While central banks are targeting ultra-low interest rates, charities can't just rely on the quality end of the fixed income market and are going to have to get used to taking on more risk and "be comfortable with that”, Trueman said, who previously led the charities team at Aberdeen Standard Capital.

They will also have to accept that their portfolios may have to be less liquid. His firm is looking at other parts of the bond market, infrastructure, and certain renewable energy assets that are not very liquid. In terms of diversifiers, gold is a possibility as are certain hedge funds. “They haven’t always done what people would want but certainly on the macro side some hedge funds in recent months have proved their worth," he said.


Typically, charities have been UK-centric in their investments and fund managers have had their work cut out in educating them to acknowledge that the world is highly inter-connected, companies are global, and they need to think more in those terms.

"We have long been recommending a global approach to investing to benefit from a wider opportunity set and access to more growth in both emerging markets and technology", Rogers at Cazenove said.

James Hambro has pointed clients to a growing number of companies in Asia that are paying attractive dividends. "But there isn’t a quiver full of arrows that you can easily pick from," Trueman said.

As equity income has been under pressure, Cazenove said it has focused on diversifying charity portfolios. "Most include property, bonds and infrastructure, which have acted as a buffer to the falls in dividends elsewhere," Rogers said.

Another lifeline for the third sector generally has been private donations, and those too are under stress. The number of £1 million-plus donations from HNWs has dropped by a third in recent months, according to private client law firm Wilsons.

Partner Rupert Wilkinson said the larger legacies come from HNWs whose relatives are already well provided for or those who want to leave their entire estate to charity. "But many of these estates will now be worth far less than they were just six months ago," he said.  The slump in residential property means that those highest value legacies are likely to drop the most.

This all begs the question of whether wealth managers should be advising the sector in entirely fresh ways as they come out of the crisis, such as pooling resources and combining focus in some overdue consolidation in a notoriously fragmented sector.

“It is a fundamentally important issue that is not often talked about because it does lead to this idea of consolidation and involves some charities recognising that they are probably better off coming together," Trueman said.

Some also feel that the UK could learn from the US in developing a culture of philanthropy amongst the better off. “In the US it is more accepted that people will make a point about giving. It will be in their biography, ‘I am involved in this charity and I support it financially,’” Trueman said. Their name will be there and they are comfortable talking about it, he said, suggesting that the approach in the UK and wider Europe is more diffident.

Minding the assets
At James Hambro, charities wanting a segregated portfolio need to be bringing in assets of at least  £1 million for a bespoke offering, in which case the firm would build the portfolio using individual securities and take in ethical considerations. Charities bringing in half a million are offered a funded solution.

The larger more sophisticated charities often take what is called a total return approach, which allows them to spend capital as well as income. But this isn’t always possible when donations or legacies come with restrictions. At Cazenove, "We have been recommending that charities consider adopting a total return approach and smoothing their spending by drawing down on capital," Rogers added.

The Charity Commission has made it easier the last few years for charities to change their structure and benefit from a total returns approach. "Doing it through capital and income makes sense," Trueman said, but there are still legal and tax implications charities need to be guided on. Larger charities will often work with a broad set of investments, such as private equity, property, land, and potentially commodities, but these assets tend to be illiquid and are often associated with high fees, he warned.

He says it is a tough market to get established in. There are ethical and cultural sensitivities and charities don’t move quickly. “They tend to be fairly cautious beasts, so you can only really build a business if you have demonstrated a very strong offering and can clearly articulate what sets you apart."

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