Fund Management

Managing Charity Interests In A Perfect Storm - Investment Views

Jackie Bennion Deputy Editor 21 July 2020


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the perfect storm for charities that have come to depend on giving when the government and local authorities have withdrawn funding over the years.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.

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