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Asset Allocation For Philanthropists Gets Tough

Tom Burroughes

20 December 2022

Markets have tumbled this year, the financial news has often been tough and for some philanthropists, the desire to make even more donations clashes with what they can afford. 

This “perfect storm” of forces – falling markets and rising inflation, potentially lower donations, and more pleas for help – makes asset allocation difficult. Even so, while the past few years have thrown up extraordinary challenges, the squeeze that charities face is not new, and can be planned for over the long term.

That, at any rate, is the kind of analysis this news service was given when it spoke recently to Nick Rees, managing director in the Private Client Practice at . 

“Markets are down heavily, inflation is a problem, and we have higher costs of capital because of rising interest rates…inflation is one of the greatest challenges for any portfolio because there is no silver bullet, especially this year,” Rees said in a call. 

Finding ports in a storm has been hard. 

Commodities are the exception to problems of market falls because they have generally risen this year, Rees said, but gold is flat; real estate is not straightforward – REITs have fallen; and TIPs (inflation-protected US Treasuries) haven’t protected against inflation, given the swift change in inflation expectations.

“There has been nowhere to hide from inflation,” he said.

“Clients are constrained by risk tolerances and liquidity. We advise all clients to keep enough cash for two to three years of spending so that we don’t have to fire-sale assets. You therefore have some time to weather the storm,” Rees continued. 

Different models
Adding to the woes caused by adverse markets, the recent pandemic ratcheted up debate on whether philanthropists spend more resources in the short term or stay with paying out funds steadily over decades. For example, in spring last year, , from their investment portfolios have an annual liability to manage – they need to be able to commit to being able to make that distribution regardless of how the markets perform,” Rees said. “They are therefore likely to have a lower risk profile; in other words, a lower allocation to equities. They will also be conscious of liquidity so will have a cash buffer and a skew to more liquid asset classes.”

“Charities with strong visibility on inflows and medium-term liabilities, can afford to take a bit more risk, or be a bit more opportunistic with new cash as it comes in. 

There is evidence that philanthropists have had to dig deeper into their wallets as inflation has risen. A study by Vanguard found that almost one in four American donors with a charitable giving budget increased their giving due to rising inflation. And in Europe, this news service spoke in June 2020 to a range of managers in the philanthropy space about how their financial positions were affected by the Covid crisis.

Looking for better things
While markets haven’t given philanthropists much protection, there are opportunities, Rees said.

It makes sense to look at high-quality firms with pricing power and strong management. “Being optimistic, parts of the market are oversold,” Rees said, citing examples such as US tech, and biotech. Sectors that are related to public policy moves, such as clean energy, are worth looking at. 

With China, it looks cheap on various valuation metrics and a lot of negative news is priced in, Rees continued.

“If you can stomach volatility and sensitivities in governance issues…it is worth it. We believe Chinese equities will do well as Covid restrictions continue to ease,” he said. (Rees spoke just prior to the latest news of Beijing relaxing some of its harsh measures.)  

“Some of our managers are coming across really high-quality businesses in China at attractive valuations,” he said. 

“Businesses with good cash balances that have no need to come to market any time soon are going to be fine,” he said.

This news service asked Rees what sort of investment questions clients bring up the most?

At the moment, Rees said that clients want to know how to handle inflation; when central banks will stop hiking rates; what Cambridge Associates thinks about energy prices; how to best put a sustainability portfolio into action; and what alternative asset classes will do well in 2023.