The survey of senior executives at charities with a collective £5 billion ($6.8 billion) of stock market-related investments found that allocations to private markets and alternatives have seen the biggest rise over the past two years. Almost nine out of 10 respondents have boosted private equity allocations while 86 per cent have done so with hedge funds and real estate. Nearly three out of four have increased allocations to renewables while 70 per cent have done so for UK fixed income and 78 per cent have done so for non-UK fixed income.

Respondents expect the shift to continue over the next two years, with almost all increasing allocations to private equity and 92 per cent to hedge funds. UK equities are more mixed, with 68 per cent planning to increase, 4 per cent planning to maintain, and 28 per cent planning to reduce allocations to the sector.

Changes to asset allocations are primarily caused by a drive for capital growth, chosen by 56 per cent, and improved diversification, chosen by 55 per cent, while 31 per cent are changing to reduce volatility.

Charities are also increasingly turning to active fund management as they seek to support long-term return objectives. The survey shows that 71 per cent plan to raise allocations to active strategies from their investment portfolios over the next three years, with 11 per cent predicting a dramatic increase. Around 29 per cent said allocations to active strategies will remain the same over the period and none plan to reduce allocations.

Reasons for the shift include the potential for stronger returns, increased transparency among active managers and the role active strategies can play in helping charities manage volatility. As one of their three main reasons for increasing allocations, 69 per cent of respondents cited the potential for stronger returns driven by the technological and data revolution, which is equipping active managers with greater insight.

Nearly two out of three highlighted greater transparency and volatility management among their top three, while 55 per cent said volatility could create opportunities for active managers to outperform passive strategies and 49 per cent pointed to the drop in fees at active managers as a reason to switch.

Rathbones research found that on average the charities questioned currently have around 40 per cent of their investment portfolios allocated to active strategies. Around a fifth have between 50 per cent and 75 per cent of their portfolios in active strategies.

The findings suggest the move towards active management is taking place alongside a broader reassessment of asset allocation, as charities seek a balance between capital growth, diversification and risk management, the firm said.

Ninety nine per cent have some of their investment portfolio allocated to UK equities with an average of 20 per cent allocated to the asset class. Around 62 per cent have increased allocations to UK equities over the past two years, while 63 per cent have done the same with non-UK equities.

“Investments are central to the finances of many charities, and organisations are increasingly focused on how portfolios can support long-term returns while continuing to reflect their ethical objectives,” James Ayre, head of investment for charities at Rathbones, said.

“The current investment environment, together with developments in active management – including better data, technology and research tools – appears to be strengthening the case for active strategies. For many charities, this is also taking place alongside a broader reassessment of risk and diversification.”

The findings also suggest risk appetite among charities is increasing. More than half of respondents said their risk appetite has increased in the past two years, compared with 25 per cent who said their appetite has decreased. Over the next two years, 63 per cent believe their risk appetite will increase compared with 27 per cent who said it will decrease.

The main reasons given for an increased risk appetite are the need to generate stronger returns and an expectation that increased volatility will present opportunities, both chosen by 56 per cent of respondents. Almost half are expecting strong market performance.

Among those saying that their risk appetite is falling, the main reason given by 67 per cent was that ESG considerations were restricting their investment choices, while for 63 per cent it was volatility with more than half braced for a market correction.