Not quite written in tablets of stone, but the Charity Commission has issued very clear guidance as to what is required from charities when investing trust monies. This follows on from the investment principles set out in the Trustees Act 2000.
Why diversify and to what extent? The last ten years to 31 July 2008 (the last year, especially) must have clearly illustrated to trustees the need to diversify. The annual compound return from the UK equity market over the last ten years was 4%. UK Government Gilts delivered an annual compound return of 5.3% and cash delivered 4.9% compound. Stock markets underperformed Gilts by 1.3% per annum but with huge fluctuations in value along the way. Clearly, over the last 10 years, there was no additional return for the increase in risk of investing in equities.
But why bother about risk? Markets rise over the long term and if trustees sit out short term volatility longer term returns will be in line with expectations. This is a familiar refrain from investment managers but simply not true. If your investment portfolio falls by 50% you need growth of 100% to return to the previous value. If you were unlucky enough to suffer a 75% fall you would require 400% growth to return to the previous value. Protecting capital is a key responsibility of trustees. Avoiding potentially significant falls in value will, in the longer term, deliver greater levels of capital growth. To quote Warren Buffett (the richest man in the world) “There are two rules for investing money. The first rule is don’t lose money and the second rule is never forget the first rule”!
The last year has been a very worrying time for Trustees. Looking into the future, will current market conditions continue and what will the next valuation reveal? The news will probably not be good if the portfolio is only invested in equities and bonds; simply because it is not sufficiently diversified.
Nobody can predict where stock markets will go in the short term, apart from being fairly certain that volatility will prevail for some time. At the moment, stock markets are being moved by fear, fear of the unknown and fear of how much longer the credit crisis will run. Confidence, and therefore stability, will not return until the issues surrounding the toxic waste investments at the root of the credit crunch have been indentified and resolved, leaving investors able to make decisions on clear information.
Diversification is key in ‘normal’ investment conditions but is even more necessary in these uncertain times. A policy of diversification across a wide range of assets is a key driver in delivering consistent investment returns.
An independent review of trust portfolios is, we believe, appropriate on at least a three-yearly basis. An objective assessment of the investment needs, a review of the trust investment policy and an assessment of how the investment portfolio measures up to these issues is, we believe, what the Charity Commission had in mind when advising trustees to review their portfolios.
In conclusion, Charity Commission guidance is both clear and appropriate. Diversify across a wide range of asset classes (not just bonds and equities) to benefit from reduced levels of volatility and more consistent levels of return. Also review the appropriateness of the investment portfolio on a regular basis.
* Past performance is not a reliable indicator of future results and may not be repeated.
For further information please contact Mike Nevill or Vantis' Charity & Not for Profit Group or please complete the online enquiry form below.