Most charities 'keep spending in line with inflation to maintain portfolio value'

Report written by Kate Rogers and Richard Jenkins for the Association of Charitable Foundations says adopting a 'baked-in' spending figure can be 'deeply misleading'

Kate Rogers
Kate Rogers

Most charities that rely on investments limit their annual spending to 3 or 4 per cent of their assets in the attempt to maintain the real value of their portfolios, research by the Association of Charitable Foundations suggests.

More than 220 charities responded to a survey for the report, For Good and Not for Keeps: How Long Term Charity Investors Approach Spending on Their Charitable Arms, published today.

Poll respondents included ACF members and charity clients of the asset management firm Schroders, which commissioned the report.

The research found that the vast majority of respondents wanted to maintain the value of their portfolios and keep their expenditure in line with inflation.

Analysis of past returns showed that early 20th-century philanthropists were able to spend at a rate of about 4 per cent while sustaining the value of their investment portfolios, but in the 21st century this is no longer so certain, the report says.

"Maintaining the real value of a portfolio is only ever a probability and never a certainty," it says.

The report says that, since the economic downturn began in 2008, 80 per cent of charities have maintained their expenditure rates and 5 per cent have increased them, despite falling equity returns.

Kate Rogers, a client director at Schroders, and Richard Jenkins, an independent charity sector researcher and consultant, who jointly wrote the report, conclude that there is no single approach to how much can be safely spent on charitable activities, while preserving the value of assets, that is right for every charity.

They write that the report offers a framework for trustees to think through what they must do as good stewards to be loyal to their charitable objectives and prudent in managing their resources.

The Paul Hamlyn Foundation, worth £565m in 2012, is one of the case studies included in the report. It has chosen to calculate its expenditure at a rate intended to preserve the real value of its investment portfolio.

It spends 4 per cent of its portfolio, calculated on a three-year rolling average. 

Richard Robinson, the foundation’s investment director, says in the report: "‘Any sort of mathematical calculation about what is a reasonable rate of spend can be a deeply misleading figure.

"It is in essence a living calculation, subject to change and subject to methodological amendment.

"There is a danger with arithmetic approaches because they can encourage committees to get an idea of a baked-in number, which you can view almost as what the markets owe you. The thing is, the markets don’t really care."

Meanwhile, the Barrow Cadbury Trust, worth £74m in 2012, takes a different view and is spending a fixed amount that could erode the real value of its portfolio over time.

The trust puts a greater priority on spending on charitable activities over preserving the value of its assets, the report says.

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