Finance: Outlook - Yale model is an investment success

Linking investment fundraising to strategic aims has proved a winner, says Paul Palmer.

One of the defining management books of the past century was In Search of Excellence. The tome identified the characteristics of a successful operation, but critics of the book had to wait 10 years to point out that many of the featured companies had disappeared. Most companies at the top of the then FT 30 are no longer around. But how does the world of charitable trusts compare?

One of my MA students has looked into this question and the results show that most charitable trusts, despite adopting strategies to maintain capital value, do drop down the league table over the years.

So what about the ones who have stayed up at the top? The initial key success indicator seems to be regular injections of new capital, and this idea correlates with the phenomenal success of Yale University's endowment.

Much has been made of Yale's use of derivatives, but less attention has been given to the fact that the US university is a successful fundraiser, with regular injections of new capital. The key to its success seems to lie in the way it has linked fundraising for investments and reserves to its strategic aims and, rather than being secretive, advises its alumni about how they contribute to Yale's success.

David Swenson, chief investment officer at Yale, has told university academics that it is not Yale's job to fund their research because good research will attract external funds. Instead, Swenson says that Yale should be about attracting the best students, irrespective of their ability to pay. It is this message that he believes resonates with its millionaire alumni.

So what can charities with investments learn? Getting the right investment strategy and fund manager does matter. My students are split into teams doing an exercise run by UBS called Fantasy Fund Manager. All groups have been handed an imaginary £10m, which they have to invest. All the groups have made money but the difference between the best and worst team is 5.5%.

Charities with investments must clearly think through their strategic aims and the purposes of their investments. At a time of stock market improvement some charities may now be tempted, once they have recovered their losses of the past few years, to sell or follow the suggestion of some commentators and not have reserves at all. My view is the opposite; investments and reserves are the true equity of the sector - not just for rainy days, but also to ensure its independence and support innovation.

Now is the time to build those reserves and invest. If an Ivy League university like Yale can persuade people to give to its reserves and invest- ment strategy, why can't you?

- Paul Palmer is professor of voluntary sector management at the Sir John Cass Business School, City University.

KEY POINTS

- Most charitable trusts have not maintained their capital value

- Charities with regular injections of new capital have done better

- Fundraising for investments and reserves should be linked to strategic aims

- The right fund manager can make all the difference.

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