Charles Nall is corporate services director at the Children's Society.
Any prediction is potentially inaccurate, especially when it comes to financial markets. So the most important quality in an investment salesman is plausibility rather than accuracy. With so many plausible salesmen, what should a charity do with its investments?
The backdrop is a world- wide glut of money chasing assets and hoping for a return. This glut is beginning to ebb. The following are some personal thoughts as to the likely impact of the ebb. I am not a qualified financial adviser, so use this article to challenge your advisers before acting.
Cash is a great asset class at times of uncertainty. Given the uncertainty of the times, and of charity finances, make sure you have adequate cash to hand. The short-term interest rate on cash beats the yield on UK government bonds, and many corporate ones too.
As interest rates rise, bond prices fall. Money in bonds is probably better off in cash. If you hold an internationally diversified portfolio, this still applies. As the cash glut ebbs, credit risks will rise - if you must hold bonds, buy only the best credit risks.
Equities need to be selected carefully. The public is buying again - the classic sign that the best is over. However, the UK is affected by the rush of pension funds into bonds - the market values of company earnings are historically low, so UK equities may offer good medium-term returns.
Meanwhile, property is touted as a great asset class - and it is. But it has experienced a sustained boom over the past decade, in line with the long-term fall in interest rates. Be selective, choosing property companies and funds that have a great record of adding value and finding top-quality tenants.
The trend at present is to diversify into hedge funds, private equity and even commodities. A recent study on hedge funds, adjusting for the funds that go bust or close down, suggests the actual returns are significantly lower than quoted. Private equity is an oversubscribed market in which the end buyer - institutional investors buying refloated companies - is becoming wary of handing over the returns to a middleman.
As for commodities, including metals, these are strictly for the speculative.
Derivatives have their uses for achieving specific investment goals - just be sure the goals you set today are going to be the same ones you will want tomorrow.
In conclusion, the world economy grows. This growth means interest rates and credit risks are likely to rise. For this reason, equities, particularly in the UK, and cash look good. For a UK charity with UK liabilities this is no bad thing. Not an exciting conclusion, but at least you will have the cash on hand to do something different if I am wrong.
- Cash is a great asset class in times of uncertainty. Money in bonds is probably better off in cash
- Equities need to be selected carefully
- Be cautious in choosing property investments.