Investment: Spotlight on the USA

Decisions by charities in the US could influence what occurs in the UK in the future. Three British commentators examine the investment policy of Yale University, faith-based funds and the Gates Foundation controversy.


Mark Humphreys, senior investment consultant at Watson Wyatt, reveals how Yale University has made the most of its investments

The institutional investment world is a diverse one with many differing beliefs and practices and contrasting levels of governance. In this exceptionally competitive arena, a wide range of results is produced, with the very best investors achieving consistently high returns and the worst destroying significant value over time.

One of the best institutional investors is the Yale endowment fund, much of whose success is due to the implementation of a diversity strategy several decades ago. Its remarkably good run is in stark contrast with many other investors in the sector.

Historically, most investors have relied almost entirely on equities, but this is changing as they wake up to the benefits of a wider range of asset classes. Many have realised that a lack of diversification in investment portfolios means unwanted volatility in asset values, not to mention large potential losses through the single 'equity bet'. Yet adopting a diversity strategy means overcoming stubborn obstacles, such as governance constraints, entrenched fund manager relationships and misperceptions, and fear of change.

The Yale University Investments Office, which manages the $15.2bn (£7.7bn) endowment and other financial assets of the university, addressed its investment governance arrangements by establishing the Yale Corporation Investment Committee in 1975.

The Investments Office, which now comprises about 20 individuals - overseen by chief investment officer David Swensen - places some reliance on equity within its portfolio, but diversity is clearly a priority, as is demonstrated by its asset allocation.

The high-performing endowment, which had a 17.4 per cent net return in 2005, classifies assets into six groups: domestic equity; fixed income; absolute return; foreign equity; private equity; and real assets and cash.

At the end of 2005, its policy portfolio was: 14 per cent domestic (US) equities; 14 per cent foreign equities, half of which are emerging market equities; 5 per cent fixed income, internally managed with an emphasis on non-callable bonds; 25 per cent absolute return (Yale was the first institutional investor to classify this as a separate asset class); 17 per cent private equities (the endowment avoids funds sponsored by financial institutions and prefers private equity companies that attempt to create fundamentally more valuable entities); and 25 per cent real assets, including real estate, oil and gas, and timberland.

It is true that the highest return is likely to come from a single bet on an asset that goes up the most, but a Yale-like portfolio aims to produce a slightly lower but more stable return and insures against a single bet going wrong. In fact, strikingly different asset classes can have expected returns that are comparable to equities but do not behave in a similar way. Chosen carefully and matched with the right investment manager, they can be rewarding.

On the downside, some of these assets classes come at a high price. Having asset diversity is less about seeking the very highest return and more about protection from poor performance.

With this in mind, it is particularly surprising to find such huge disparities within the charitable sector, with the majority still eschewing diversity strategies and some maintaining excessively high exposure to equities.

Diversity strategies are governance-hungry and may not always be suitable when there are constraints, especially as good governance is needed to ensure that alternative asset 'betas' are correctly priced and that one isn't overpaying for 'alpha'. However, these constraints can be overcome through delegation or the use of diversification funds that incorporate a wide range of assets. The key question is: in an increasingly volatile and low-return environment, can trustees afford not to diversify - even if governance needs bolstering first? I would suggest this is a suitable price to pay for the prospect of a Yale-like performance.


David Heron, chair of Christian charity Premier Media Group and a former stockbroker, asks whether US-style faith-based funds could thrive here

Faith is big business in America. According to the World Values Survey, more than 40 per cent of US citizens are regular churchgoers. Little wonder, then, that faith-based groups are making their presence felt in the financial world. Indeed, the fund research firm Morningstar recently estimated the value of assets held by faith-based funds to be in the region of $15.9bn (£8bn). The figure has grown nearly seven-fold since 2000.

Like ethical investment funds, faith-based funds are often formed through a screening process. Butmany, like the US-based Christian Brothers Investment Services, go one step further. The CBIS website says: "Our focus is not exclusively on screening companies from our investment portfolios, although we do exclude some, but on engaging the companies we invest in so they become better corporate citizens."

Similarly, the Timothy Plan offers organisations "a biblical choice" when it comes to investing, promising that it avoids speculating in companies involved in practices contrary to Judaeo-Christian principles, such as pornography, gambling, non-married lifestyles and anti-family entertainment.

It is this kind of control that is appealing to many Christians and Christian charities. Through faith-based investments, Christians can ensure their money will perform as they would - according to Christian principles.

Here in the UK, despite the fact that 70 per cent of the population consider themselves to be Christian, only 7 per cent of individuals regularly attend a church service. By numbers alone, it would seem the UK faith-based investment market will always be smaller than its US counterpart.

With the lines between green, ethical and faith-based investments remaining blurred this side of the Atlantic, it would seem that investing in funds with an outlook generally consistent with Christian values is as close as the market will allow many Christian investors in the UK to get to acting in accordance with their beliefs. The options for faith-based investment in the UK are still limited, but they do exist.

For example, CCLA, an investment management company that is based in the UK and which originated in the Church of England, has developed a strong competence in the field of ethical and responsible investment. With £4.6bn under management, and more charity clients than any other UK fund manager, it has managed to attract not only Christians of all denominations, but also Jews, Muslims and Buddhists.

Meanwhile, BlackRock (formerly Merrill Lynch Investment Managers) has a fund here in the UK entitled Charifaith, which caters specifically for Catholic charities. Charifaith's ethos reflects much of the broader Catholic church's philosophy, restricting investment in companies that provide adult entertainment services and armaments. However, it also focuses on distinctively Catholic requirements, including restricting investments in companies that perform abortions or manufacture contraceptives.

Initiatives such as Charifaith indicate the differences between ethical and faith-based investment services. Choices that seem small to much of the secular public are important to Christians - not to mention the many other religious groups that follow a defined moral code and generally do not waiver on their beliefs.

Faith-based investment in the UK may never become as significant as it is in the US, but the more religious people within the UK demand an investment policy that reflects their faith and ethical perspectives, the stronger this market will become.


Mark Robertson of Ethical Investment Research Services ponders the fall-out from the controversy surrounding the Gates Foundation

The Bill & Melinda Gates Foundation is the largest philanthropic organisation in the world and a leader in the grant-giving community. So will its recent decision not to align its investments with its mission influence the investment strategies of other foundations? Does this mark the end for ethical investment within the charity sector?

In January 2007, the Los Angeles Times ran a series of articles asserting that the foundation had invested a large proportion of its $32bn (£16.1bn) endowment in companies that contribute to the very problems it seeks to relieve. The foundation initially responded by announcing it would review its investment strategy. A day later, it said its strategy would remain the same.

The resultant publicity prompted others, such as the David & Lucile Packard Foundation, to re-evaluate their investments. So is the Gates Foundation right to eschew socially responsible investment? Or is it wrong to profit from investments that contravene charity aims?

At the time, the Gates Foundation issued a statement saying: "Bill and Melinda have prioritised our programme work over ranking companies and issues because it allows us to have the greatest impact for the most people." But could it have had a greater impact by using the power of all its $32bn investments to further its objectives?

Naturally, the question affects us in the UK too. The reality is that if all UK charities took an ethical approach to their investments, a massive £38bn would end up being ploughed into socially and environmentally responsible companies. There are a number of ways that such investments could be used to support a charity's objectives. An environmental charity could buy shares in a renewable energy firm, for instance. Charities can also use their rights as owners to vote on issues of concern or engage with companies to seek to improve their social or environmental performance.

It is possible, for instance, to collaborate with other charities or join groups such as the Carbon Disclosure Project, which allows institutional investors to request disclosure of information on greenhouse gas emissions.

It is striking that the Gates Foundation's statement comes at a time when ethical investment is booming and mainstream investors are increasingly recognising that social and environmental factors can be relevant to the financial bottom line. In the past six months alone, Marks & Spencer has launched its own ethical fund and a Co-operative Insurance sustainable leaders' trust has topped the performance league table of 324 unit trusts.

Increasing numbers of consumers are seeking ethical investments, and many of them would be surprised to find out that the charities they support do not do the same.

Instead of marking an end to ethical investment, however, the developments within the Gates Foundation are a chance for charities to learn more about socially responsible investment, understand how it can help rather than hinder their work and discover the expertise that is available to assist them.

Of course, the Gates Foundation's grant-making work should be applauded. But it could have had an even greater impact on even more people by aligning its investments with its mission, reaping social and environmental returns too.

- The Eiris Foundation and UK Social Investment Forum charity project recently launched free guides for charities on how to develop a policy and how to invest ethically in bonds, property, private equity and common investment funds.

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