- This article was corrected on 10 May 2011, see final paragraph
After 10 years as finance director of the Nuffield Foundation, one of the voluntary sector's largest grant-making trusts, James Brooke Turner is well placed to assess charities' attempts to weather the stormy investment market of the past decade.
Brooke Turner, a student of investment history who has spent all his working life in the sector, believes the charities that best survived the recent turbulence held their nerve and took the long view.
"Over the past three years, a lot of old-fashioned truths turned out to be true and a lot of new ideas turned out not to be true," he says.
"For example, there was a theory that if you diversified your portfolio into different assets such as equities, bonds, hedge funds and the like, you would be better protected." But a diversified portfolio did not save Lehman Brothers, he says: "All its asset classes went down the pan together."
Charities that did well, he says, had a clear idea of what they wanted their investments to achieve and measured their performance against that, rather than chopping and changing.
"Many charities spent a lot of time looking around, wondering whether they were doing as well as others," he says. "The more successful ones thought about what they wanted their portfolios to do."
Investing, says Brooke Turner, succeeds or fails over years and charities need to develop metrics that assess performance over the long term. "If you experience volatility, you need to say to yourself 'this is a long-term game' and sit it out," he says.
Nuffield has parameters within which it expects the value of its investments to vary. They fell in value during the credit crunch but stayed within the parameters, which Brooke Turner says allowed trustees to maintain confidence in their decisions.
He says the economic downturn has highlighted the importance of good governance in relation to investment. "If all the people in charge of investment policy understand how it works and how your portfolio will behave during a crash, you are much better off," he says. "If you are frightened by what happens to a market, you can make the wrong decision - and there are stories of trustees who did exactly that.
"It is absolutely worth taking the time to make sure you have trustees who know what they are doing. Make sure they respect one another, respect their investment manager and know enough to hold that manager to account."
One of the biggest investment disasters to affect charities over the past decade was the collapse of Icelandic banks in 2008. Twenty-eight charities lost about £50m between them.
Brooke Turner feels some trustees were misguided in their approach to cash deposits. "Holding cash is about security," he says. "You want to make sure that your money is secure. If someone is offering better rates than the guy down the street, there's a reason. Charities who chased the last percentile of return sometimes followed it into Iceland."
But he says some charities went too far in the other direction by taking an approach to investment that was too laissez-faire.
"There's a phrase I've been introduced to recently," he says. "It's 'reckless caution'. It applies to people who don't understand the risk of doing nothing. If your trustees do nothing with your money, its value will erode."
But the biggest mistake of all, according to Brooke Turner, was making a plan and failing to follow it through to its conclusion.
"Some trustees said 'we've lost enough' at the bottom of the market and moved out of equities into bonds," he says. "That's the worst thing you can do because you crystallise your losses. Everyone did better than those who changed their minds."
2001: Finance director, Nuffield Foundation
1996: Director of finance and resources, Muscular Dystrophy Campaign
1993: Company secretary, Church Commissioners
1989: Grants officer, Church Urban Fund
- This article refers to James Brooke Turner as saying that all Lehman Brothers’ assets lost value at the same time. In fact, he said that after Lehman Brothers went bust, asset classes in the wider market lost value.