At one point in 2011, charities were facing losses on their investments of more than 10 per cent, but by the end of the year equities had rallied and, including their rise this year, charitable funds are back in positive territory.
In addition, many charities will have seen gains in their income of more than 10 per cent. So was 2011 a good year for charities?
The first difficulty many charities will have faced is in their fixed-interest assets. As noted by Bill Gross of Pimco, the largest fixed-income manager in the world, government bonds yielding less than 3 per cent are expensive. The trouble with calling the end of a bull market, where yields on 10-year gilts have fallen from 13 per cent to 2 per cent in the past 20 years, is that markets can stay expensive for a long time. With interest rates unlikely to rise soon, yields still look attractive compared with cash.
We focus on where we see value, so we are currently invested in corporate and short-dated bonds. These produced a return in 2011 of about 7.5 per cent, or less than half the return of gilts. So a charity with 20 per cent of its benchmark in bonds might have lagged behind its benchmark by 1.5 per cent. Was this a good result? On a long-term view, probably yes, but it still means the charity's fund manager might have to explain why it is behind the benchmark.
Similarly, many charities that invest abroad tend to concentrate on the growth markets of the Far East and emerging markets, and do not match the heavy US weighting of 57 per cent in the FTSE World Index ex-UK. As the US market rose over the year and emerging markets fell heavily by more than 18 per cent, every 1 per cent a fund invests in emerging markets rather than the US hurts that fund's performance by 0.2 per cent compared with its benchmark.
So 2011 will not have been a great year for most charities, with many losing money. However, the reasons they have underperformed are understandable and those charities that have held their nerve will, over a 14-month period, have seen rises in their income and capital. Indeed, the risk is that a charity, looking at its 2011 results, decides to move more in favour of government bonds and ends up hindering its ability to grow its capital and income in the future.
John Hildebrand is an investment manager at Investec Wealth & Investment.