Many charities are depleting their investments, says report

Andrew Pitt of the investment management firm Newton says a sustainable amount of spending is about 3 per cent a year

Andrew Pitt
Andrew Pitt

Many charities are likely to be spending too much to maintain the value of their investment portfolios, a report from the investment management firm Newton suggests.

Sustainable Portfolio Withdrawal Rates for Charities says that over the last 113 years the sustainable amount a charity could spend was about 3 per cent of its portfolio, based on a typical charity portfolio of 60 per cent equities and 40 per cent bonds.

But many charities that see themselves as perpetual in nature and rely on their investments are spending more than 3 per cent of their funds each year, the report indicates.

Charities that hold a greater proportion of equities and a smaller proportion of bonds would be able to spend more on average, but face much more volatility in their investments, the report says.

However, it says that no allocation of assets has a 100 per cent chance of maintaining the value of its investments over 25 years, even if it spends as little as 2 per cent.

Andrew Pitt, head of charities at Newton, said: "The current financial backdrop is increasingly challenging the assumptions investors make about future returns. The key question for charity trustees is: what is a reasonable level of annual withdrawal to take from a portfolio without depreciating its long-term value?

"Our research shows what constitutes a sustainable rate of withdrawal for a charity to make from its investment portfolio. However, the most important implication of our analysis is that charity trustees should address this topic as part of the regular review of their portfolios."

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