Should charities spend or save? A tricky question...

Charity boards across the country are asking this question and the responses vary signficantly, says Kate Rogers, client director at Schroders

Kate Rogers
Kate Rogers

After a decade of yo-yo stock markets and not much overall upward progress in values, charitable investors would not be blamed for feeling the need to stand back and re-evaluate their asset strategies.

Is it really in the best interest of beneficiaries to hold on to assets, given their disappointing returns, or should trustees be focusing on increasing expenditure at a time when government, corporate and individual charitable giving is falling? This question is being tackled by boards across the country: interestingly, responses vary significantly.

Some charities emphasise the importance of longevity. These boards are focused on maintaining the real value of their assets over the long term so that they can continue to deliver their charitable missions indefinitely. They might be permanently endowed or have a strategic wish for sustainability. These charities respond to a lower return environment by cutting their cloth to suit or, more optimistically, by maintaining spending and increasing their reliance on the management of their assets to maximise returns.

At the other end of the spectrum are those boards focused on meeting a perceived increase in need as budgets and donations from other funders are cut. These charities are increasing spending and reducing their asset base at varying rates, perhaps intending to spend out or to fundraise and recoup the spent capital in future years.

Once the strategy of how best to meet the charitable mission - put crudely, to spend or save - has been established, the next question is how to achieve this. As an investment manager specialising in charities, the question that I get asked most is "how much can we spend?"

For those charities seeking perpetuity, it follows that the assets must grow in line with inflation to maintain purchasing power. Existing charitable expenditure should be funded from any excess returns, over and above inflation. But what is this magic number? What amount can a charity afford to spend without risking its long-term sustainability?

The answer will depend, of course, on asset allocation - where the money is invested - and the level of returns in the future. Time to polish the crystal ball, I fear. Long-term return analysis suggests that expenditure levels of 4 per cent should be sustainable for charities with long-term asset allocation strategies. These are necessarily biased towards equity markets that have historically generated the best returns against inflation. But returns since the turn of the millennium have been disappointing and a gulf has opened up between equity returns and inflation.

So where to go from here? I believe in the power of collaboration and knowledge-sharing. For that reason, Schroders has commissioned research into spending decisions. The report will be written by Richard Jenkins, author of the report The Governance and Financial Management of Endowed Charitable Foundations, and will be published by the Association of Charitable Foundations later this year.

We are asking charities with long-term assets to share their thoughts, experiences and methods with us.

If you would like to participate, please visit The survey will run until 12 October. I look forward to sharing the results later this year.

Kate Rogers, client director, Schroders

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