What can charity investment portfolios expect in the year ahead?

After a polarising year for charity portfolios, investment experts consider what organisations should expect in 2021

To say that 2020 was a difficult year for charity finances would be an understatement. Study after study showed incomes collapsing as organisations battled to survive while doing less with more.

The combined shock of the Covid-19 pandemic and the oil price drop in the early months of the year provided a catalyst for the fastest equity market decline in history, and for charities with investment portfolios, the ARC ACI Steady Growth Index predicted a fall of more than 15 per cent in the first quarter alone.

Fund managers say it is difficult to know how charity investments as a whole have fared since the onset of the pandemic. As Heather Lamont, client investment director at CCLA explains: “If we look at the market that dominates global investment fortunes – US equities – it has grown by about 12 per cent over the course of 2020 [to December], so many charity investors have indeed had a ‘good year’.”

But others have not fared that well, she says, as some have reluctantly had to spend more of the capital from their investments to counter shortfalls in fundraising and other income sources affected by Covid-19.

A polarising year

Katie Green, a portfolio director at Cazenove Charities, describes the performance of the investment market over the last year as having been polarising.

“As a whole, global equity markets are up over 10 per cent since the start of 2020, which is quite remarkable given the troubling economic data we’ve seen,” she says.

“However, different regions and sectors have behaved very differently. The US and particularly the large technology stocks, (Facebook, Apple, Amazon, Netflix and Google) have seen seemingly insatiable growth this year, now accounting for over 25 per cent of the US stock market.”

On the other hand, says Green, the UK market has shrunk. Charity funds that have a greater value bias, which tend to hold more in unloved stocks such as large oil companies and banks, have struggled. But sustainable funds have performed very well, as have emerging markets funds that benefited from being ‘first in, first out’ from the pandemic and are supported by structural growth trends and an emerging middle class.

Lamont says that too many trustees have been told to expect very sizeable reductions in income flow, which is having an impact on charity spending budgets. However, what trustees should be asking is why other charities are continuing to enjoy stable and sustainable income from their portfolios.

For obvious reasons, high-street retailers have struggled over the past year, but supermarkets and those with a strong online offering have done much better. In alternatives, gold has been the stand-out performer in 2020, according to Green.

The year still provided plenty of opportunity for charity fund managers, with many existing investment trends accelerated by the pandemic. Ecommerce accounted for about 15 per cent of retail sales and was growing at about one per cent a year last January; it has since doubled.

Looking ahead

Sustainable investing is also a key trend.

“We have seen a greater social focus on environmental factors and increasing pressure on companies to disclose and manage their impact on people and the planet,” Green says.

She predicts that charity fund managers should expect to see continued progress in the markets overall as economies start to recover lost ground, company earnings pick up again, and governments and central banks remain supportive in their fiscal and monetary policies.

But fortunes won’t be evenly spread, so fund managers need to remain alert and respond with active management to keep their long-term strategies on track.

With mass vaccination now on the horizon, the economic recovery is looking more likely. Nonetheless, experts warn this will be a slow and difficult process.

Rolling out the vaccine will take time and economic activity won’t bounce back straight away. And there are further bumps in the road ahead: as furlough schemes come to an end, there is likely to be a rise in unemployment in the UK, and Brexit remains a risk.

Lamont warns that the world is going to look very different when it emerges from the pandemic, with changes likely in both companies and consumers. “We remain cautious, keeping plenty of diversification in our portfolios to hedge against further volatility into 2021,” she says.


How Sarasin found sustainable success

Investment firm Sarasin Partners started its Climate Active Endowment Fund in February 2018 with £86m

The fund aimed to address an increasing number of clients that wanted to make investments in a way that didn’t harm the planet, but also those that felt overly simple ‘exclude fossil fuel mining/extraction stocks’ policies were weak.

Richard Maitland, partner and head of charities at Sarasin Partners, explains that their problem was not just with those who extract fossil fuels from the ground, but also those who burn and use fossil fuels inappropriately or inefficiently.

He says: “There is room for oil companies if they could show they were transitioning their businesses, [for] clients wishing to actually change things, not just exit the climate debate.”

The fund helps organisations screen out negative investments over time in the five sin sectors (tobacco, pornography, gambling, alcohol and armaments), as well as tar sands and thermal coal, plus any that are not aligned with the Paris Climate Accord.

The fund picks stocks that are designed to do well in generally weak economic conditions, so focuses on companies with strong organic growth prospects and less cyclical exposure. This is why, explains Maitland, when the pandemic hit, the fund was underweight in equities.

It holds 10 per cent less in pounds sterling than it did when it launched, with no oil producers, airlines or restaurants on the books. Retail exposure is primarily limited to online shopping, while those equities with a digitalisation theme performed well during the lockdown.

The fund produced a return of +1.7 per cent from 1 January to 31 October 2020, which compared well to the benchmark return of -2.7 per cent – and the fund is now worth over £871m.

Maitland says the key to investing policy at the bottom at the market is to hold your nerve and steadily add to risk.

“Don’t fight the Fed and expect a dislocation between markets/asset prices and the underlying global economy,” he advises. “Maintain exposure to genuine growth companies, avoid cheap cyclical exposure, and retain low exposure to sterling and the UK.”


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