"Fund managers are now demonstrating more clearly to charities the level of risk. We're not telling clients to invest everything in the stock market, especially if they have a low-risk mandate, because there are still risks, such as another terrorist attack or the credit boom affecting consumer confidence."
Chief investment officer David Kidd says: "We have an eclectic approach, adopting different investment strategies depending on the investment cycle. Currently we are keen on companies that will benefit from an economic recovery, as that is what many forecasters are expecting.
"Any investment approach will depend on the ultimate objectives of the charity. Most want protected income so we'll often look first at investments that offer a virtual guarantee of income, such as equities and index-linked gilts. They offer an income of around 3.5 per cent so they should be balanced with other investments that offer a potentially higher return, such as higher yielding bonds.
"In the medium term, we expect equity growth of 7.5-8.5 per cent a year, which is much lower than the increases seen in the 1990s, but still pretty good while inflation is just 2.5 per cent.
"In March, when the UK equities market was at its low point, we strongly advised our clients to buy equities. Since then equities have gone up but there is still a further upside. Many of our clients have had to look much more closely at their investment approach and the risks of equity markets.
"A lot of charity investors were caught out during the bear market because their investments were so concentrated in equities, and income was squeezed by low interest rates and dividends. If investors are unable to lose 25-35 per cent of their portfolio in a short time, perhaps they shouldn't be in the stock market. The last three years have been about re-learning old investment truths, such as not putting all your eggs in one basket."
We do have expertise in ethical investment - a third of our clients have some ethical constraint."
Director of charities Jamie Korner says: "Our approach is 'growth at a reasonable price' and we have an emphasis on the provision of income.
We don't see the outlook for the stock market quite as simply as some others do. While we are a little more enthusiastic about equities, the market won't be plain sailing. We believe charities must satisfy current beneficiaries through holding bonds and future beneficiaries through equities.
"We've always held corporate bonds at the expense of gilts, but we've never held so-called junk bonds, because then you're at risk of losing both capital and income.
"There's greater interest in alternative assets like hedge funds but many such funds lack transparency, so charities should approach them with caution. There's an argument that property is a good way to achieve diversification, either through direct investment or funds. The lesson of the past few years is that it's important to diversify a little, but not too much.
"A third of our charity clients have some form of ethical investment.
But you don't get something for nothing - it's a more complex area than many realise. If you want an ethical approach you have to be willing to pay for it."
Given the poor state of the financial market in recent years, charity investors would be forgiven for having reservations about investing. A now recovering stock market promises better financial returns - but which assets should charities go for? Patrick McCurry finds out.
Since the euphoric financial markets of the late 1990s, most charity investors have been through a torrid time. After the equity markets took a nosedive in 2000, charities have seen huge chunks of their equity portfolios plummet, while low interest rates and the phasing-out of advanced corporation tax have made generating income increasingly difficult.
But with the recent recovery in the UK stock market, many see a slightly rosier future for share values, although low interest rates will continue to put pressure on income.
The bear market of recent years has forced both charity investors and their investment managers to take a harder look at measuring risk and seek to diversify portfolios into so-called alternative assets such as property, private equity and hedge funds.
Some investment managers are also promoting the benefits of an "absolute return" approach to investment returns, in which the charity specifies what return it requires, instead of the traditional benchmark approach of measuring performance against one's peers.
Carol Harrison, finance director at the City Parochial Foundation, says: "The encouraging thing about stock market recovery is it's been a steady gain, rather than volatile."
She adds that the foundation is looking to "dip its toe in the water" of alternative assets, such as private equity funds.
But opinion is still divided on which alternative assets are most suitable for charities. For example, hedge funds, which are based on derivatives and bet on market movements, are still controversial. Some investment managers argue the funds are a useful way of reducing overall risk, while others see them as too complex and lacking transparency.
Below is a snapshot of attitudes in some of the main investment houses to the investment approach, advice on how to mitigate risk and the role of alternative assets in portfolios.
Executive director Julian Winser says: "Our investment approach has been reasonably constant regardless of market movements. This is because the investment strategies adopted by charities, rather than their tactical approach, are to meet the long-term needs of the charity.
"As a result of the bear market we've spent more time with our charity clients looking at risk issues and the needs of clients. The increased focus on risk means more charities are looking to diversify portfolios by investing in hedge funds, private equity and property.
"A downside of private equity, however, is the lack of liquidity. About 15-20 per cent of our charity clients have some exposure to hedge funds, and many have also invested in property.
"A large proportion of our clients have ethical requirements, often requiring the exclusion of tobacco. We can carry out this screening ourselves or outsource it. A lot of charities talk about ethical investment but far fewer actually implement it."
Head of charities James Saunders Watson says: "We don't have a particular style when it comes to equity investment, but aim to get the best of the 'value' and 'growth' approaches. The stock market has recovered, but valuations are not back to their earlier peak levels, although the economic prospects suggest that the world will not slip into decline.
"It's very hard to make general comments about the investment strategies charities should adopt because each charity has its own requirements and will need to balance the assets in its portfolio. We look at the needs of each fund and the risk profile of the charity.
"Charities' attitudes to risk varies. Some, with long-term perspectives, may be willing to take on more risk, while others are more concerned about the short term. For some clients there's a role for hedge funds.
"Corporate bonds are another area where there is more interest as we've seen significant issuance of corporate bonds because yields are so low."
Fund manager James Codrington says: "Our investment approach is broadly 'growth at a reasonable price', so we target companies whose growth is not recognised by the rest of the market.
"The bear market has left many charities disillusioned with benchmark-driven investment - we took on our first absolute-return client some 15 years ago, so we have the experience to lead trustees away from benchmarking towards a 'targeted return'. This means that we talk to the charity investor and find out what level of return they need from their investment. We then use risk-return matrices, based on long-term forecasts of markets, to construct a portfolio to provide that return. The problem with benchmarking against one's peers is that it is backward-looking and a herd instinct develops: before you know it, Vodafone, for example, amounts to more than 10 per cent of the portfolio.
"To provide the targeted return, we advise charities to diversify their portfolios by, for example, following Yale University's example of having a greater exposure to hedge funds and property - these act in a different way to bonds and equities and thus can reduce overall volatility.
"For ethical investors, it is fairly simple to exclude certain sectors from segregated portfolios, but we haven't had a big demand for the positive screening of investments."
Charities specialist Charles Mesquita says: "Our investment approach is a combination of approaches. We look for 'themes' in the market when choosing which sectors to invest in. Our broad approach remains the same: if charities want growth and income the only way is from equities and property, because fixed income and cash will not provide that.
"Property has become increasingly popular. There's a place for private equity and hedge funds at the right time in the investment cycle. But investors in private equity must be prepared to lock up their money for some time. Hedge funds are the flavour of the month but we are cautious about recommending them to most of our charities - it can be a problem if trustees do not fully understand what they're investing in.
"About 60 per cent of our clients have some ethical constraint, mainly exclusions of stocks like tobacco. There's been a lot of publicity about socially responsible investment, but I think there's quite a lot of confusion between ethical, SRI and corporate governance issues. There is some cross-over between them but they're not the same."
Marketing manager David Kightley says: "Our basic investment approach is diversification by geography and asset class.
"Our main message to clients on equities has been to stay the course.
Since the beginning of the bear market we've been telling clients to moderate their expectations of equities - we expect a total return over the next five years of 7-9 per cent a year. In recent months we've seen some of our clients drip-feed more money into the equities market, at the expense of their fixed income investment. The markets can be a roller-coaster ride, and you don't necessarily change your investment style at every turn.
"We take a traditional approach to investment and have chosen not to go into hedge funds or other derivatives, but we are recommending commercial property as an alternative to traditional investment. Property has performed very well over the past 10 years and offers not only income but also the prospect of capital growth. Charities that have specific income needs are having to consider changing their asset mix.
"With regard to ethical investment, we see this as part of the overall investment process, and not as a bolt-on."
John Gordon, a director at the company, says: "We have a 'business-cycle investment' approach, which is a pragmatic strategy that will adopt different approaches depending on the cycle. At the beginning of this year we were heavy in defensive stocks, but since the spring we've moved our focus on to growth stocks.
"Trends among charity investors include a move towards gaining an 'absolute return' on their portfolios, and to look at the equity market for income rather than bonds. The reasons for this change were highlighted in March when, for the first time, the equity market was offering higher yields than bonds. The trend towards absolute returns has led to more interest in assets like hedge funds and property. We launched the only common investment fund for hedge funds, which has been very successful in its performance and the interest it has attracted.