Doing good today without compromising the future

Preservation of funds is only ever a probability, writes Kate Rogers

Kate Rogers
Kate Rogers

Charities exist to do good, to solve problems in our society, to help those in need. For many charities, endowments and foundations this mission doesn't stop after the current generation. Trustees are tasked with balancing the needs of beneficiaries today and in the future. How is this achieved? In a report released today, Richard Jenkins and I examine this balance and how investing charities approach their decisions about how much to spend and how much to keep.

Our research shows that many charities with long-term assets want to spend as much as they can while preserving the value of their assets against inflation. In fact, 80 per cent of the 226 respondents we surveyed were striving for this outcome. This concept is known as 'intergenerational equity', after an idea proposed by James Tobin, professor of economics at Yale. He said in 1974: "The trustees of endowed institutions are the guardians of the future against claims of the present. Their task in managing the endowment is to preserve equity amongst generations."

So what spending rate is consistent with this quest for immortality? We have found that there is no magic number. History tells us that investing charities spending between 4 and 5 per cent of their total assets each year would generally have achieved their goals. Since 1900, to take an example of a charity investment portfolio, the sustainable rate of spending would have been 4.2 per cent a year. Since 2000, any expenditure at all would have eroded the real capital. Looking forward, a lower spend rate of 3.2 per cent a year is suggested by return forecasts. This compares with an average spend by our surveyed charities of 3.4 per cent a year.

However, returns vary hugely over time, so there can be long periods when charities are in the red. What becomes clear is that preservation is only ever a probability. Even the best investment managers cannot predict the future. Trustees should beware of the false security offered by long-term return analysis and recognise that by investing and spending they are taking a risk with the longevity of the assets. Perhaps the most helpful question is not "how much can I spend while preserving the real value of our investment portfolio?", but "when I determine our policies, what risk am I prepared to take with longevity?"

To answer this, trustees might find it helpful to reflect on what sort of long-term charity theirs is. Our research suggests three main types: legally permanent organisations that are obliged to safeguard the original capital sum; indefinite preservation organisations that choose to maintain their activity indefinitely and will strive for intergenerational equity; and open-ended charities that have expendable endowments and are prepared to take more risks over longevity to allow higher spending.

The report does not give trustees direction on the right level of spending. However, it aims to challenge them to think through the purpose of their investment assets and how that relates to their spending policies.

I hope you find it useful.

The report is at

Kate Rogers is client director at Schroders

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