Don't be shy about taking 'risks' with investments

Trying to avoid risk is potentially damaging over the long term, writes Kate Rogers

Kate Rogers
Kate Rogers

I have found myself in charge of a village fete this year and I fear that I am rather out of my depth. It seems absurd that I am comfortable looking after significant charity investments but am challenged by organising some stalls and a coconut shy. But it is true.

I have a reinvigorated respect for people in the charity sector. It is tough to ask others for help, time and donations. It is also incredibly rewarding and, for me at least, has provided a fabulous opportunity to meet and engage with my neighbours.

But what has this got to do with finance? After spending four hours painting faces at our fete last year, I raised the princely sum of £18.50, before subtracting the cost of the paints. I concede that I probably got my pricing model wrong, but the experience highlighted the hard work involved in raising even small amounts. It is important that this hard work is valued.

It would be natural for the steward of a charity's assets to take no risks, to think that such hard-won funds should not be exposed to the vagaries of the stock market. It would also be natural to try to keep costs as low as possible. But I would argue that both of these responses might be flawed, at least for long-term funds.

Risk is often characterised as the oscillations in the value of funds. It follows that cash is low risk and shares are high risk. However, if you are holding reserves for the long term, your charity will probably be concerned about inflation. Focusing on inflation as your key risk changes the characteristics. Cash is less likely to beat inflation over the long term, whereas shares are more likely to do so. Therefore, trying to avoid risk is potentially damaging over the long term. Your charity must look at the purpose of the funds to evaluate your key risks and objectives. That, and only that, should steer your investment choices. 'Risk' is not always bad.

Paying investment fees is also not necessarily a bad idea. You might accuse me of being biased - I am a charity investment manager during the week, a fete organiser only at the weekend. But I believe that the cost of having your charity's funds professionally managed can be good value. An investment manager is paid to get better returns on your charitable investments. To earn their keep they should more than cover their fees in improved returns over the long term. It is too easy to focus on the tangible absolute fee level and opt for the cheapest, while losing sight of the less tangible future returns. Long-term performance after fees is the key metric. The difference between the best and worst UK charity equity returns last year was 12.1 per cent, the range between fees just 0.7 per cent.

My counsel, for what it is worth, is to value your advisers as you do your volunteers and donors. They too have an important role in building your charity's future. Ensure investments are managed in a way that fully represents your objectives and don't be frightened to take risks where appropriate. Pay for good advice if you don't have the knowledge within your organisation. And love thy neighbour, because you might need them to run a coconut shy one day.

Kate Rogers, client director, Schroders

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