Finance News: Goldman urges UK fund diversity

UK charitable trusts and foundations should follow the example of US not-for-profits and invest more heavily in 'alternative assets' such as hedge funds and private equity, according to asset manager Goldman Sachs.

In a seminar for charities last week, the investment bank argued that the best way for charity funds to avoid having to cut spending was to diversify away from shares and bonds into alternative investments and adopt a 'total-return' strategy.

In a total-return approach, a charity's investment is not split into capital and income; instead the overall return of the fund is the main focus.

Goldman Sachs argued that taking a total-return approach, combined with more money invested in alternative asset classes, could enable UK charities to get more from their investments.

In the US, universities Yale and Harvard have led the way, with 50 per cent of their assets now lodged in alternative investments such as private equity, hedge funds and commodities. The average US endowment now has more than a third of its money in such assets.

A report from Goldman Sachs, UK charities: bridging the gap, argues that alternative assets such as hedge funds and private equity are not as risky as many charities fear. Indeed, there are also significant benefits from such investments, said the bank. The report argues that private equity can return between 3 and 12 per cent more than returns from UK equities.

A relatively unexplored alternative asset Goldman highlighted was commodities, which can reduce volatility in an investment portfolio because they perform in a different way to shares and bonds.

Unless UK charities change their approach, they face having to cut annual spending by 25 per cent if they are to stand a good chance of preserving the value of their assets over the next 10 years, warns the report.

But John Hildebrand of fund managers Investec said charities should not rush into alternative assets. He said it was important for a charity to decide whether its main objective was maximising returns over the long term or strengthening current income.

"If investment returns over the long term are crucial, then you need to keep a large proportion of the portfolio in equities," he said.

He added that there was a danger that charities might invest in hedge funds and other alternative assets without fully understanding how they worked, and simply because they were the current fashion.

"Institutions such as Yale have very big funds and have built up expertise in hedge funds over many years, but for others to pile into this sector might be a mistake," Hildebrand said.

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