Diversification and stock selection will become increasingly important in the coming years, delegates at today's Merrill Lynch Charity Investment Conference will be told.
The fund management firm predicts that returns from investment will be far more modest in the next decade than they were in the 1990s, and that charities will have to react by seeking pockets of growth in overseas equity markets and branching out into alternative assets such as property and hedge funds.
Equities in the Far East, China, Japan, the Pacific Rim and emerging markets in Europe are set to do well, analysts believe.
Merrill Lynch figures suggest long-term returns for investors will be 7 per cent in global equities and 4.5 per cent in bonds.
But Andrew Hunter Johnston, head of charities at Merrill Lynch, said the mood of the conference would be upbeat. "The markets have risen by more than most of us expected a year ago," he said. "Most of the charities at the conference will have seen their investments go up in double figures."
But he added that there were "a few clouds on the horizon", such as rising oil prices, slowing economic growth and a cooling housing market.
Merrill Lynch is advocating asset diversification, but remains sceptical about bonds. "They will only perform well if there is another major terrorist attack and the world moves into deflation," said Hunter Johnston. "Bonds tend to do well when interest rates and inflation drop, and also in times of uncertainty."
The firm will also argue that charities should consider a targeted or absolute return policy for their investments. Voluntary organisations with long-term commitments should consider it as a way of generating a defined return with a lower level of risk, it will say.