The past five years have been a rollercoaster ride for any charity finance director tasked with overseeing an investment strategy that safeguards the capital value of investments while maintaining dividend income for the charity's operational needs.
Coming to Coram from the private sector and having also worked in Europe, the US and the Far East, I have been struck by a number of things about the UK charity sector's investment policies. First, the conservatism of the asset classes trustees are prepared to invest in. Second, the unquestioning acceptance of fund managers' performance. And, third, the faith in benchmark returns.
Until recently, Coram's experience was not untypical of many similar-sized charities. The booming equity markets of the late 1990s saw our endowment grow to more than £14m, only for a significant portion of that gain to disappear as equity markets plummeted from 2001 levels.
The lessons for Coram were simple. We followed a benchmark strategy that, when equity markets were booming, brought significant returns.
But the obvious downside was that we followed the benchmark down when we entered a global bear market.
This was compounded by a narrow selection of asset classes whose returns were positively correlated to equities and fund managers whose performance was justified by a 'following-the-herd' approach to achieve returns in line with composite benchmarks.
In 2004, Coram opted for a 'multi-fund manager' strategy, investing in a wider range of non-correlated asset classes that now includes property funds, hedge funds and private equity funds.
Moreover, we switched from a composite benchmark approach to a total-return strategy.
This outcome might not suit every charity, but the questions we asked should be applicable to most. Some of them were:
- What return did we want to increase the capital value of our endowment and income to meet our annual operational needs? Was this rate of return commensurate with our reserves policy?
- How risk-averse were we when selecting new asset classes and their relative investment weightings?
- How correlated were the asset classes? This was more about spreading our eggs between more than a couple of baskets. When selecting our asset classes, Coram made a conscious trade-off between missing the upside returns when equity markets were booming and investing in asset classes that were not as positively correlated to equity markets when those markets were underperforming.
- Over what time horizons did we want to invest? We would not normally expect to see returns from private equity funds within the first two to three years.
And finally, never underestimate the need to have an appropriately qualified investment committee that can help the non-specialist finance director navigate the charity through such complex questions.