Julie Pybus discovers

Last year's equity recovery brought welcome relief to charity portfolios. It also makes this an ideal time to refocus long-term planning, as Julie Pybus discovers

At long last, it's happened. In 2003, for the first time since 1999, charity investments recorded positive rather than negative annual returns, and the charity sector has breathed a sigh of relief.

According to performance measurement consultancy, the WM Company, the average charity fund - made up of around 75 per cent equities - achieved a return of 17.5 per cent in 2003. This is a welcome change after the recent run of bad returns. Since WM's charity records began in 1984, there has never been such a sustained period of negative returns as seen for the years 2000/2.

The downturn began when charity funds slid by 1.6 per cent in 2000. Then, in 2001, things began to tumble more dramatically with returns of -10.2 per cent. And, just to kick charities when they were down, in 2002 there was a 16.7 per cent fall in charity investments.

These losses had a painful impact on many organisations. In a survey of charities with investment portfolios published by JP Morgan Fleming in February 2003, more than half said the fall in the market had affected their work, and more than a third said they had reduced running costs as a result of investment performance.

Children's charity the Coram Family relies heavily on its endowment to fund its work, and in 2002 drew £1m out to cover the gap between income and expenditure. Major building expansion plans were shelved until conditions improved. During 2002, the Baring Foundation reduced the value of its grants by 13 per cent as income from its investments fell. And last year, the RNIB announced it was making 100 staff redundant in response to a financial crisis that was largely fuelled by falls in the stock market.

Paul Breckell, chairman of the Charity Finance Directors' Group and finance director of the Church Mission Society, says: "All the voluntary organisations that rely on investment income and the equity market have had a really tough few years. The steady growth we have seen during 2003 is very encouraging."

George Urquhart, performance and investment consultant at WM, agrees.

He says: "2003 was an excellent year for charity funds and will have gone some way to relieve the pressures on charity fund finances."

But before charity investors start throwing their hats in the air and drawing up ambitious new spending plans, a closer look at the investment situation reveals that perhaps it is time for charities to take a fresh look at their investment portfolios. As charity funds had fallen so low since 1999, the healthy returns seen during 2003 only go a small way to recouping the huge losses that were incurred.

Richard Brumby, director of UK charitable funds at Credit Suisse Asset Management, points out that the 2003 results have only just compensated for what was lost during 2002. He says: "Obviously, last year was a much-needed recovery, but we have only won back one negative year out of three, so we are still in negative territory."

WM's figures demonstrate that the average charity return for the three-year period between the end of December 2000 and the end of December 2003 is still negative, at about -4 per cent for each year. But the knowledgeable equity investor knows that this asset class is enormously volatile. Therefore, a charity shouldn't go into equities with the expectation of making a quick profit in a couple of years, but as part of a long-term investment strategy.

This viewpoint is borne out if we take a longer look back into the investment history books. According to WM, over the past 20 years, the typical charity fund has returned an average of 10.7 per cent per annum. Taking into account the retail prices index of 3.8 per cent, this is a real return of 6.9 per cent. Urquhart says: "Although the short term has been bad, considering the long term - the past 20 years - this is still a very good return for charities."

So perhaps all that panic over the past few years has been unjustified and charities should have just sat back and ridden out the storm, safe in the knowledge that their equity-based investment portfolios would deliver - eventually.

Economic experts argue that most charities should take this sort of long-term view of their investments. However, there is one very significant point that they are trying to emphasise to charities - the returns seen from the stock market during the late-1990s were unusually high. The expectations built up during these unusually productive boom years might be why many charities fell with such a painful bump when the stock markets dropped at the turn of the millennium.

Paul Palmer, professor of voluntary sector management at City University's Cass Business School, explains that the bull market of the late-1990s was artificial and over-inflated. He says: "Charities were seeing double-digit equity returns and this led to the automatic assumption that they were always going to get that level of return. Some people saw this unprecedented return from equities and moved into equities. The trouble was that some charities speculated."

Charles Mesquita, charities specialist at Carr Sheppards Crosthwaite, agrees that the bull market affected the way charities invested. "In the 1990s, when trustees were seeing 15 or 16 per cent returns each year, they didn't need to think very hard about what their investment strategies should be." So, perhaps charities need to set up their investment portfolios for the future, drawing upon the lessons learned over the past few years - and with lower expectations of what equities can deliver.

David Bailey, vice president of charities at Deutsche Asset Management, says:

"People are finally realising that the 20 years up to 1999 were quite unusual - it is unlikely that we'll see those high returns again. We are predicting that future returns from equities will be 8 per cent, bonds 5 per cent and cash 3-4 per cent year-on-year for the next 20 years."

These predictions are actually a return to the norm for the markets.

Taking a long-term look back at performance between 1990 and 2003, the real return from equities was 5.2 per cent per annum, bonds 1.1 per cent per annum and cash 0.9 per cent per annum.

Charity trustees need to couple a more realistic expectation of what investments can deliver with well-planned investment strategies, argues Palmer. "Charities need to think why they need their investments and then construct an investment portfolio to meet their needs," he says. "Investment policy should be part of the overall strategic planning. It sounds obvious but quite a lot of charities don't do this."

Palmer argues that charity investors should rely less on the advice of investment managers who, in the past, have often taken charity money and simply stuck it in a conventional pension-style portfolio. "There is a deference to investment managers from trustees and finance directors," says Palmer. "They shouldn't be determining your investment strategy."

Mesquita contends that trustees are becoming more proactive. He says: "The past four years has really focused trustees' minds. We are seeing them taking an in-depth look at their investment strategies." And he points out that investment managers could do more to help trustees define the right strategy for their charity.

Although there is no one-size-fits-all charity investment portfolio, the consensus seems to be that, despite their recent appalling performance, equities, in the long term, can still play an important part in an investment portfolio.

However, as Breckell points out, "Volatility is here to stay. We are one shock - economic or political - away from having another difficult market situation." Therefore, charities must ensure they create balanced, diversified portfolios that are robust enough to weather economic storms of the future by considering the part that other asset classes, such as cash, bonds, hedge funds and property, should play. Hopefully, things are looking up in the investment world. Breckell says: "The economic outlook is more rosy than the turbulent times that we have just been through."

But Brumby warns against the complacency that helped to magnify the horrors of the past few years. "2003 is not necessarily a sign of better things to come," he says. "The greatest danger facing fund managers and charities is wishful thinking. A lot of people engage in wishful thinking because they can't bear to think of the alternative."

A sound investment strategy plus realistic expectations should be key to the way charities invest effectively for the future.


The Church Mission Society has an equity-based investment portfolio that has taken some hard knocks over recent years. Finance director Paul Breckell says: "We are one of the charities that are directly affected by the ups and downs of the stock market."

Investment income makes up around £1m of the charity's £8m turnover.

At the same time as taking a hit in investment income, 2003 saw the charity face its worst year for legacy income since 1981. As a result, 14 jobs were shed from its 130-strong UK workforce and grants were cut to missions in Africa, Asia and the Middle East. "We had the worst of both worlds in 2003," says Breckell. This situation forced the society to draw upon its investment capital. "Taking money out of a depressed market is not an ideal situation," says Breckell, "but something had to be done to compensate for the downturn in legacy income." In spite of the difficult recent years, the Church Mission Society is committed to maintaining the equity bias in the charity's investment portfolio.

Breckell is taking a long-term view of the charity's investments. "We have a finance strategy, and in the long term equity returns outstrip other asset classes," he says. "Equities are an important asset class for us."


In June 2003, the NSPCC's trustees decided to withdraw completely from equity investments over the coming five years. At the time, the charity held 60 per cent of its £44m investment portfolio in equities and the rest in cash and bonds. Following a review of the charity's investment strategy, the charity is liquidating its equity portfolio at the rate of 1 per cent a month and putting the funds into bonds.

Finance director John Graham says: "In the longer term, bonds are the best investment for us because they give a more certain yield. With the size of the losses the sector has generated, we saw there was concern among our supporters. They saw their money being lost and we thought they were more concerned about the losses in our investments than the gains."

The NSPCC's investments comprise just 1 per cent of the charity's income, but two-thirds of its balance sheet value. "We need capital protection rather than income," says Graham, pointing out that a bond strategy will offer this.

The charity financed growth of its services and supported its Full Stop campaign by increasing its equity stake from 50 per cent to 60 per cent of its portfolio in 1998. Now its fundraising income is covering its expenditure again.

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