These are difficult times for charity sector finances. The National Council for Voluntary Organisations estimates the hole in voluntary income to be more than £4bn, and a survey from the Charity Finance Group, the NCVO and the Institute of Fundraising found that charities expect the pandemic to cause a 48 per cent decline in fundraised income at the same time as a 43 per cent rise in demand for their services.
Understandably, charities are dipping into reserves and foundations are pulling together emergency plans to increase their support for grantees.
But for those charities with investments, the timing of this increased cash need is difficult. Stock market movements over the past month have been both dramatic and unsettling. The combined shock of the coronavirus pandemic and the oil price fall provided a catalyst for the fastest equity market decline in history, interspersed with some of the strongest days on record. Investing charities will have seen their portfolio values decline, with the ARC ACI Steady Growth Index suggesting a fall of more than 15 per cent in the first quarter of this year.
Thankfully, most of the charities that we advise have ample cash reserves and are not forced into selling these investment assets at depressed values.
In addition to falling capital values, investors will feel the implications in their dividend income. The coronavirus crisis and oil price war are having a profound impact on economic growth and the cash position of companies. Many businesses in the most affected sectors, such as tourism, hospitality, aviation and retail, might have to cut or suspend dividend payments entirely for a period to preserve their cash resources and the viability of their businesses.
Any company that has received government assistance to stay afloat will find it particularly difficult to justify maintaining their dividend payments to shareholders. Even those companies that have ample financial capacity to keep paying dividends at the same level through a temporary profit dip are likely to adopt a cautious approach, given the high level of uncertainty.
So how far could investment income fall? With so much uncertainty, it is difficult to predict what will follow. Depending on the course of the crisis we could see anything from a V-shaped recovery in the global economy to a longer-term depression. We can look to history for a guide. Over 2009 and 2010, during the financial crisis, dividend income fell by 18 per cent globally and 15 per cent in the UK. Investment income from a diversified portfolio is likely to be less affected, but the implications for the sector are still significant.
The most recent UK Civil Society Almanac shows investment income as an important contributor to the sector, valued at £4bn. We are working with our charity clients to understand the impact of these forecast income falls on individual budgets and how we can best support them.
It is clear that the economic implications of global lockdown are significant, but we are optimistic that they are temporary. Although the companies in which we invest will feel the impact in the short term, we remain confident that they will deliver attractive returns over time. And history shows us that it is time that delivers the best, most reliable investment returns.
Of course, it is tempting to say that this time it is different. However, in many respects this is familiar territory in the cycle of financial markets, with an unexpected event triggering a downward spiral of pessimism and fear. What we know from history is that, at some stage, often when things look the most bleak, markets will find a firmer footing and recovery will be in sight.
Until then, a diversified approach should be able to protect charities from the worst of the equity market volatility, and careful cash-flow planning will be essential. For those charities and foundations that can take a longer-term approach, these volatile markets provide many opportunities to get access to good quality investments at discounted prices.
Kate Rogers is co-head of charities at Cazenove Charities