What is risk for charities that invest? It might sound like a simple question, but in this respect we sometimes miss both the point and, more importantly, the opportunities. Risk, I could answer, means volatility, or the amount that the value of your investment assets yo-yos up and down. Or does it? Is this really the most important or most concerning risk for your charity investment pot?
The bulk of charities that invest do so for the long term – not just a few years, or even decades, but perhaps hundreds of years. In this scenario, why does the value of your assets matter on a daily, monthly, quarterly or even annual basis? If your house was valued every day, would you worry more or less about living there for 20 years? Capital value matters only when you want to sell.
So if volatility isn't the key risk, what might be? You need to ask what the investment is there for. For long-term grant-making foundations, it is probably there to generate an income so that it can support beneficiaries; here, cash flow is a key risk from year to year. Over a longer time, the foundation will want this income to increase at least in line with inflation, which leads to another large risk – inflation over the long term. And to avoid the risk involved in changing course or strategy at a bad time, and undoing all of the long-term investment thought, organisations need to have strong governance in place.
Quantifying risk as volatility is appealing and does have its benefits in both the construction of a sensibly diversified portfolio and the appraisal of your investment manager. It is natural to seek the comfort of numbers, but I would argue that this is misleading. Cash is not volatile, so it is low risk. Stock markets are volatile and thus high risk. But the latter have a much better chance of keeping up with, or outpacing, inflation over the long term that most of us are worried about.
Investment managers are just as culpable in all of this as the charity investment committees. By providing quarterly performance data, rather than focusing on the long term, we amplify the anxiety that many charity trustees feel about preserving capital value. This encourages a lack of focus on long-term objectives and the key risks individual charities really face. Do we actually care if we do better than the market, or if the market is falling or not keeping pace with inflation? If all of our analytical time and energy is consumed by benchmarking and volatility, I suspect that we risk missing the wood for the trees.
Risk might be seen by some as a boring topic, but the appraisal of what really matters to your charity is important for your investment portfolio and long-term strategy. If we focus on what each charity wants its investments to achieve, rather than market-related statistics or frequent reviews, we will have a much better chance of grasping opportunities and making the most of our charity assets.
Kate Rogers is client director at Cazenove Charities