Kate Rogers: Three strategies to keep investments on course

These will help you minimise the impact of low points, take advantage of the ups and stay on track

Kate Rogers
Kate Rogers

Over the past 12 months I have been working on a new report on investing for charities with my colleague Richard Jenkins. It is finally ready. Time and Money considers how charity investors can take advantage of their ability to take a long-term approach.

Our research shows that a long-term focus allows charity investors to both make and spend more money. Long-term investors can also act as stewards of their assets, promoting responsible and sustainable corporate behaviour. Our discussions with practitioners have shown, however, that operational and governance timeframes can get in the way of the long-term goals. The report explores these conflicts and shares expert thinking to help trustees avoid unnecessary short-termism.

For charity investors, the long term holds the promise of sustained returns over time. But the journey is characterised by short-term ups and downs. For charities that rely on investments to support their long-term missions, this volatility can be alarming. We identify three strategies to help trustees minimise the impact of low points, take advantage of the ups and stay on track.

The first is diversification. Diversifying investments ensures that when one type of asset class, industry, company or manager performs less well, the risk is spread.

Second, we found that setting a range for the expected value of the portfolio over the long term rather than a target can help trustees look through the year-to-year variations and keep focused on the long-term goal.

Finally, research participants said the most significant thing for charities was not the fluctuation of the value of the investments, but maintaining the levels of spending. To achieve this, they frequently used "spending policies" to smooth volatile returns by spending income, which is less volatile than capital values, or basing their spending on some sort of rolling average market value across three to five years. They also maintain cash or liquid investments to enable them to keep spending in market downturns.

We believe these tactics can enable trustees to be resilient through the peaks and troughs of market performance.

The report also looks at the governance of investments. Our research shows that many charities take a similar approach to the timings of strategy reviews, trustee tenure and the appointment and review of investment managers.

These organisational timeframes can both help and hinder long-term thinking. For example, long-term charities measure time in decades, but trustees generally stay for shorter terms. Investment manager reviews tend to come around more frequently – these can be helpful operationally, but they also need to focus on long-term questions. There were strong messages for investment committees and managers alike to emphasise long-term goals and on the managers’ decision-making and strategy, rather than short-term performance and market prediction.

For charity investors, a long-term focus can reap financial and social rewards. Short-term thinking can get in the way, but trustees can take steps to build resilience, helping them to remain committed to their strategies through changing times.

Kate Rogers is head of policy at Cazenove Charities

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