During certain times the importance of charities maximising the impact that their investments have is even more acute. However, trustees’ heightened perceptions of risk can make it more difficult for them to consider new approaches to investing.
Talib Sheikh, who heads up Jupiter Asset Management’s multi-asset strategies team, pushes back at the idea that the current environment is more uncertain than it has been historically. “There is a degree of hindsight bias to say it was clearer three years ago, five years ago, ten years ago.
“As an investor, markets are always incredibly uncertain, and you are trying to make decisions where the odds are on your side. The thing that has changed as opposed to three, five, ten years ago, is the valuation point at which you enter. When you consider risk and reward as two sides of the same coin, risk has remained largely constant. But the reward available is less so. This poses huge problems for all investors and one of the reasons that we have had growth in multi-asset investing.”
He continues: “In reality, pre-financial crisis, if you were looking for cash plus 3 or 5 per cent you could mostly do it yourself through government bonds, investment grade credit or if you felt really racy, some equities. This would have got you 90 per cent of where you needed to be. Now most of that has gone.
“In Europe, for example, the Germany bond yield curve is deeply negative, adjusted for inflation. In the UK ten year gilt yields are less than 70bps. Many traditional sources of income with medium risk return have disappeared. I don’t think they are coming back. We have to understand this.”
Bridgit Richards, director of product and marketing at CAF, agrees that views on the uncertain nature of the world may be purely perception, but those perceptions are having an effect. “The rear view mirror is always clearer than the windshield. But still, there remains a level of uncertainty. At CAF, we see a lot of charities holding off on making decisions around lending and investment and sticking with the status quo. They are increasingly aware of the need for transparency and the glare of social media on how they operate, which brings a higher sensitivity to that uncertainty, whether or not it is new.”
Elizabeth Garner, head of pensions and investments at Save the Children, wonders whether overall risk is constant because it has stabilised at a higher riskier level. She adds: “And is Brexit not a significant risk?”
Sheikh responds by saying that measures such as the VIX index shows volatility has been falling since the height of the 2008 crisis. “It is now about average, which means an average risk environment. This is reflected in the equity market. I think the world we live in is one of the most benign of the last ten years in investment terms.
“Don’t get me wrong I think Brexit is a risk, but it’s not at the top of our list of issues. The UK makes up about 6 per cent of the global equity market. For us as investors it’s about being conscious of the risks out there, but it’s very easy to overestimate the potential for those risks to affect markets, and thereby miss out on what can be decent investment returns from an otherwise benign environment.”
Guy Davies, an investment consultant at Yoke & Co, founder of Charity Intelligence, trustee of a number of charities, and clerk to the Charity Investors Group, identifies a gradual trend towards more pooled fund investing by charities, including into CIFs and CAIFs. “They are moving away from a segregated approach and asking if there are funds out there that meet their needs. The amounts being invested in funds is increasing. And what’s interesting is that over the last ten years, charities invested in general multi-asset funds have doubled their money, even after taking income out. In real terms they have done well. But maybe charities are a little bit complacent about valuations because of these returns. The investment community is now saying that you won’t achieve that in the future. In reality, for most charities, the investment bit of their operation is not of very great concern. They are more focused on, for example, staff cuts, beneficiaries, safeguarding. Investment chugs along in the background. Yet beneficiaries have had stagnant wage inflation so it might be time to spend a bit more money.”
Henrietta Gourlay, investment manager at the Grosvenor Estate – Family Office, which looks after the Westminster Foundation charity, points out that markets are cyclical. “As long as funds are managed for that, then things should be fine.” However, she points out another area of uncertainty. “ESG is a big focus for us, and making sure managers are properly doing what they say they are doing is quite tough. You may be investing in something today that seems fine from an ESG perspective, but might not be in five years’ time. There’s not a lot you can do but you need to be aware of the triggers.”
Having considered the needs of charity investors in the current climate, Sheikh says that this is where solution-based investing has come in. “I dislike the term multi-asset solutions, as no one will ever refuse a solution. But it is about trying to meet that end investment objective. A lot of investors will talk eloquently in great detail about how they are trying to beat a benchmark – for example, the FTSE 100, and have beaten it. Increasingly charities are realising that this approach isn’t relevant to their actual investment objectives. This is where there has been a growth in multi-asset investing, where, for example, aiming to deliver steady income and capital appreciation for a set level of risk is much more in accordance with what many clients might be trying to achieve.
“In some cases, the investment world has overpromised and under-delivered on these objectives. Some of those chickens could, and have, come back home to roost. Nonetheless, I firmly believe that the approach of investing for an objective that accords with what our clients actually need can have significant benefits. The difficulty going forward isn’t that the world has become more complicated – it hasn’t, but the valuation point we are starting with is much higher, and this means the margin for error in multi-asset simply becomes much greater.
“If we flip to the other side, the needs of users have remained constant, so this has focused a need for a different approach. Charities have been a bit slower than other institutional investors to embrace this need for change for all sorts of reasons, but they are increasingly realising that the things that have worked for the last 20 or 30 years may not do so in the future.”
Garner says: “In my head a multi-asset approach is about having more balance, holding things with a lower return to balance the riskier instruments.”
For Davies it comes back to seeking alternative sources of income, which charities can get obsessed with. “It pushes you into more difficult areas.”
So what is Jupiter’s multi-asset approach? Sheikh explains that traditionally a multi-asset fund would be roughly split 50/50 in equities and government bonds. “They have done well over the last decade, where the correlation between the two was largely negative over that period. Now, when I look at the world, this has changed as bonds have become expensive. The traditional diversifiers are compromised. So we have to look more broadly at the assets we can buy. Rather than a two-asset class portfolio, we can use a very wide range of different asset classes. This is where we can add underlying value, by having to look more broadly. We are looking for assets that can help us meet clients’ objectives with a reasonable balance between risk and return.”
Jupiter has launched two multi-asset funds – one an income fund, and one a total return fund. “Clients are pretty agnostic about what goes into them, to a degree. They’re saying I want the product because I have an investment desire for a repeatable level of income, or a relatively uncorrelated return stream. Consistency is about trying to achieve that solution.
“I think of it in terms of the following question. Why buy a takeaway when you can cook yourself? The solution is the takeaway. You don’t care what goes into it, within reason, as long as it tastes nice. Investors care about whether the end product meets their needs.
“In my previous role at JP Morgan we used to have a conversation about what the investment need was. The first step is determining what we are trying to solve. Then you look at what is a sensible mix of assets that can meet that need. Finally, you build a portfolio around that and make sure that the investor is comfortable with its risk attributes. They can either feel more comfortable taking market or liquidity risk, or accept lower returns.”
Richards says that the level of understanding of the range of choice out there for charities is a barrier to new approaches. “Some bigger charities can use advisers and employ specialists. But many others don’t have that expert guidance to hand. Being able to explain concepts like multi-asset and what it can bring as a solution for charities of all sizes, letting them know that they have a range of options, is very much what we are trying to facilitate. We need to open up those choices and opportunities at all levels. It is about educating trustees, and more broadly finance teams.”
Sheikh concedes that while it may sound obvious, a multi-asset fund looks from the outside potentially more complicated than a single asset fund. “The hurdle for the investor is higher. They know what equities and bonds are, but are confused by multi-asset. It needs greater trust and understanding. The days of fund managers saying ‘I am really clever, give me your money and I will report back in a year’ have gone, which is great. We should be explaining that this is what we are investing in and what we are trying to do. Part of our job is to ensure this.
“I hate the term hand-holding, but it is about making trustees comfortable. They have other things to worry about other than investment. That should only become an issue if something goes wrong.”
Gourlay says that one concern for charities might be the proportion of the fund which is held in illiquid assets, and what return they are giving.
Sheikh thinks that some charities are naturally comfortable with illiquid assets, and he is starting to see more illiquidity than in the past. However, he cautions: “It is called liquidity risk not a liquidity free lunch, so you have to be comfortable with that and be there for the long term. People may not be comfortable with things such as emerging market debt. This is where the multi-asset investor makes the decision for you.
“I am not blind to the fact that the client needs to be sure that if they give us more rope we won’t hang ourselves. They need to understand what we do and trust us. From a business point of view we love to have that dialogue as we have a happy client, and it obviously suits us to have a long-term relationship. Charities want a trusted adviser and we want to get engrained in the process.”
Clearly multi-asset intuitively sounds sensible but charities are at different levels of engagement and understanding. And while everyone agrees there is a potential problem with the traditional charity approach to investment, and is able to discuss the solutions, how can charities be persuaded to try something new?
Sheikh says that firstly, a multi-asset approach can be seen as more complicated. “They are considering whether they trust you. You need the dialogue to comfort people about the risk being taken. Speak to clients. Work out where they are and what they are worried about.
“The fund management industry has to be honest about what is achievable. Everyone wants cash plus 3 to 5 per cent with no risk, which doesn’t exist. You have to take some risk. You have to make sure people understand that and that it matches their risk tolerance. We need to be more transparent.”
Richards says it is a question of oversight and clarity of mandates, transparency and knowing what is really going on.
Davies adds: “Ultimately investment decisions sit with trustees, whether they like it or not. Some don’t understand these concepts so lose confidence. But as traditional asset allocation to some extent no longer works they need to be nimble about where they put their money. It might be easier to let someone else do it.
“But even when trustees have greater understanding, they still need to find the right manager. It is a generalisation, but many charities are not good clients as they are not clear about what they really want. A manager may come in once a quarter to a board meeting, talk briefly about performance and then go. There should be, on both sides, greater understanding about what each are doing and trying to achieve.”
Gourlay says that this lack of understanding is not unique to charities, and also exists in the pension industry, while Richards points out that there is a reputational risk for trustees by not having a full understanding. “This isn’t an insurmountable obstacle but it is a danger that fund managers can help with,” she says. “While long-termism should make them open to riskier assets, there is a sense of ensuring things don’t go wrong on their watch. If you are looking after donors’ money for future beneficiaries the stakes are high.”
Davies agrees that there is a psychological problem related to trustee term timescales but says this can sometimes work the other way. “Sometimes, far from being cautious, trustees might want their watch to be the one where great returns were achieved.”
Sheikh says that doing nothing is not an option in itself – it is also a decision. “Not doing anything is as risky as taking a risk today. You could end up 30 years down the line and the purchasing power of your assets has gone. Doing nothing is not an option. And being transparent about the risks that come with taking a different approach is the investment manager’s job.”
With thanks to Jupiter Asset Management for its support with this feature