Invested assets play a fundamental role in enabling many charities to deliver on their missions now and into the future.
Effective management of investments demands significant oversight, and trustees must make a series of crucial decisions – from choosing fund managers to determining when and where to disinvest to meet cash flow needs.
No decision is more pivotal than setting the strategic asset allocation – determining how assets are distributed across different classes. In this article, we describe our approach to constructing a durable strategic asset allocation which can stand the test of time.
Why is the strategic asset allocation important?
A charity’s investment strategy should serve as its “North Star”, a template that guides the organisation towards its long-term objectives.
We believe your strategic asset allocation is the primary engine driving your investment performance, so building the right strategy – and ensuring it aligns with the charity’s aims – puts you firmly on the path to success.
Yet, many charities operate with investment strategies that are unclear or not well defined, making it difficult for stakeholders to explain the reasoning behind asset allocation decisions.
A clear, unambiguous approach – where the role of every asset class is understood – helps to build portfolio resilience to withstand the inevitable bouts of volatility. You also need to ensure that the strategy remains relevant for the current market environment, not based on historical performance.
Ensuring that key stakeholders understand the rationale behind the construction of the strategic asset allocation is important. In our experience, many charities invest through multi-asset funds where the fund manager sets the allocation across equities, bonds and alternatives such as gold or property.
But often, the link between these allocations and the charity’s specific needs for return, risk, and liquidity isn’t clear – making it difficult for trustees and committees to grasp how or why assets are invested in a particular manner.
How to approach constructing a strategic asset allocation?
Traditional approaches to setting strategic asset allocation typically rely on the relative positioning of candidate portfolios in terms of their expected return and risk profile.
These models have merit but may not always reveal the underlying rationale behind asset allocation decisions.
The foundation of any successful investment strategy lies in truly understanding what you need from your invested assets. We start with a discovery phase – a collaborative and structured journey where we help clients clearly identify their goals, challenges, and stakeholder expectations.
This thoughtful approach enables us to build a strategic asset allocation that aligns seamlessly with the charity’s mission and paves the way for future success.
It’s essential to involve key stakeholders – including trustees, the CEO, and the chief financial officer in this process. By fostering open and transparent discussions, you ensure everyone understands, contributes to, and supports the charity’s investment direction.
The key questions we ask include:
- What is your time horizon for investing? Are your assets intended to support your mission indefinitely, or do you intend to focus on the needs of today?
- What level of investment returns are you seeking to support your charitable mission?
- What level of investment risk are you willing to tolerate to achieve investment returns? What level of short-term loss might cause you organisational challenges?
- How much do you intend to spend each year? Are there major projects on the horizon that require substantial funding?
- To what extent do you seek to integrate responsible investment and environmental, social, governance (ESG) themes into your portfolio?
The answers to these questions drive different strategic asset allocation decisions.
As an example, for many charities, the investment time horizon has traditionally been perpetual, designed to balance the needs of today’s communities while safeguarding resources for future generations.
This approach often targets portfolio returns of 3-4% p.a. above inflation, aiming to fund current initiatives and preserve spending power for tomorrow.
However, some organisations are now considering drawing more heavily on their reserves to respond to pressing, immediate social challenges. Taking this path may shorten the investment timeframe or require a greater willingness to accept risk in pursuit of higher returns, to ensure that assets deliver sufficient growth for future generations.
Recently, we partnered with a charity facing an uncertain investment timeframe, where the standard 70/30 portfolio proposed by conventional thinking simply wasn’t the right fit.
By working closely together, we helped them clarify their risk tolerance and future spending requirements. Then, we crafted a well-diversified portfolio tailored to their unique needs – designed to deliver stable, attractive returns and support their mission.
The building blocks of a charity investment strategy
Once we understand the key needs of the charity, we move on to our “Develop-and-Deliver” phase, using our proprietary tools at each stage to build robust, tailored investment frameworks.
Asset classes serve a variety of important functions within a portfolio – they can drive returns, enhance diversification, offer liquidity, and generate income. We believe it enhances the clarity of the strategic asset allocation when the key stakeholders understand the roles that their asset classes play.
Broadly speaking, a well-constructed investment portfolio consists of four key asset classes which can play the following roles:
- Public equities: are often the engine of long-term growth, offering returns that tend to beat inflation over the long-term – though they can experience significant short-term drawdowns.
- Public credit: includes assets like government and corporate bonds, which can deliver steady income and add valuable diversification to your portfolio.
- Liquid alternatives: investments such as hedge funds, insurance-linked securities and gold which tend to be less correlated with traditional markets and provide diversification to help smooth performance through varying market conditions.
- Private markets: investments including property, infrastructure, private equity and private credit. These can boost returns, broaden diversification, and present opportunities to align your investment strategy with your charity’s mission – especially through impact investing.
For many charity investors, public equities have long been the foundation of their portfolios. This approach likely still makes sense for most; however, many investors are growing increasingly concerned about the level of concentration in public equities and are considering opportunities to diversify.
In our previous articles, we’ve highlighted the compelling opportunities we are seeing in liquid alternatives and private markets. In our view, these asset classes have traditionally been underutilised by charities, offering untapped potential to further strengthen and diversify investment portfolios.
Responsible investment and ESG considerations are increasingly integral to portfolio design. Some may view ESG alignment as an implementation consideration; however, ESG priorities can also shape asset allocation decisions.
A charity which is aiming to be more impactful with its investments may look to allocate more to private markets in areas such as renewable infrastructure or social housing.
The importance of good governance
Strong governance is essential: it sits at the heart of an effective investment programme. When there is clear agreement on strategic asset allocation, decision-making becomes straightforward, and confidence replaces uncertainty.
Trustees and executives can stay united and purposeful – even during times of market volatility – knowing they have a well-defined plan to guide their responses, no matter what challenges arise.
We referred to the strategic asset allocation earlier as the “North Star”, a guiding light to support investment decision-making. But how often should this be reviewed?
We usually recommend a light-touch review of objectives on an annual basis with a deeper-dive review every three years or if there is a material change to your organisation’s needs or in investment markets.
We’d recommend reviewing investment performance on a quarterly basis and use this as an opportunity to rebalance when allocations exceed control ranges or if you need to draw down funds.
Good governance also involves considering emerging investment opportunities along the way and there is no need to be beholden to the strategic asset allocation if you’ve identified a compelling opportunity. It’s okay to deviate from strategic asset allocation from time to time as long as decisions are informed and balanced.
Building long-term success
For charities, crafting the right strategic asset allocation means truly understanding how each piece fits within your broader investment approach.
By establishing a clear sense of purpose, upholding strong governance, and ensuring every investment decision supports your key objectives as an organisation, charities can lay a powerful foundation for portfolios designed to succeed over the long term and drive meaningful progress toward your mission.
Jennifer O’Neill is UK investment partner and head of not-for-profit investment and Matt Hurshman is associate partner at Aon
