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Tom Quicke: The art of adaption - investment lessons from the pandemic

25 Jan 2022 Expert insight

Tom Quicke reflects on investment lessons learnt from the pandemic.

This content has been supplied by a commercial partner.

From the financial impacts to the operational challenges, many charities are still facing significant hurdles and are having to adapt to continue supporting their beneficiaries. The importance of adaptability during the pandemic has also been seen in the management of charity investments.

The pandemic materially changed the investment landscape. As the world shifted to reflect a post-pandemic environment, many charities, with the help of their investment managers, reappraised their investment strategies accordingly. The pandemic, as with other crises before it, has resulted in even greater demands on the services of the charity sector. Charities that rely on investments to meet such increased demands have been faced with the simultaneous challenges of turbulent markets and falls in investment income, and the necessity to adapt to overcome these hurdles has been imperative.

Income versus total return

One of the greatest impacts of the pandemic on charity investment portfolios has been in respect of investment income. Tailored investment portfolios with a UK equity bias for income purposes suffered a dramatic fall in portfolio income as dividend cuts took hold as companies looked to preserve cash and strengthen balance sheets amid the uncertainty caused by the pandemic.

UK market dividends, at its lowest point, reached approximately half of pre-pandemic levels. Other asset classes, such as commercial property, also saw significant income pressure caused by tenant rent holidays or rent reductions. During the pandemic, a bespoke approach with flexible investment strategies, enabled Investec to react swiftly to evolving circumstances and adapt its approach where necessary.

In many instances, this led to us reviewing with charities how they distribute returns from their portfolios, with those that could spend capital looking instead to a total return approach to distributions whereby both income and capital is spent at a sustainable rate rather than relying solely on income. For example, portfolios that were producing income yields of 3% pre pandemic may have seen their yields fall to 2%, but the income shortfall could then be easily made up by 1% of capital. This shift in strategy has enabled many clients to either maintain or increase their distributions from pre-pandemic levels thereby helping them to support their beneficiaries. With the road to income recovery looking like a slow one, we anticipate more charities will explore the total return option towards distributions.

Overseas equities versus UK equities

The UK equity market, previously held in high esteem for its income qualities, saw this key attraction disappear during the pandemic with the collapse in UK company dividends. With its yield premium having gone, many UK investors and charities have questioned the need to retain any bias to their home market, particularly when the UK market only accounts for about 5% of world markets by value.

Dominated by sectors such as financials and extractive industries, many investors argue that the composition of the UK market is structurally unattractive and has lower growth prospects while the pandemic accelerated a number of longer-term thematic trends that the UK market is underrepresented in such as newer growth areas of technology, e-commerce, environmental companies and those involved in social change. A greater focus on total returns has enabled previously income-focused clients to pivot away from the UK market to concentrate on growth opportunities on a more global basis instead.

While many of these overseas companies trade at high valuation multiples, these can often be justified given their proven ability to generate higher rates of growth. Overseas markets have outperformed the UK market nearly threefold over the last five years in sterling terms, and while we do not anticipate necessarily that degree of outperformance over the next five years (nor indeed can we guarantee outperformance), we believe the investment case for investing more globally remains compelling.

We reviewed clients’ strategic asset allocations during the pandemic to determine whether changes were required on this front, and many income-focused charities were able to adopt a greater global approach to their investments by forgoing their previous income bias for a total return approach instead.


The pandemic highlighted to many charities the increasing importance of environmental, social and governance (ESG) considerations within their investments. Social factors – the S in ESG – became more prominent than they perhaps had been previously, with clients and investors alike more attentive to how companies were reacting to the challenges of the pandemic in terms of looking after their employees’ health and wellbeing, while also addressing societal inequalities in their communities that the pandemic may have exacerbated.

Sustainability is a word that also gained more prominence during the pandemic as the sustainability of economic returns no longer became the sole consideration for the majority, with the sustainability of companies’ impacts on the environment and on society gaining greater importance. Investment managers are increasingly being asked by their clients to explain how sustainability and ESG considerations are incorporated into their investment process and to evidence how their portfolios are constructed on this basis.

In a fast changing and evolving ESG landscape, adaption has been and remains essential to deliver positive change and meet clients’ expectations. We have seen increased demand from charity clients on ESG reporting with, for example, clients wishing to see what the carbon emissions are from their portfolio or what their exposure is to companies that score poorly from an ESG risk rating perspective. We have embedded ESG considerations into the investment process and use the services of Sustainalytics, a leading ESG score provider, to provide ESG risk scoring, as well as Institutional Shareholder Services (ISS) to provide data to enable us to identify companies that are contributing positively to the UN Sustainable Development Goals.

Charities have also become increasingly interested in how their managers engage with the companies they invest in and again wish to see examples of engagement and collaboration with other investment houses to deliver positive ESG outcomes and greater disclosure. As such, we are a signatory to both the United Nations Principles for Responsible Investment and the UK Stewardship Code 2020.

Charities’ circumstances and requirements are often changing, as is the investment backdrop and the pandemic highlighted this to the extreme. Investing on a global basis to seek the best possible returns rather than being constrained by income or geographic region is becoming a greater focus for charities and ESG considerations will continue to play an ever increasing role in the way portfolios are constructed. The ability, and indeed necessity, to adapt to the shifting sands has been paramount to delivering positive client outcomes over the last 18 months.

Tom Quicke is senior investment director in the charities team at Investec

Charity Finance wishes to thank Investec for its support with this article

The Charity Finance Yearbook is the ultimate reference source for charity finance professionals. Produced by the Charity Finance editorial and research team it includes updates, advice and trends on accounting and audit, VAT and taxation, investment strategy, responsible investment and finance, risk, funding, performance and governance, law and regulation, HR and pensions, IT and property. Purchase online here.


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