Inflation is currently not an issue for charities, but it is likely to be in the future, warned Giles Neville, head of charities at Schroders at the 2010 Charity Finance Investment Forum. 

“It is especially a problem for long-term investors,” said Neville, “as inflation erodes the real value of a portfolio and compromises spending power.

“We live in a global world,” he continued. “Half of growth comes from emerging markets. This means commodity prices will go up. Therefore the cost of imported goods will rise.”

Neville said the solution to long-term challenges with inflation depended on a charity’s time horizon.

“If you are investing for 30 to 50 years you can ride out the volatility,” said Neville. “But most trustees have shorter time horizons.

“The majority of governance spend is on controlling risks to benchmark, while risks from benchmark to inflation target is only managed intermittently.”

Neville advised that charities needed to focus a financial portfolio on required return (+inflation) rather than the benchmark. They should adjust the asset mix through cycles and incorporate current valuations and environment in forecast returns.

Neville also warned that the traditional growth engine of equities would struggle to be the sole solution to the inflation problem.

He pointed to selected periods in history when the world experienced large equity losses, including the dotcom bust in the 2000s and the recent credit crisis.