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Charity Investments - 2022 Outlook

Updated: Feb 9, 2023

Looking back at 2021, according to the Charity Commission Covid-19 Survey, nearly all charities (91%) in England and Wales have experienced some negative impact from Covid-19, including a negative impact on their financial positions. In the world of investments, the picture was very different with global equity indexes ending the year near all-time highs as investors were optimistic about the global economic recovery and successful vaccination programmes.

2021 was very positive for equities with FTSE World Index returning 22% in GBP, while UK gilts lost nearly 5% value for the year. Long-term charity portfolios, on balance, achieved strong returns with a peer group index (ARC Steady Growth ACI) returning 12.2%.

Source: Morningstar Direct, ARC Research

Key themes for 2022

Key themes for the global financial markets in 2022 will likely be a continuation of those we have been discussing last year, including rising inflation, uncertainty and volatility and climate change.

Most investment managers that we follow retain a constructive outlook on equities (although not to an extent seen in 2021) and a much more cautious view on fixed-income investments. While we expect that investment managers will deploy their tactical views when managing charity portfolios, we believe that these themes are also important for charity trustees and investment committees to address as they are discussing their investment strategies.

Rising inflation

With debates around the timing and level of inflation continuing, most would probably agree now that inflation is more than transitory and we will need to learn to live with it. Interest rates, at the same time, are likely to remain low in real terms.

For charities, the implications can be significant as many rely on investment returns to fund their annual expenses, which are now rising faster. Many charities hold elevated levels of cash that were built to deal with uncertainty and now face a higher risk of being eroded by inflation. Traditional "balanced" portfolios of equities and bonds, which are common in the charity sector, can face a second consecutive year of a challenge in the bonds part. And for those charities relying on investment income, this is also likely to remain scarce.

On a strategic level, charities can take different approaches to manage inflationary risks. Some can adopt a higher tolerance to market volatility seeking to achieve higher returns. In other instances, it may be prudent to reduce spending in order to protect the real value of the capital over the long term. And it becomes even more important to manage cash reserves diligently and not hold excessive cash balances.

Uncertainty and volatility

A mix of global events, including re-starting of economies, new strains of the virus, supply-chain disruptions, geopolitical risks, climate risks, just to name a few, create a wider range of possible economic outcomes, thus leading to an increased risk of market volatility.

From a viewpoint of charity trustees, we believe that comprehensive portfolio diversification is the key. We wrote about our Five Top Tips on Diversifying your Charity Investment Portfolio in more detail last year.

ESG and drive to net-zero

One of the key differentiating factors of COP-26 in Glasgow last year was that the financial industry for the first time was included in the core of the discussions. Impact investing strategies already become widely available even for investors with relatively modest portfolios and we expect this trend to only continue gaining momentum. With this fast pace of growth, unfortunately, comes a problem of "greenwashing" which is further exacerbated by the delayed and insufficient regulatory framework.

We find that there is a significant discrepancy in how charity trustees interpret their responsibilities in particular when it comes to impact and responsible investment strategies, including their stance on climate change. In this environment, we find it is particularly important to raise these issues at trustee discussions to reach a collective understanding of what is the most appropriate stance for your particular organisation. We help our clients to start looking at sustainability risks in their portfolios on a regular basis alongside financial returns. We work with them to enhance their ethical and responsible investing policies to proactively manage their reputational risks and ensure that their investment portfolios are aligned with the values of their stakeholders. This is particularly important for charities with a high public profile and those reliant on external funders.

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