Charities have had a particularly tough time following the market turbulence over the past year and have been squeezed from all sides. Not only have the total values of their portfolios taken a significant hit, inflation has eroded the actual value in ‘real’ terms. This, coupled with the fact that the finances of charities are correlated to the strength of the economy, has had a huge impact on their abilities to provide services.
For the last ten years or so, low inflation and low volatility created a relatively comfortable environment for investment portfolios and enabled many to generate returns above inflation with relative ease. With this no longer the case, we have seen an increasing number of charities requesting comprehensive reviews of their investment policies, strategies and underlying managers.
As I have experienced in the past in times of market upheaval, performance from fund managers becomes diverse. Growth managers have had a torrid time recently in performance terms; where those with a brief to maintain a balanced portfolio with an element of value have done rather better. In the past, trustees (typically meeting quarterly) often took a view to ‘jump ship’ having seen their managers perform poorly for the past few quarters and change managers without really looking at the reasons why the performance of the incumbent was poor. If the manager was appointed for their credentials of being a growth manager initially, then analysis should be carried out as to whether this style is still appropriate for the charity’s portfolio. One should be very wary of managers changing their style to suit the market at the time.
Given the moves in the market recently, trustees should take a close and considered look at how the portfolio is managed and whether the policy originally adopted is still fit for purpose. If following a review of the investment policy and strategy is to be revised, it is important to assess that the incumbent managers can still meet the brief. So before making a change in management, it is vital to understand the requirements of the portfolio to see if a change in management is likely to improve the future returns as well as other factors, such as meeting the brief in the policy on ESG.
With greater divergence in managers' performance and investment committees experiencing more pressure on impartial evaluation and validation of investment management arrangements, independent consultants can provide help and advice, reviewing investment strategies, policies and portfolio arrangements.