Reflections on the Past Three Decades of Charity Investing
Updated: Feb 9
Over the next few months, I thought that I would set out my experiences of advising charities over the past three decades and why I believe why external professional impartial advice is increasingly needed.
I find that the role of the charity trustee in overseeing a charity’s investments has become more complex and demanding and given that trustees give their time for free, even if they have a raft of investment knowledge they may not have the time or resources to devote to the demands of overseeing the investment portfolio.
“As I stated in my proposition to charities when I set up my first charity advisory business, Jewson Services to Charities in 1993, I believe that charities need access to the best external advice in order to minimise expenditure and maximise voluntary and investment income, and to ensure that they are complying with tougher and more extensive charity laws and regulations. If anything has changed since then, the charity investment world has become ever more complex and requires more specialist knowledge.”
Edward Jewson, Founder and CEO of PMCL Consulting
When Jewson Services to Charities changed to Jewson Associates at the end of the 90’s, the charity investment world was very different from today: charity trustees were constrained by the Trustee Investment Act 1961 where the restrictions of the types of investments that charities could make were limited. The Trustee Act 2000 loosened those restrictions and gave charities a greater opportunity to invest more widely, although many trustees were nervous of broadening the scope of investments in their investment portfolios. The Trustee Act 2000 put more responsibility on trustees and therefore there was a greater need for trustees to seek external investment advice from investment consultants.
Prior to the Trustee Act 2000, charity trustees tended to appoint fund managers to manage their charity portfolios through personal contacts. Fund managers were changed when performance was poor or the individual who was managing the fund left or service levels dropped off. When trustees of small to medium sized charities decided to change managers they would arrange a tender process (often of managers known to trustees through personal contacts) to select new managers for what was normally a balanced mandate - the exercise was (and still is) somewhat subjective.
In the coming months, I will endeavour to address how things have changed in the investment world for charities. I note, however, that while some of the specific issues that trustees are facing now may be different, it is an evolutionary process and I have been seeing many variations of many of the same themes, for example:
Ethical investing - With ESG, ethical and responsible investing and climate awareness are probably one of the biggest trends in finance this decade, charities are no novices to this concept. In the 90’s, the debate was mainly about exclusions principally tobacco, nevertheless despite the exclusions being fairly limited, charities were at the forefront of the ethical debate. However, some would argue they have slipped back a bit in the area of ESG integration and engagement and some are still approaching with an exclusionary bias and less focus on impact and positivity.
Dealing with market volatility and manager underperformance - while most charities have seen generous returns from their portfolios in the past decades, the markets have become more volatile and we have been seeing some sharp reversals in such areas as growth vs. value trade earlier this year. With inflation adding to pressure on real returns, we expect many trustee boards to be seriously challenged. Unfortunately, I have seen too many times in the past when investment managers were fired after 3 years of poor performance and replaced by managers who had performed well for the previous 3 years, without much due diligence on the underlying reasons. Quite often the reverse happened over the next 3 years leading to more losses. Some trustees although having adopted a long-term strategy, have been known to make short term tactical decisions in a reaction to the market - often to the detriment of the long term strategy.
There will be other areas where the debate has evolved in the charity investment arena and I will attempt to cover them in the months to come.