History has shown that taking a long-term approach helps investors to ride volatile markets, survive shocks and maximise returns. This is a real benefit for charity investors with long-term missions, allowing them to not only stay committed to outcomes through uncertain times, but even spend at a higher than average rate across the years. However, behavioural, operational and governance timeframes can hamper trustees in planning for the long term.

Time and Money, a new report published by Cazenove Capital, seeks to consolidate and enhance thinking in this area and is based on rigorous research from over 250 foundations and charity investment practitioners. “We felt it was important to recognise the opportunity for long-term thinking in charities and identify any barriers”, says report co-author Kate Rogers, head of policy at Cazenove Charities and chair of the Charity Investors Group.

Co-author Richard Jenkins, who is an independent researcher and consultant, adds that the report isn’t proposing a single formula to success. Instead it asks: “Are you in good shape to pursue your mission through an uncertain social and economic future, and what do you need to be so?”

James Brooke Turner, who is investment director at the Nuffield Foundation and a director of the consultancy firm Yoke and Co, says he has been interested in this subject for years: “Ultimately, attitudes to time are what make investing for charities different to pension funds.”

But Max Rutherford, head of policy at the Association of Charitable Foundations, suggests that the report presents an opportunity for foundations to consider their own time stamp. “There are some foundations working on a different timeframe and making a deliberate choice not to think long term.”

Time horizons

Danielle Walker-Palmour, director of the Friends Provident Foundation, says her foundation’s time horizon is broadly long term, but its trustees have said they are content to spend capital to meet an identified need. As a result, it is one of a growing set of charities with an “open-ended” approach to the longevity question.

“We are not spending down but are not in perpetuity,” says Walker- Palmour. “We spend according to demand. If we have good things we can fund then trustees will do it, while managing money to maximise return.” However, she adds: “Our reflex is to maintain capital, so we end up like a ‘normal’ trust.”

So if a foundation has a longterm outlook, what questions should trustees be asking? What information do they require from the professionals? How often should they meet?

Brooke Turner says he and two colleagues meet the Nuffield Foundation’s managers once a year and report back to the investment committee. “The committee never get a manager presentation. They never hear about the detail of how the portfolio is invested in, for example, Chinese equities. Our governance obligations are met but the noise is taken away. They are told if there is a problem or if something needs changing.

“The committee meets three times a year for 90 minutes and considers whether the portfolio is positioned for a range of outcomes, reviews the different components, and considers if the overall risks remain unchanged.”

He also wonders whether there is sufficient clarity in the sector about what monitoring managers means. “We have a checklist. It isn’t intense, but it’s a framework to check whether things are working. If things are fine then you don’t need to change anything.”

A number of the recommendations in the report are around the purpose of meetings, says Rogers. “We’re not saying trustees shouldn’t meet their managers, or that two-hour meetings are too long. We’re saying that trustees need to ask: ‘Why are we meeting?’

“I often step into meetings and sense we are providing the entertainment. There is an implicit expectation that we will talk and there will be questions. But an opening up of the conversation is often more useful so that it isn’t only about investment markets. It needs to address the context, the spending and the strategy.”

For Jenkins it is all about relevance. “What surprised us during the research was how much feeling there was and frustration about how meetings are currently structured. Most charities reported that they didn’t think manager meetings were productive, partly because the information was often overly complex and even irrelevant to their specific objectives.

“An essential ingredient in successful relationships with managers is being able to trust their judgement – and that’s difficult to do if you don’t understand what they’re saying. So it’s key to ensure the information managers field is relevant to the charity. Rather than going off into market speculation, managers should illustrate the actual decisions they are making day to day, so that trustees understand and are bought into the approach.’”

Brooke Turner argues: “People in our world are enthusiastic about whether the narrative is good, but how often do you hear a trustee at an investment committee saying: ‘I am concerned that you are not taking enough risk?’ It is an important monitoring question. Are managers taking as much risk as they have been asked to take? You never hear it.”

Active approaches

Given the importance of long-term planning, how do trustees know how and when to react to economic shocks that could impact their returns in the short term? As Brooke Turner points out, if you lose half of your money, you cannot fulfil your plans. “This can be a disaster, therefore you need to be fully aware of what will happen if you lose money and what that means for your spending. If you have no ongoing liabilities, for example you are a grantmaker, then it isn’t necessarily a problem.”

Charity investors can get caught up in the mentality of pension funds, worrying about liabilities and matching them with assets, says Walker-Palmour. “You don’t have to maintain a level of spending. You can change your plans and have a different conversation. Spend what you need to spend, and don’t worry about markets going down.”

For Rogers, long term should not mean inactivity or stasis. “The charities and foundations that persist over generations have adapted both their approach to investment and the way they carry out their charitable objects in a changing environment. The dangerous assumption we need to avoid is the belief that being long term means putting it under the bed and forgetting about it.”

Jenkins agrees, but adds that there is a risk of going too far the other way as well. “We need to get people away from the idea that you need to keep busy to justify your existence. It is about necessary investment activity, which means factoring out the shortterm noise that provokes unhelpful reactions. If you try to be very active and control things then you’ll end up making short-term decisions.”

Generally it is agreed that charities with longer-term horizons feel able to spend at a higher rate than their peers with a more short-term view. “You can tell a lot about a foundation by its spending rate,” argues Jenkins. “If you have a long-term view you are more confident and optimistic about the future, so are more relaxed and feel able to spend more now.

“If on the other hand you find the short-term twists and turns frightening, you might retrench, drip feeding money in a way that does some good but where your main concern is to preserve your own existence. In that scenario you are probably going to take fewer risks in other areas as well, all to the detriment of the mission.”

Good intentions

Rutherford thinks it is important to explore intentional investment and total mission, whereby investors pursue opportunities that directly enhance their charitable mission, rather than simply generate money. “More are starting to think about mission first with investment strategy as part of it. They are looking across their assets and deciding how to put them to the best possible use to achieve that mission.

“Is it right to maintain the presumption that the bigger the return, the bigger the impact in terms of grant spend?” he continues. “You may not have as much of a grant spend in a given year, but your investment choices may have gone a long way to achieve mission.”

The Friends Provident Foundation is one charity that is taking this approach, says Walker-Palmour. “We have defined ourselves not as a grantmaker but as a capitalised charity. Trustees are trying to judge the impact across all of our money, not just grants. There is an evaluation on how the mainstream endowment is being spent. Is it in pursuit of the mission?”

However, there are challenges with this, she says. “There is plenty of data on the financial side, whereas the other things are harder to quantify. Trustees ask how they can tell what the human return is. They find it easier to leave the money invested to get a nice shiny financial return. Intentional investment is the new frontier, but it is hard to move the debate on because the metrics are missing.”

“Or the metrics are mistaken,” observes Jenkins. “In terms of outcomes, people devalue the importance of narrative – compelling evidence-based narrative about the difference they are making.

“We need to reset the defaults around the model for charities with investments. Think again from the ground up about mission objectives. Once you start with that, anything is possible.”

Spending out

Rutherford observes that while focusing on survival may be entirely appropriate for the more than 80 per cent of foundations which have opted for the perpetuity model, there are those which have strategically chosen not to do that. “We should think of them not as those who haven’t survived but as those who have chosen to fulfil their endgame.

“It is often said that all charities should have an endgame and know what it looks like. Foundations should not be exempt from that, even those which operate on a perpetuity basis. Although their mission may be unlikely to ever be fulfilled, they should still consider what the endgame means for them. For example, do we want to be here in perpetuity to alleviate the symptoms of malaria or do we want to eradicate it in one go so we don’t need to be here in future generations?”

Some 4 per cent of respondents to Cazenove’s survey had a deliberate strategic spend out, and Rutherford highlights the Diana Fund as a classic example of this approach. Set up to spend out within ten years, it is very highly thought of. “Its model and legacy has survived,” he says.

Brooke Turner cites the Tubney Trust as another example. “They considered what the donor would have wanted and decided to spend out. What a joyful thing to have done. Spending down can give trustees such total pleasure and joy in discharging their liabilities. It can avoid all of the hard sweat and work of getting bang for your buck, as you can just give away the money and make an enormous difference.”

Ambitious charities might contemplate spending at 5 per cent and above if they feel confident enough to contemplate their own mortality, says Jenkins. “It is about humility. If you are humble enough to think the world will go on and others might step in once you have spent out, then you can loosen everything up.”

Brooke Turner ponders how many of the investment manager community would feel comfortable with a charity requesting inflation plus 5 per cent a year as a return target if a charity doesn’t necessarily want to spend down. “The career risk to the manager is colossal, so it wouldn’t be a popular mandate.”

It would be a high risk portfolio, agrees Rogers, but she says some managers would be willing to take it on. “This is about having an honest conversation. Managers have to say ‘we can’t do that’ if that is the case, but we have seen in practice that if we say we can’t meet a charity’s unrealistic expectations, the next manager may think they can.”

Time as an asset

Despite all of this, one of the major assets of most foundations is being around for a long time, suggests Rutherford. “It is not enough to be in the right place at the right time. You need to be there for long enough to have secured an evidence base, legitimacy, reputation and a network of partners to collaborate with, so that when the right time comes you can act and take a great step forward in achieving your mission.”

Jenkins agrees. ”Foundations can buck the social, political and economic cycle and be patient in playing a long-term game. That is what makes them unique.”

However, the danger of “time” as an investment factor, according to Walker-Palmour, is that trustees can get obsessed with the mentality of “not on my watch”. She says: “They feel they have got to leave foundations in the same state that they found them, which leads to conservatism. They need to understand time as an asset but also as a liability.”

In conclusion, Rogers emphasises that trustee expertise and thinking long term are valuable contributors to an investment strategy. “A successful foundation needs to be aware of the alignment of investment and mission brains. Stick to what you believe in and wait for the right opportunity.

“David Swenson at Yale always advised that in a crisis you should buy more of the companies you believe in. This can be difficult, but knowledge, experience and a track record gives you the confidence to stick to your principles. There is therefore a benefit to building the expertise of trustees who don’t have investment knowledge.”

In this way, charities with investment assets will be better prepared all round to fulfil their objectives, whether they be short or long term.

Charity Finance would like to thank Cazenove Capital for its support with this feature