“Everyone thought the pandemic was the worst crisis,” says Nicola Toyer, head of charities at Investec. “Now two years later, we are in yet another one and this creates a lot of uncertainty.”
Toyer says that the rising cost-of-living, energy prices and the war in Ukraine are key factors in driving the biggest macro challenge for investment at present – inflation. “Clearly 2022 was a challenging environment where you saw multi-asset portfolios dropping on average around 10%. A typical charity investor might have been targeting inflation plus 3-4%, but we had inflation go up by just over 10%. So there is a massive gap in what your expected return should be versus what your investment objective was aiming to achieve. And this has impacted charities in very different ways.”
To a certain degree, the impact felt by a charity will depend on how long they have been investing, says Toyer. “A charity that has been investing for 10, 20 or 30 years will be able to absorb such inflationary shocks better because it has a bigger buffer in reserves due to the benign inflation environment which we have had for the previous decade.
“But other charities might be asking where they will be in a year, or two years. Is their strategy sustainable? They might be looking at drawdowns and asking what impact that will have on reserves and investment pots.”
Steady and stable
But despite the uncertainty and macro-economic pressures, Toyer says there is not a sense of panic among Investec’s charity clients. “I think they are definitely more considerate in their decision-making in terms of what they are spending, and whether they are getting the most from their money – really maximising the benefits in terms of the investment strategies,” she says. “The boards that we deal with are quite experienced investors and are at wealthy charities. A lot of our clients have been with us for a really long time and they have been in this situation before. I think many investors are waiting for the dust to settle. No one’s making any snap decisions.”
Toyer says that she is having a lot of conversations with clients around market strategy and where inflation is going. “We’ve been talking about recession for a long time now but it hasn’t formally materialised. We’re still on the cusp, which creates a lot of uncertainty. One thing investors like is to know what’s going to happen in the markets over the next one to two years and being able to create a very clear economic forecast. We don’t have that kind of certainty right now.”
What fund managers need to do is to continue to offer reassurance and stability, says Toyer. “I think that’s what most clients want to see from their investment manager. They will have tough questions around performance, asset allocation, positioning and outlook, because that’s their job as trustees. But what they really want to know is that we haven’t dropped the ball, that we are close to the markets, understand the environment we are in, and are doing everything we can to protect their capital and help them meet their objectives.
“Our priority for our charity clients is to maintain a balanced portfolio. The worst thing we could do in a time of uncertainty is to take any big bets. That’s not what you should be doing as a steward of a charity’s assets.”
Butler-Sloss vs Charity Commission
From an environmental, social and governance (ESG) perspective, there is yet another factor that is adding to the uncertainty: the outcome of the Butler-Sloss vs Charity Commission case. The judgment made in April last year confirms that trustees have wide discretion to exclude certain investments based on non-financial considerations when making financial investment decisions. These principles are described as ethical investment in the Charity Commission’s CC14 guidance, but have also been described as responsible investment. This wider approach appears to supersede the Bishop of Oxford case, where it was held that the purposes of the charity are usually best served by the trustees seeking to obtain the maximum return on investments.
However, there is still uncertainty and debate as to whether this is in fact the case. With updates on the Commission’s guidance not likely now until the summer, this leaves a lot of charities in limbo, says Toyer. “The Butler-Sloss case confirms that a charity’s remit in regard to investment decisions is wider. It puts the onus on the trustees to really consider responsible investment in the context of their charities values and in some instances consider more than just financial return if it means not compromising your values in other ways.
“The reality is that many charities have already been looking at ethical restrictions in line with their values. They want good ESG integration and are thinking a lot about impact. This ruling gives them permission to do that and hopefully the Commission’s guidance, which we get in the summer, will be very much aligned with this ruling. If it isn’t, I think there will be a lot of confusion.”
ESG integration and stewardship
Although the ruling confirms the general direction of travel, Toyer warns that there are other concerns that need to be taken into account when pursuing a purely ethical strategy. “Although you are not necessarily compromising the returns, by aligning values and excluding certain sectors or certain stocks, you’re reducing the size of your investment universe and potentially increasing the risk of the portfolio and the disparity of the returns.”
She says that the role of fund managers in furthering responsible investment is to help navigate this by encompassing ESG integration and stewardship. “Good ESG integration is now seen as a given when you are thinking about risk management, and looking at non-financial risks and how they might impact future financial return. ESG integration is absolutely essential to maximise the financial return of a charity. The stewardship side is also really important, because we are being trusted to act as a voice for our investor base. It is our responsibility to hold companies to account. So ESG integration and stewardship go very much hand in hand in creating that responsible picture.
“Generally, value statements differ across the sector, and that’s the additional overlay you can provide with a bespoke portfolio. But even if you don’t apply a valuesbased assessment, you can still invest responsibly with a focus on ESG integration and stewardship.”
Nicola Toyer is head of charities at Investec.
Fast facts
Over £3.2bn in charitable AUM and £39bn of total assets*
Top 10 manager of UK charities, with over 80 years experience
Donated £8.9m to community projects and over 9,000 volunteering hours in 2022
Investec Beyond Business: created 53 social enterprises, with over 375 jobs
UN PRI and UK Stewardship Code signatory
*As at 30 September 2022
What we do
At Investec, our Charities Investment Service underpins our corporate purpose to create enduring worth, living in society, not off it. We are responsible for preserving and growing the wealth that is entrusted to us by over 1,000 charities; supporting them in delivering their mission. Sustainability is core to our investment approach and we will aim to deliver your financial goals, while ensuring your values are protected. We will take the time to understand your charity and can provide local charity specialists through our 14 regional offices across the UK.
