Jeremy Wells reports on the results of Newton’s third annual charity survey, and finds charities with lower expectations of growth.

In the year the UK voted to leave the European Union (EU), the findings indicate that charities have lower expectations of future returns than previously, while environmental, social and governance (ESG) factors and alternative investments represent growing areas of interest.

Between mid-May and the end of July 2016, we surveyed a total of 80 charities, representing some £15bn of investment assets, with a record date for data responses of 31 March 2016. The survey covers diverse aspects of the management of charitable portfolios, from investment returns achieved, to the setting of targets, developments in ethical policies, and the stewardship of portfolios. With three years of data for many of the questions in the survey, we have been able to identify certain trends that are developing within the charity sector, as well as where opinions have changed since 2015 and 2014.

The average charity in the 2016 survey has investment assets of £188m, making them among the largest charities in the UK. Respondents were well spread across size and type of charity organisation.

Among other things, we asked charities:

• How their portfolios performed over the last year, and what returns they expect to see over the coming years.
• How they allocate their portfolios between different asset classes, including alternative investments.
• Whether they are investing ethically, including whether they have adopted a fossil fuel-free policy.
• How many investment managers they use, and how frequently they review them.
• Their thoughts on the UK’s referendum on EU membership, as well as how the referendum result has affected their thoughts on other issues.

The results of the survey are presented in aggregate to maintain the confidentiality of individual survey participants’ data. The key findings of the survey include the following:

Charities are increasingly cautious about the future

Reflecting tough market conditions, the weighted average total return of charities surveyed was just +1.6 per cent over the year to 31 March 2016, while almost a third of this year’s respondents report a decline in their investment portfolio value. Moreover, the majority of charities expect annual total returns of 6 per cent or less over the next three to five and ten years.

Charities are withdrawing less to spend on their charitable objectives

In aggregate, charities are withdrawing less to spend in 2016 than in 2015, with both the weighted average and median withdrawals lower, at 2.9 per cent and 3.2 per cent respectively. However, charities still consider a sustainable withdrawal rate to be higher than this, with weighted average and median figures of 3.4 per cent and 3.5 per cent respectively.

The majority of charities satisfied that investment managers are meeting their income or total-return targets

For those charities that set an income-only target, satisfaction is very high in 2016, with only 4 per cent feeling that the income produced by their investment portfolio is insufficient to meet their obligations. A slightly higher proportion of charities with a total-return target feel their total returns are inadequate (12 per cent).

ESG factors are increasingly important for charities, with fossil fuel-free investing rising up the agenda

73 per centof charities now rate environmental, social and governance factors as either very or quite important in the management of their investment portfolios. In terms of charities’ ethically screened portfolios, tobacco remains by far the commonest exclusion, but more portfolios now exclude fossil fuels than alcohol. Some 16 per cent of charities surveyed have adopted a policy to exclude some or all fossil-fuel investments from their portfolio, a fourfold increase in 12 months.

Exposure to UK equities has experienced a steady decline, while exposure to bonds and global equities has risen

There has been a steady decline in the overall exposure of charities to UK equities, from 36 per cent of assets in 2014 to 28 per cent of assets in 2016. Over the same period, the exposure to overseas equities has risen from 26 per cent to 31 per cent. There has also been a steady rise in bond exposures, to both UK and overseas bonds, from a combined 12 per cent in 2014 to a combined 16 per cent currently.

Although commodities have declined in popularity, attitudes towards other types of alternative investment are increasingly positive

There has been a decline in the popularity of commodities in the latest survey, perhaps driven by the falling prices of industrial commodities and hence disappointing returns. However, the three most popular categories of alternative investments (property, hedge funds and private equity) all show increased take-up year on year. In addition, there appears to have been a big shift in attitudes towards the future use of alternatives, with 73 per cent of charities in the current survey (compared to 39 per cent in 2015) saying they would consider using alternatives in the future.

Most charities contract out investment management to external fund managers, with smaller charities less likely to change their arrangements

In 2016, 43 per cent of charities (down from 49 per cent in 2015 and 57 per cent in 2014) indicated that they had changed a manager following their last review. Small charities appear much more loyal to their incumbent managers than large charities: 80 per cent of charities with under £20m of assets did not change their manager following their review, while 86 per cent of charities with over £500m of assets did make a change.

Most charities believe the UK’s vote to leave the EU will have a significant impact on their investment activity

When asked whether a vote to leave the EU would have an impact on their investment activity, only 17 per cent of charities felt there would be little or no impact, and over half (56 per cent) thought a vote to leave would have a significant impact in the short term, with less of an impact longer term. In general, charities that completed the survey once the result of the referendum was known were a bit more downbeat about their prospects than those who completed the survey beforehand.

Jeremy Wells is investment relationship manager at Newton

Civil Society Media wishes to thank Newton for its support with this article