In the sector press
Kate Rogers, Portfolio Director and Head of Policy at Cazenove Charities shares her thoughts on issues faced by the charity sector in Third Sector Magazine every other month.
Eeek risk. We're all charities, we hate risk (don't we?). Particularly financial risk. An understandable starting point perhaps, especially for hard earned fundraising proceeds in times of need. But are we missing the point and, more importantly, an opportunity?
It is probably best to start at the beginning and ask the simple (sounding) question. 'What is risk for charities that invest?'
Elementary my dear reader (I might say)... of course risk is volatility... or the amount that the value of your investment asset yo-yos around.
Or is it? Worry not, I do not intend to bore you with statistical definitions or a greek alphabet soup of terms. Instead I want to think about whether this sort of risk is the most important or most concerning for your charity investment pot.
The bulk of charities that invest do so for the long term. That isn't just a few years, or even decades, but can be many hundreds of years. In this scenario why does the value of your assets matter on a daily, monthly, quarterly even annual basis? If your house was valued every day would you worry more or less about living there for twenty years? Capital value only really matters when you want to sell the investment.
So if volatility isn’t the key risk, what might be? What is the investment there for? For long term grant making foundations, it is probably there to generate an income (whether funded wholly from income or from total return) so that you can support your beneficiaries. So cash flow is a key risk from year to year. Over a longer time horizon, you will want this income generation, or the amount that you are able to donate, to increase at least in line with inflation. Here lies your second large risk, inflation over the long term. Thirdly, you will need to have strong governance in place, to avoid the risk of changing course or strategy at a bad time, and undoing all of the long term investment thought.
Quantifying risk as volatility is appealing, and does have its benefits in both the construction of a sensibly diversified portfolio and the appraisal of your investment manager’s returns (making sure they are not taking too much risk for the level of return). It is natural to seek the comfort of numbers, but I would argue that this is hugely misleading. Cash is not volatile, therefore is low risk… stock markets are volatile therefore are high risk. But the latter has a much better chance of keeping up with or outpacing inflation over the long term time horizon that most of us are worried about.
The investment managers are as culpable in all of this as the charity investment committees. By providing quarterly performance data, rather than focusing on the long term, we emphasise short term volatility and amplify the anxiety that many charity trustees feel about preserving capital value. By forever benchmarking against market indices (or strategies) we encourage a lack of focus on the long term investment objectives, and the key risks that each charity really faces. Do we actually care if we do better than the market, if the market is falling or not keeping pace with inflation? If all of our analytical time and energy is consumed by benchmarking and volatility I suspect that we risk missing the wood for the trees.
Risk may be a ‘boring’ topic, but the appraisal of what really matters to your charity is so important for your investment portfolio and long term strategy. If we focus on what each charity wants its investments to achieve rather than market related statistics or frequent reviews, we will have a much better chance of grasping opportunities and making the most of our charity assets.
A version of this article first appeared in Third Sector on 24 July 2014
For this and other articles by Kate Rogers visit the Third Sector website.
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