Earlier this year with the support of Cazenove Charities, Charity Finance convened a panel of experts and Ian Allsop noted their opinions. An extended version of this article originally appeared in Charity Finance Magazine in May 2017 and appears online at civilsociety.co.uk

Panellists:
Matthew Cox, Investment Director, Esmée Fairbairn Foundation
James Fitzpatrick, Director, Joseph Levy Foundation
Cat Fraser, Principal - Investments, Wellcome Trust
Giles Neville, Head of Charities, Cazenove Capital
David Renton Director of Finance and Investment, Guy’s and St Thomas’ Charity
Karl Wilding, Director of Public Policy and Volunteering, NCVO

The UK has a strong and vibrant foundation sector, the members of which have to strike a balance between present and future beneficiaries. Their independence and longevity of funding gives them an ability to influence and shape policy in both the short and long term. But how do they plan for tomorrow without becoming distracted by what is happening today? And are current models of governance able to maximise the effectiveness that foundations have?

Maintaining spending

Karl Wilding, director of public policy and volunteering at NCVO, cites evidence of how foundations behaved following the disruption of the financial crisis. Referring to the NCVO UK Civil Society Almanac, he says: “From 2008/09, foundations carried on making grants because they were needed more than ever. There was a clear message that beneficiaries wouldn’t be abandoned.”

Returning to the present, Matthew Cox, investment director at the Esmée Fairbairn Foundation, says his organisation is carrying on as usual. “Our biggest risk is not hitting our long-term return target, which is inflation plus four per cent, and our job in the short term is to not get distracted from that. “There are secondary risks of market uncertainty and volatility, but while we would be concerned that they would hit our cash flow, we would hope that the portfolio has been set up to deal with that. We lock up money for the long term but have a liquidity reserve to free up cash in the short term.” Cat Fraser, principal – investments at Wellcome Trust, echoes this. “Our focus is on cash flow now more than ever. We have committed to spending £5bn in the next five years.”
For David Renton, director of finance and investment at Guy’s and St Thomas’ Charity, foundations must hold their nerve. “If we get too worried in the short term, it affects our long-term thinking. We need to have the confidence to stick to our risk levels. It can be difficult to predict the markets. They are currently riding high despite political uncertainty – we shouldn’t fixate on value today or else we won’t stay in shape for the long term.”

For James Fitzpatrick, the big challenge is about balancing the need to conserve capital, generate income and spend money. He asks: “There is always uncertainty, but how should foundations best manage the balance between money in – the finance side – and money out – the grantmaking?” Renton mentions the introduction of a spending rule at Guy’s that is aimed at dealing with this. “We’d had a committee looking at investments, and it was quite divorced from the team doing grants. The advent of the spending rule was to try to bring those together; so how much investment risk we need to take in order to generate what we're spending. “There is an element of smoothing included, so if markets change, the spending doesn’t change so dramatically. Smoothing allows a longer-term horizon for spending decisions – even if we model a 20 per cent fall in markets and them staying down for five years, actually we still have a 90 per cent degree of confidence in what we will have to spend. And that’s enormously powerful because then we can start funding longer-term programmes.” Giles Neville, head of charities at Cazenove Capital, observes that in the short term, investment is about responding to opportunity. “Are you picking up long-term trends? Are your targets realistic? Investors should look at demographics, and issues such as global inclusivity versus isolationism. It is about using the here and now to assess an impact on returns in the long term. It can be difficult, but it is important.”

Perfect timing

All of which illustrates the importance of timing when making investment decisions. Neville reflects on the specific conflict that exists between the short and long term in terms of trustee decision-making, especially in times of nervousness. “Do they have enough of a sense of security to ensure they are less likely to sell at the wrong time?” Fraser recalls that when she joined Wellcome at the end of 2008, there were plenty of concerns about the wisdom of buying global equities after the collapse of Lehman Bros. However, after a healthy debate, her investment committee was supportive of the actions the investment team was taking. "Having an empowered investment team is really helpful in making difficult decisions like this in a timely fashion," she says.

Renton says there is a risk of selling stocks at the wrong moment. “You don’t want to rush for the exit at the wrong time. Policies that smooth are helpful as they provide the framework to have a discussion and offer greater investment freedom. “It is also about monitoring and providing information,” he says. “If you can look back and see patterns from history, it can provide reassurance in difficult times.” Cox agrees that as long-term investors, this can help overcome nervous or over-cautious trustee reactions. “You need to spend time on communicating the investment process when times are good so that everyone is aligned when the more challenging market conditions arrive, as they inevitably do.”

Supportive governance

Fitzpatrick raises the issue of governance when managing for the long term. “In my experience, the default position of boards is to conserve. When developing investment strategy, boards should seek external expertise if they don’t have the expertise themselves. But there is a risk that they end up with a product that they don't have the skills to implement effectively.” He says the problem is not recruiting trustees per se, but recruiting trustees with the right skills. “Foundations are charities with capital. Therefore we probably find it easier than other charities to recruit trustees. ‘Come and help us spend money’ is an attractive proposition. “But do all foundations use skills audits to identify the range of specific skills required? It may be possible to find trustees with financial expertise, but not specifically investment-related.”

Renton argues that the governance challenge for the foundation sector is that organisations are effectively running two businesses. “We are managing money and spending for impact. Does our governance always reflect that? It is important to have both angles represented on boards.” Cox thinks that the lines between spending and managing the investment portfolio have become increasingly blurred. “There is much more direct engagement from the board now; trustees are more clued-up.”

Wilding suggests that for better strategic philanthropy, some organisations might consider collaboration to bring greater scale. Fitzpatrick agrees. “Are there opportunities to pool resources? It is beholden on individual foundations to identify opportunities for collectively using assets. “However,” he continues, “it can be difficult bringing people together. Sometimes independence can go too far. Being independent for the sake of it has an opportunity cost.” Cox highlights collaborative investor engagement as an example of how to make a long-term impact. "There is a link between businesses that are managed in a sustainable way and long-term value creation for shareholders." Indeed, Neville concludes that there are opportunities for foundations to collaborate directly with the corporate sector, as companies are increasingly recognising the importance of expressing social values, especially given the importance placed on this by millennials. “Ultimately, charities have a collective knowledge and history of effecting change that the corporate world doesn’t.”

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