History tells us that growth is cyclical. That investment markets don’t go up in straight lines and that there are periods when stock markets fall dramatically. Unfortunately, what history doesn’t provide is a crystal ball. A way to forecast future downturns. We know these downturns will come along periodically, but not when or why.
It is now more than 10 years since the global financial crisis. A period that was painful for many charity investment portfolios. In 2008 the average charity investment portfolio fell by 20%. Since then, markets have been kinder and asset values have rebounded - bolstering charity balance sheets. But is there a danger that we become complacent? That we begin to expect the friendly upward markets and aren’t ready for the next bump in the road? According to our ‘Time and Money’ research last year, the average trustee tenure is five to nine years – suggesting that many trustees won’t have experienced a downturn in markets during their tenure at the organisation.
The good news is that your investment managers should be ready. That is because we build the most appropriate long term investment strategy for each charity using history as a guide. This history includes periods of down markets, indeed the analysis assumes they happen. But the analysis also assumes that trustees and investment committees are able to stick with their investment strategy when the going gets tough. Research consistently tells us that the worst possible time to sell is the time of maximum pessimism; and that the best thing to do in a crisis is to remain rational - which might even mean buying more (in 2009 the average charity investment portfolio was up 19%).
So how can we ensure that happens – how can we build the financial resilience of our organisations and people to be ready for the next downturn? We know that sharp falls in markets provoke emotional responses such as anxiety and panic. Perhaps having a conversation ahead of time, when the water is calmer, would make managing in the storm easier.
How about asking ‘what if’ questions of your investment committee, to help identify the core principles that you’ll use as your roadmap to guide you through challenging market conditions. Such as ‘what would happen if the portfolio value fell by 20%?’; ‘how would the investment committee react?’; and ‘what would be the impact on the organisation’s broader finances?’. These should help identify any pinch points. For what it is worth these are my top three suggestions.
First, identify the likely cash flow needs from your investments. Make sure there is enough cash at the bank to meet expected outgoings and examine the implications of a multi-year decline in asset values. Secondly, where possible, hold your nerve, and resist the urge to run for the exit in tough times. This can be helped by all trustees understanding the investment strategy and that downturns are a normal part of investing. Thirdly, be open to opportunities – with the right mindset, downturns in markets can provide wonderful opportunities to buy good assets at cheap prices.
I’m not predicting the timing or the cause of the next downturn, I can’t do that. But I can encourage my clients to be prepared, so that they are resilient when the storm hits and emotions run high.
The views and opinions contained herein are those of Kate Rogers, Head of Policy, Cazenove Charities, and do not necessarily represent the house view.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.
Cazenove Capital is part of the Schroders Group and is a trading name of Schroder & Co. Ltd, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
For your security, communications may be recorded and monitored.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.