Investment book club - Summer 2017
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.
Book reviews aren’t usually my thing. Mostly because two young kids and a wandering mind makes it increasingly difficult for me to read anything substantial from cover to cover these days. This helps explain why a nice short essay, recently published in the Financial Analysts Journal, is my chosen specialist subject for the month.
The said article has been written by John C Bogle, the legendary founder of the first index fund, and comments on the lessons learnt over his 65 years in investment management. His seven lessons offered to investors, are salient for charities with long term assets.
He starts by affirming the need for investment if capital is likely to be held for the long term; ‘the biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates.’ For long term charity investors, in a world of low interest rates outpaced by inflation, holding on to excess cash on the balance sheet can be costly in real terms.
He goes on to highlight that ‘time is your friend’ but ‘impulse is your enemy’. That long term investing is a virtuous habit leading to superior returns, and emotional decisions can hinder performance. Charity investors often have the benefit of these long term time horizons, with endowments looking out to perpetuity. However, governance structures should be robust enough to protect against reactive, emotional decision making when markets are more difficult in the short term.
The fourth ‘lesson’ highlights the potential erosion of returns through costs. It is perhaps unsurprising that Bogle, as the father of index funds, believes in the importance of keeping expenses low. However, irrespective of passive or active management, all managers should be able to demonstrate the value that they add to the charity investor, considering how much return has been generated for every pound paid in fees.
Simplicity is espoused as an attractive trait of a well constructed portfolio; balancing risk, return and cost. Bogle discourages alternative investments, omitting them entirely from his ‘basic portfolio’. I suspect he is unconvinced by the higher fee structures implicit in many of these approaches. Simplicity does have its benefits; I have long fought against the battle of city speak and jargon; and am certainly of the view that if it can’t be easily explained it is probably not appropriate for an average charity investor.
For his penultimate lesson, he reminds us of a common mistake; picking the fund manager with the best performance, in the expectation that it will continue. Under the heading ‘never forget reversion to the mean’, Bogle quotes the bible ‘So the last shall be first, and the first last’ (Matthew 20:16, King James Bible). Although it is important for charity investors to keep performance under review, it is not always the best course of action to jump ship after a bad spell.
Finally Bogle highlights the ‘single most devastating mistake you can make as an investor’ is changing your strategy at the wrong time. The importance of being able to set an investment strategy and stay the course is emphasised; and is, in my view, a sign of a high performing investment committee.
So, if you’re looking for a good quality, jargon free, short summer read; try ‘Balancing Professional Values and Business Values’ by John C Bogle. Or stick to Third Sector.
Co-head of Charities
Kate specialises in investment on behalf of charities, endowments and foundations and has over 20 years of experience, with 15 years at Schroders and Cazenove. She is a CFA charterholder and has a BSc (Hons) in Natural Sciences from the University of Durham, is Chair of her local community foundation, Vice-Chair of her local primary school and Chair of the Finance Committee of the Cripplegate Foundation. She won a Women in Investment Award for her work with the Charity Commission and FCA creating a new charity investment vehicle.
She has researched and co-authored a series of publications on Charity investment best practise including 'For Good and Not For Keeps', which examines sustainable expenditure, ‘Intentional Investing’, which researches how charities can align their investment policy with their aims as an organisation, and more recently ‘Time and Money’, which explores how charities can make the best use of longevity. Kate was chair of the Charity Investors' Group for 12 years, standing down in 2019. In this role she collaborated with CFG and authored a guide to written investment policies. Kate also regularly writes on charity investment in the charity sector press.
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