In the sector press
Looking ahead: increased volatility, lower returns
Disruptive political, economic and technological forces are just some of the challenges which charity investors are likely to face in the coming decade
It has been over a decade since the financial crisis and loose monetary policy has helped drive strong returns. But have investors become complacent about the outlook? What does the next decade have in store?
In a far reaching piece of research, my colleagues at Schroders have identified a list of "inescapable truths" that they believe will shape investment markets over the next ten years. These economic and disruptive forces are likely to provide challenges and opportunities for investors. But what are they and what are the implications for charity investors?
The next decade certainly looks more challenging for the global economy. Demographics will mean both an ageing population and a slowdown in growth in the working population.
Also, there will no longer be the tailwind of ultra-loose monetary policy, where interest rates have been kept well below inflation and returns have been bolstered by quantitative easing.
As interest rates go back to more normal levels and quantitative easing unwinds, market volatility is likely to increase and overall market returns will be lower. This means investing passively (tracking a market index) is unlikely to reap the returns that investors have grown to expect. In this scenario the implication is simple: there will be more need for active fund managers, who can potentially beat the market in the period to come.
The research also identifies four sources of disruption; market; technology; environmental and political. Market disruption comes in the form of changing patterns in finance and the rise of peer to peer lending and crowd funding, alongside the impact of the end of quantitative easing. Technological progress will continue to challenge business models and the use of robotics and AI have implications for both unemployment and inequality. Rapid action is needed to tackle the impact of climate change and unchecked environmental damage could have severe economic and social consequences.
Finally, political disruption is set to continue as government finances remain under pressure leaving it a challenge to meet voter expectations.
The research certainly suggests a more challenging future investment environment, one in which charity investors may need to rely on additional sources of return such as active asset allocation and investment selection to bolster their investment results to allow them to meet their long term spending commitments.
So as we enter the next phase of the investment cycle perhaps these inescapable truths can help guide long term investors through a time of unprecedented disruption. Allowing long term charity investors to maintain their spending and support their mission in a decade that looks set to pose some significant social, environmental and financial challenges.
The full report is available in our 2019 Charity Investment Annual.
This article first appeared in the Third Sector magazine
Co-head of Charities
The opinions contained herein are those of the author 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. 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 Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.