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Foundation investment should be driven by 'charitable objectives'

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  • Foundation investment should be driven by 'charitable objectives'

EUROPE – Spending decisions by trusts and foundations should be driven by the aim of delivering their long-term charitable objectives, rather than by a commitment to preserve the value of their assets, according to a new report.

Richard Jenkins, a consultant specialising in the governance and management of charities, and the report's co-author, said: "Rather than ask 'How can we protect the real value of our investments?' a better question for trustees might be 'When determining our spend and investment policies, what risk are we prepared to take with the trust's longevity?'".

The 'For Good and Not For Keeps' report is published by the Association of Charitable Foundations, and co-authored by Kate Rogers, client director with Schroders Charities.

It is based on research commissioned by Schroders, including a survey of more than 220 charities in England and Wales.

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The survey is the first-ever of its kind into the attitudes and behaviour of charities with a long-term mission, and which rely on the returns from investments to fund their activities year on year.

Many charities said they believe they can maintain the real value of their endowments while relying on investment returns to fund their activities at a reasonable level that keeps pace with inflation.

Generally, that means calculating a 'safe spend' rate of return minus inflation.

As a percentage of their portfolios, spending by respondents varied, the most common rate being 3-4%.

Based on the 'safe spend' calculation, this is within the range that historically could have maintained the real value of their portfolios over the 20th century, when investment returns exceeded inflation.

However, the report said the average charity generated an annual return of just 3.1% between January 2000 and December 2011.

This was exactly matched by average inflation, so charities spending anything at all would have seen erosion of the real value of their portfolio.

Nevertheless, since the beginning of the financial crisis in 2008, 80% of respondents had maintained their expenditure rates while 5% had increased them, despite falling equity returns.

Nearly seven out of 10 respondents saw their investment portfolio primarily as a means of supporting their charitable activity, rather than as reserves to be kept or grown.

Just under one-third of respondents aimed to grow their investment portfolio over the long term, while four-fifths aimed to at least preserve the real value of their capital.

One of these is the Paul Hamlyn Foundation (PHF), which spends 4% of its £565m (€657m) portfolio calculated on a three-year rolling average; its goal is to create a reserve in short markets to bolster spending in times of stress.

While the spend level demands strong returns in order to beat inflation, the investment approach favours steady and incremental growth in value over the long term, with some spikes either side.

Richard Robinson, investment director at PHF, said: "We're not trying to win a race or top the performance charts. While the approach to grant-making is innovative, we tend to caution when managing the portfolio."

Jenkins added: "Many trustees think there are only two options available to them: either to spend out within a few years, or to preserve their investment portfolio for all time.

"Our research highlighted a third option, the 'open ended' charity. Their trustees are prepared to spend at a higher rate that suits their mission, but that also risks their disappearing at some point in the future."

These charities could, however, go on to exist for generations, should the markets deliver high returns, or future trustees decide to change policy.

Given that preserving the real value of endowments is only ever going to be a probability rather than a certainty, the report said the best driver of spending decisions was therefore what best served the charity's mission, not preserving capital above all else.

And it said trustees could improve their chances of thriving into the long-term by making as much money as they could, using share voting rights and social investment, and recruiting other donors to support their cause.

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