Much has been said of the extreme shock the Covid-19 pandemic crisis has inflicted on the charitable sector in the UK. No doubt estimates for the initial 12 weeks of lockdown of a £1bn shortfall, even after the £750m government lifeline and the amazing fundraising generosity from events such as Captain Tom Moore’s garden laps, Big Night In and the 2.6 Challenge, will be close to the mark.
We thought it would be useful to chart charity investments during the period, taken from the returns of the pooled funds that appear in the Charity Intelligence Quarterly Fund Review for Q1 2020. Contrary to media reports, our findings are not as extreme as some may expect. Yet again, the crisis highlights the need where possible for diversification of assets to mitigate the downside risks.
There will be few if any charities who held just UK government Gilts, index linked bonds or gold in the last quarter and actually made money for the year to 31 March 2020. Most will have had exposure to the UK or global stock markets, which declined by 25.1% and 19.8% respectively. The fact the UK stock market fell by over 5% more than the rest of the world further highlighted the need to diversify and this will be more important in future as companies halt or slash their dividends, a vital income stream for charities.
Most charities invest into a broad spectrum of assets with a long-term objective of growing their capital in real terms and producing an annual income of around 3% to spend on their charitable mission. Investment managers will have been contacting their charity clients in earnest over recent weeks to offer updates and reassurance.
The reality, if a charity has not had to sell its investments, mixed asset funds will have seen declines of between 11% - 16% in the first quarter. There were naturally outliers; Ruffer’s Charity Asset Trust did exactly what it should do in these market conditions and was basically flat for the quarter and funds with higher exposure to UK equities declining by over 20%.
Given the extreme economic and monetary stimulus to combat a global lockdown it is remarkable that the UK and global stock markets have risen from their lows on 23 March by 20.3% and 24.2% respectively. Even the charity multi-asset funds have risen by 13% over the same period to the end of April or 5% since the end of March.
More encouragingly, on a 12-month view to 31 March 2020, most charity multi-asset funds have either declined by only -5% or have even broken even, meaning that to the end of April many charities investment portfolios will have not declined in value over the past year.
It is also very encouraging to note that for the year to the end of April 2020 a straw poll of many charity investment managers, very few charities have been redeeming their investments so while the markets have been volatile charities have not crystallised losses.
A special mention for the open-ended charity property funds, who have had dealing suspensions placed upon them by the Financial Conduct Authority. While this ‘gating’ is frustrating for both the managers and their charity investors, the funds have been flat or shown mild gains for Q1 2020. Furthermore, the funds have good liquidity and while there will be undeniable pressure on rents and development in the near-future – especially for tenant failure in non-food retail and suspension of student accommodation, there is cautious optimism that income yields will not be depressed.
History rarely repeats itself, but people learn from the past. There are many V, U or L shaped forecasts for the future being made on economies and markets with caveats as no one really knows how the Covid-19 virus will play out. This is a global health crisis that we haven’t seen since 1918, but to put recent market falls in context, the end of the technology bubble in 2000 and the financial crisis in 2008 saw a big drop in equity markets followed by a rally, a drop, a rally, and a big drop before markets found their floor. It took seven years to regain the market highs after 2000 and over five years to regain the highs seen in 2007.
Charities have to remember that witnessing a 15% fall and then gaining 15% doesn’t get you back to the starting point, as inflation will have eroded returns no matter how low it is. They must also get out of the habit of looking at the highest value in their portfolio as the rebase of their wealth. Charities have mostly an inflation-based investment objective and generally invest for the long-term. Many will have almost doubled the value of their assets since 2008, even after the recent shock.
Investment managers think of risk as market volatility whereas charity trustees should think of risk as permanently losing money. It seems that for now, charities have not been faced with this problem. Those charities who can afford to do so should continue with their mission and spend down their reserves on those who need it the most and make the most of the crisis.
Guy Davies Charity Intelligence
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