Brewin Dolphin’s Head of Charity Development, Ruth Murphy, highlights some of the findings from their latest research, which examines the investment and other financial challenges facing UK charities.
Our last biennial charity investment research was published just before the pandemic, so we were especially keen to understand how charities are coping and adjusting financially, and to what extent their 2019 concerns had altered in terms of magnitude or priority.
We received a record response, with more than 370 charities taking part in our online survey, which was conducted alongside interviews with charity trustees, directors and consultants.
The findings give us and the sector a sense of where finances sit in the overall management of organisations, and what might (or need to) alter in the investment management landscape.
We once again distinguished the responses from charities making grants and those providing services. Both charity types had experienced an increase in demand, which they expect to continue. This, in addition to dealing with the effects of the pandemic, has placed unprecedented pressures on how charities manage their financial budgets and reserves.
Over half (54%) reported the need for income as their main financial concern. This was found to be more acute among service providers (58%) than grantmakers (46%).
Concerns about income from investments was also significant, reported by 53% of respondents. Grant-making charities, perhaps inevitably given their multiple funding sources, are more concerned about investment risk than service providers (36% vs 22%).
In light of the short-term market falls in early 2020, and the longer-running theme of reduced dividend earnings, we were also keen to understand whether or not charities had reviewed their investment policy and what changes, if any, they had made. Almost two thirds (64%) had recently debated or revised their investment policy statement.
Over half (55%) of respondents said their main investment objective is to preserve capital whilst generating income, as opposed to adopting a total return strategy. We know from client discussions that this is a topical subject, and the research confirms that more than one in three (34%) are considering total return in light of the reduction in dividend income in 2020. The pros and cons of dipping into capital are likely to be an area many charities will need to address in the coming years, particularly if other funding sources and natural investment income levels remain under pressure. A total return strategy should always be considered, even if it is subsequently ruled out.
69% specified ESG or ethical criteria, and despite negative screening being the approach adopted by the majority (56%) of respondents, the shift from this to ESG considerations is notable this year – 30% compared to 13% in 2019 and 16% in 2017.
A climate of uncertainty was in evidence long before the pandemic and operational challenges, such as staff shortages, have intensified financial concerns. The impact of Covid on income was the second biggest concern, reported by one in three (33%) respondents.
In terms of investment risk, grant-making respondents expressed more concern than service providers about the risk to investment income, low growth, low-interest rates, and inflation. Service providers said they are significantly more concerned about volatility and absolute loss.
Interviewees agreed that it is not possible to avoid all risks; managing it correctly alongside a long-term investment focus is most important. This allows all charities, particularly those that aim to exist into perpetuity, to ride out market peaks and troughs, and to consider a higher level of risk for greater reward.
Despite their financial challenges, the majority (58%) of respondents said they are confident that funding levels will enable them to meet their charity objectives – up from only 50% in 2019, but down from 86% in 2017.
The insights highlight the importance of a holistic approach to financial planning and investment, to not only manage the challenges ahead, but also make the most of opportunities that arise.
In our experience, there are five key considerations that can help to ensure financial plans stay on track:
- Budget for today and tomorrow – align your invested assets with your cashflow plan
- Keep risk in perspective – stay focused on the long term
- Be mindful of inflation – use your investments to preserve real value
- Optimise diversification – include a range of assets and income sources
- Consider the bigger picture – ensure investments are part of your wider financial sustainability plan
