Measuring up

As Head of Charities at Quilter Cheviot, I spend my working day focusing on providing advice and managing discretionary investment portfolios for a wide range of charities, across the spectrum of the third sector. However, this does not preclude time spent investigating areas of interest that I believe are of growing importance to both the charity sector and investors in general. My time as a governor of a school and as a member of a charity investment committee, have served to reinforce this view. What follows is an insight into a number of my enthusiasms, and one bugbear …

Behavioural Economics

Our regulator, the Financial Conduct Authority (FCA) believes that embracing behavioural economics (BE) will make it a more effective policeman. BE uses insights from psychology to try and explain why people behave the way they do. It may not come as a surprise, that contrary to financial theory, people do not always act rationally, with many decisions made on an intuitive and automatic basis, rather than in a controlled and deliberated fashion.

There are two central pillars on which BE rests, the first of which is mental accounting. This is the tendency to value some pounds less than others and thus waste them. Charities may fall foul of this when considering their attitude to risk for proceeds from fundraising, against similar funds held in long-term reserves. This is an anathema to traditional economics, which says all money is ‘fungible’. Put simply: a million pounds is a million pounds!

The second pillar relates to prospect theory and is considered the source of behavioural finance. There are a wide number of ramifications, but here I wish to highlight framing. This is a cognitive bias in which divergent results tend to be produced from the same problem when being described differently. When you last renewed your charity’s insurance policy were you offered legal cover? If so, was this done as a percentage or cash amount? Are you willing to pay an extra £25 on a £500 policy or does ‘for just 5 per cent more’ sound more attractive?


Investment management firms tend to see themselves as the single most important deliverer of income to the charitable sector. However, as a recent survey highlights, for the sector as a whole, investment income has stagnated as an overall proportion of real total income in the order of 8 to 10 per cent since the turn of the century. The same survey further demonstrates that the individual remains the key source of income, representing over 40 per cent, for all sizes of charity.

How then should charities engage with individuals in the new era of fundraising that is encroaching the sector, following the report by the Fundraising Standards Board after the death of Mrs Cooke and the E.ON/Age UK corporate relationship? Time for the sector to embrace innovation; an excellent example is provided by charity Founders Pledge. Here entrepreneurs commit to donate at least 2 per cent of their share of the proceeds following the sale of the business, to a social cause of their choice.

This reflects positively on both the individual and their company. Compared to the challenges of chasing legacies, the immediate attractions are obvious; develop a bond with a potential long-term supporter, who may in turn choose to support the charity, in a meaningful way, throughout their life and not just at death.

The fundraising tool kit available to the nimble charity has also grown through the expansion of social impact finance, and latterly Social Impact Tax Relief (SITR). However, SITR is currently limited to benefit smaller operations, which may lack the financial expertise to turn an opportunity into reality. The jury is also out on the extent to which SITR will have a negative impact on Gift Aid receipts. It is also clear that frustrated philanthropists are seeking to gain a greater understanding of the issues behind the causes they wish to champion. In this regard, I am enthused by the work of Jake Hayman at Ten Years’ Time, an organisation aiming to help philanthropists learn about the fields they care about and take big bets on impactful new ideas. Which neatly brings us onto our next topic...


Working with Keith Ward at RSM, I have witnessed first-hand, since the Charity Commission turned its focus towards public benefit, that there has been a quiet evolution in how trustees and charities measure their effectiveness and impact. There are three aspects of social impact; firstly, the economic, quantified as the financial and other effects on the micro or macro economy. Secondly, the social benefit, which usually measures the effects on individuals or communities, and how it affects their inter-relationships. Finally, environmental, measuring the effects on the physical environment.

To enable trustees to understand if they are meeting their charitable objectives, it is arguably necessary for them to understand the impacts of their benefaction on the recipients and the wider community. This may range from cost savings to local services; economic value created or perceived value for the individual. Not all measures will be quantifiable in pounds, shillings and pence, but may rely on the collation of anecdotal evidence. I commend reviewing the impact report produced by The Outward Bound Trust as an example of what is possible.

Effective measurement allows trustees to assess the charity’s social impact and the difference achieved. It can also provide a measurement of efficiency and effectiveness of an organisation and highlight areas for improvement – immensely useful to those charged with delivering the charitable objective.

For the fundraising departments it provides a means of reporting back to investors, funders and stakeholders to prove that intelligent and quantifiable benefaction is in operation. Not only does reporting meaningfully demonstrate your impact as an aid to fundraising activities, but also should assist in publicising the wider benefits to increase donations.

Finally, a potential benefit to the sector is an ability to compare against and influence other organisations’ policy, practice or investment decisions. Sharing good practice and innovation may also allow an assessment of negative or unintended consequences.

Performance reporting and costs

My biggest bugbear (professionally!) is the lack of a common standard of investment performance reporting to investors. At the root of the problem is the theoretical debate about reporting a fund’s performance gross (meaning before fees are deducted) against a benchmark, which itself has no fees to pay, or instead showing the actual outcome after charges are taken into account (net). Many reports I have seen lack clarity in stating what is actually being reported. At Quilter Cheviot we have a passion for transparency and clearly report net returns to our charity clients, even if against a gross benchmark.

For most investors, performance is one factor taken into consideration, with service and administration normally featuring higher up the ranks. However, when used in charity beauty parades, trustees need to clearly state what they wish to see, or else they may draw the wrong conclusions, inadvertently comparing the gross performance of one manager against the net performance of another.

Whilst my colleague, Pamela Reid (no relation!) has led past efforts to create a reporting standard for overall costs, working in collaboration with Rathbones, this is also an area liable to cause confusion. Depending on the outcome of the forthcoming European referendum, we will have an answer of sorts courtesy of the Markets in Financial Instruments Directive II (also known as MiFID II) which will require firms to provide a single figure, totalled as both a cash amount and as a percentage of aggregated initial costs and charges, ongoing fees and exit costs and charges – which in turn brings us neatly back to behavioural finance! Finally, were you easily distracted whilst reading all this? I suggest you take Simons and Chabris’ ‘selective attention test’ on YouTube to find out.

William Reid is head of charities at Quilter Cheviot

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