The investment imperative

Charities are set to be even more reliant on the performance of their investments during 2013 as they look to plug the funding gap caused by the continuing slump in donations
and government spending. But according to investment experts many charities are too risk averse and mistakenly still see cash deposits as the safest place to invest.

The Charity Finance Group (CFG) estimates around £18bn of UK charity sector money is invested in cash deposits,where they are left to the mercy of low interest rates and inflation, says Jane Tully, CFG head of policy.

She says: “Charities are traditionally very conservative investors and like to have high liquidity with a large amount of money in cash deposits. But with interest rates being so low and inflation putting pressure on the value of assets some charities are quite rightly starting to question whether cash investment is the best way to use their money.”

The unanimous advice from investment experts is to focus on equity. Paul Cattermull, an investment director at Brewin Dolphin, says that between August 2007 and August this year equity yield has risen from 3.7% to 3.8%.

But over the same period the base interest rate has slumped from 5.75% to 0.5% and the retail price index inflation stands at 3.2%, according to October 2012’s figures. Cattermull says: “Low risk investments such as cash simply cannot compete with inflation.”

Income growth through equity investment is particularly important, says Kate Rogers, charities client director at Schroders and chair of the Charity Investors Group.

Investment realism
A survey of 226 charity finance representatives by Schroders, to be published next February, has found most charities spend between 3% and 4% of their investment and eight out of ten had not altered this proportion despite the poor economic climate.

Rogers says: “This is to charities credit. They are being sensible with the income they are making and resisting the urge to either cut costs or increase spending to meet the growing needs of their service users in recession.”

She warns charities, however, that they have to be realistic when investing in equities and accept that “it will be a rough ride.”

She says: “Charities have to look at the long-term picture. Investments will go up and down over a period of time and there can be a temptation to take the money out if there is a fall one year.”

Rogers advises charities to invest in equity among “the big corporate global companies that over a 10 year period should give a return above inflation.There are of course no guarantees but it is important to look at growth potential and there is no prospect of growth in cash.”

Andrew Pitt, head of charities at Newton, favours equity in “high quality companies in the healthcare, telecommunications and utilities sectors” and warns against investment in more cyclical sectors such as retail and construction.

He stresses that charities’ inflation rate is typically higher than the official published rates, reflective of the fact that “a lot of their expenditure is on salaries and while salary growth has been somewhat more subdued recently, it will go up over time.”

James Codrington, investment director at Rathbones, has around half his portfolio invested in equity, with 28% in UK stock. He says: “We think that the UK is a reliable market with no explicit currency risk and is a good place to invest.”

He is also optimistic about a US economic recovery creating more opportunities for investors over 2013. Predictions of a decline in global oil price rises and increasing enthusiasm in the US for energy self-sufficiency are key factors in this optimism.

Codrington says: “I would be sceptical of further oil price strength given increased US self-sufficiency, rising Iraq production and a sharply declining forward curve. This potentially represents further good news for the US and Western consumer as high oil prices in recent years have simply acted as a tax on consumption.”

Investment optimism
Increasing focus on shale gas production in the US is also set to bring opportunities
for investors in the coming years. Shale gas is set to account for 46% of US gas supply by 2035, according to the US government’s Energy Information Administration.

Raudhri Duncan, investment manager and senior associate partner, charities, at Sarasin & Partners, says: “This will lead to a rebuilding of railways and infrastructure as America seeks to move Shale gas around. Refineries are obviously another area of opportunity.”

But such optimism in US economic growth into 2013 comes with a caveat due to the fiscal cliff America faces in January, when tax hikes and public spending cuts kick in, warns Duncan.

While Duncan agrees that the rate of return in equities is far better than in cash deposits, investors need to also be aware of a changing political climate towards company taxation.

Duncan says: “Governments are having to increase revenue and I can see an increased targeting of corporations to do that. This is a situation that needs to be watched closely.”

Cattermull urges charities “that buy into the equities argument” to ensure they guard against risk. He urges them to diversify investments across sectors and countries as well as the timing of investing and de-investing.

Efficient Emerging Markets
Among the emerging markets investment experts are recommending during 2013 is Mexico. The Organisation for Economic Cooperation and Development (OECD) is
predicting GDP growth of 3.3% in 2013 and 3.6% the year after. This is down on 2012’s GDP growth of 3.8%, but still higher than that of many developed countries.

Codrington adds: “Mexico’s debt is low and it is an economy where 80% of exports go to the US, so will do well if as expected the US economy strengthens.”

China, which is forecasting 7.5% growth this year, is another area that will continue to offer strong investment potential, says Rogers. “In the UK we would give our buck teeth for that sort of growth,” she adds.

As with cash deposits, UK government bonds are seen as a poor avenue of investment, according to Rogers.

According to latest figures their two-year yield is just 0.29% and a 10-year yield is just 1.79%, still well below inflation.

“They are already yielding less than they ever have in history. It is not an efficient market,” Rogers adds.

This is not the case for all government bonds though and Codrington says there are “some good value overseas government bonds such as Singapore, Canada and Australia.”

With low interest rates and inflation continuing to hinder the viability of traditional low risk investment routes it is clear that charities are set to face some tough decisions over 2013 on how the get the most out of their money.

Joe Lepper is a freelance journalist

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