Charities no longer complacent says JPMorgan Asset Management

The JPMorgan Asset Management Charity Investment Industry Survey 2006 finds that charities retain the optimism shown in last year’s survey, but are showing some caution. This is in contrast to the findings in 2005, where the overriding theme was of bullishness.

The findings of the 2006 survey reveal that 80% of charities expect the returns from their investments to meet their future requirements and commitments of their charity. This figure is down from the 90% found in 2005, which indicates a fall in confidence in charities’ investment strategy, but is in contrast to charities’ increased confidence in future returns.

Equities remain popular, but alternative assets continue to grow in status

As in previous years, UK equities remain the most popular asset class amongst charities, with 76% of organisations stating that they have some allocation into the asset class. As we would expect, the safe haven investments of cash/deposits and UK bonds are also widely held, with 70% and 61% of charities having exposure to the asset classes. However, all three asset classes saw a drop in the number of charities investing in them in 2006 from 2005. Instead, hedge funds and property were the only assets to see some growth in terms of the number of charities investing in them. More specifically, nearly half of charities (42%) invest in property and 20% of organisations hold hedge funds, up from 35% and 13% respectively in 2005.

Understanding of hedge funds is increasing

Turning to hedge funds in particular, the survey found that charities’ understanding of the asset class and whether it represents good value for money continues to grow. When asked to specify whether returns from their hedge fund investments had met expectations, 62% of charities responded that returns had either met or exceeded expectations.

In addition, when asked whether hedge funds are good value for money, 81% of respondents believe that hedge fund investments are good value, up from 72% in 2005.

Use of consultants continues to decline

Continuing a theme we have seen over the last couple of years, the survey found that the use of investment consultants in the investment manager review process has continued to decline. Less than a fifth (19%) of charities responded that they used consultants in 2006. This compares to 23% in 2005 and 30% in 2004. A possible explanation for this is that charities have remained relatively positive about the future and are feeling generally satisfied by the returns from their portfolios, so many organisations may be comfortable with their current asset allocation and investment managers, and do not feel they need the advice of consultants.

Socially responsible investing is not a priority

One of the topics we re-introduced into the survey in 2006 was charities’ attitude towards Socially Responsible Investing (SRI). We investigated the topic a few years ago and returned to it in the 2006 survey to discover if there have been any changes to charities’ thoughts on SRI. When asked whether they have any socially responsible/ethical constraints when investing, over half of charities (58%) stated that they do not have socially responsible/ethical constraints. In addition, when looking to the future, 81% of charities responded that they have no plans to introduce a new ethical or socially responsible investment policy.

Jeremy Wells, Head of Charities Investment at JPMorgan Asset Management, said: “All in all, we can conclude from the survey that charities are still quite optimistic about the future, but have tempered their confidence and are thinking more about controlling risk than the aggressive pursuit of returns. The sharp correction seen in equity markets during May 2006 has perhaps caused charities to be more cautious and aware that markets can change direction suddenly.

In response to this heightened risk awareness, charities are sensibly ensuring that they have a portfolio diversified across different and sometimes uncorrelated asset classes to minimise the impact on their portfolio of a downturn in any particular market.

Charities are also more confident in their own abilities, preferring to trust the advice of their trustee board and relying less on the recommendations of investment consultants. This also reflects the overriding theme of the survey that charities remain pragmatically optimistic about the future.”