Charities braced for the market storm

Despite continuing instability in the investment markets, UK charities remain cautiously optimistic for 2008, with almost half (48%) anticipating returns of 8% or more, according to the 7th annual JPMorgan Asset Management (JPMAM) Charities Survey, where respondents collectively account for over £20 billion of charity assets under management.

Charities taking pragmatic view of future

Although it was conducted during one of the rockiest periods for stock markets in recent years, the survey sees plenty of optimism from the UK’s charities. 48% of respondents expect their annual returns over the next three to five years to be 8% or more. Whilst over all time frames, one, three and five years, less than 20% have experienced a fall in investment income. This optimism is mirrored by 92% of respondents anticipating that their future investment returns will match the obligations and commitments of their charity.

Managing risk with diversification

Whilst charities are relatively confident over the medium to long term, risk and volatility have become key concerns for most, jumping from fourth to equal first place in the list of key concerns when successfully managing charity assets over the next 3 – 5 years. The other key concerns for charities are investment returns, followed by income and market performance.

As a result charities are increasingly seeking to diversify – with overseas equities seeing an 86% net balance increase in allocation. Unsurprisingly, this was at the expense of UK equities which saw a net balance reduction of 24%.

Alternative investments also maintained their appeal, with charities being net buyers of all major alternative asset classes throughout this time. Property continued to see a steady increase in allocation, and no charity reduced its exposure to private equity or absolute return strategies. Allocation to UK and overseas bonds continued to fall, possibly reflecting the low bond market returns over the previous four years.

As risk and diversification of portfolios become a key consideration for charities, half of all respondents (50%) are planning to use a consultant in their next investment review – reflecting a heightened ongoing precaution over investment choices, looking ahead.

Hedge fund exposure approaching saturation?

Although hedge funds saw no charities reduce their exposure, there are early signs that going forward these inflows will be at a slower rate. Despite three quarters (75%) of respondents saying that hedge fund returns met or surpassed expectations, there was a significant increase in those who believe hedge funds do not offer good value for money – rising from 19% in 2006 to 29% in 2007.

Charities are wary of using derivatives

For the first time, 2007 saw JPMAM question charities on their attitudes towards derivatives. Interestingly, although charities remain keen adopters of alternatives, many are far more wary of derivatives – even though they are permitted to use them as downside protection. An overwhelming 81% of respondents stated that they had not used derivatives and would not consider doing so in the future.

Jeremy Wells, Head of Charities at JPMorgan Asset Management, said: “Although charities are rightly concerned by market volatility, their confidence reflects their position as long term investors, with a positive, but cautious outlook for the future. This may reflect the fact that charity investors have the luxury of a long-term horizon, while other stock market investors have become progressively shorter-term in their investment timeframes.

“What is evident is that a smart investment strategy, which has seen charities move their portfolios to become well diversified across varied and sometimes uncorrelated asset classes, and a willingness to bring in third-parties for advice when necessary, has enabled charities to be much better positioned to withstand periods of turbulence than many.”