A false stop: having confidence and conviction on future returns
We've just come across an old report dated 2013 from an investment management firm.
It sensibly suggested that portfolio returns had been so good that they must now be unsustainable and charities should begin to reduce the spending they funded from their endowment. There were many other similar reports making the same point and also suggesting charities should reduce their spending. So what did happen?
In fact the world’s stock markets went up by almost 16% a year for the next four years, an astonishing rise by any standards, especially when inflation barely moved above 1% a year. Longer-term analysis, based on Barclays data, shows the real return on UK and US equities, from 1900 to 2016, was 5% and 6.6% respectively.
If you were a charity Trustee or executive in 2013 and received that advice from your professional adviser, what did you do? Did you do as advised and accept a lower distribution and lower spending? If you did, what choice did you have in the face of such confident advice?
Think of it another way: if a fundraiser had said that they wanted to lower their fundraising target for the year because they had done so well recently it couldn’t carry on, what would you do? Both markets reply on past performance and there is no guarantee that this will continue.
A Trustee should listen, understand, push back and then decide. Trustees and CEOs are much better at pushing back when they are familiar with the subject, such as fundraising, but in a world such as investment management it often appears too complex or high risk to ask some of these very basic questions.
This shouldn’t be the case, and Trustees have a duty to push back to make sure that the advice they are being given is reasonable and reliable - whether its comes from a fundraiser or a fund manager. That’s the law and this responsibility lies ‘upstream’ of the normal business of the investment management community and amongst Trustees and the executive themselves. One common barrier to this taking place is the absence of any ‘neutral’ support that charities can call upon when trying to push back – everyone has an angle - so the key is to find the one that is most trustworthy for the task in hand.
For most charities, they have a degree of discretion on both income and expenditure. Even the best budgets allow or forecast for some volatility of these measures as there is no certainty.
There can be no doubt that where Trustees did push back against such advice in 2013 and stayed with their spending plans (or even increased them), their charities would have made a distinct additional contribution for many people who were experiencing times of considerable hardship. If they had been wrong, they still had the chance to pull up the drawbridge, but not before they had made sure everyone was inside.