How much can charities spend from their investment portfolios?
This is a simple question, easy to answer.
First, charities should be clear whether they are trying to get bigger, stay the same size (allowing for inflation), or shrink. If you can’t answer that question you can’t know if you are spending too much’ (obviously).
If you are seeking to maintain your portfolio against inflation, and your manager is making CPI + 4% after costs, then 4% is what you can spend. If fact you can spend everything in excess of CPI and meet your goal, although it’s best is you average this over a few years for a smoother and more confident number.
There are a few things to remember though:
What makes you charitable is what you spend, not what you save.
What you receive as a total return is different to what you receive as income. It’s the total return number that is relevant here, after inflation, not what you receive as income. Selling surplus capital gains is not selling the family silver.
What a charity spends is a decision only for trustees. The management industry always seems to project a 3.something% sustainable spending rate – never more, regardless of what they earn. It just means starting today, but most clients have probably already built up an amount of unspent investment return in excess of inflation so they can usually spend more and still meet their preservation objective.
Remember there is a tension between charity and investment manager’s goals: for the manager a growing pile of assets (after inflation) is a measure of success but for the charity it is a measure of failure (to spend enough).
For charities, investing is not an end in itself, but a means to an end which is delivered by spending. At Yoke, we think the default should be to err on the side of spending fully rather than too cautiously. We think that’s what trustees want for their beneficiaries.
We appreciate that all charities are different in their approach to investing and spend. At Yoke we have seen the full spectrum so if you would like to unpick this thorny issue please do not hesitate to contact us.