Soaring utility bills, despite the energy price cap, will leave many people struggling to pay their heating bills this winter, while rampant food inflation is already beginning to bite. And, as if the cost-of-living crisis couldn't get any worse, fast-climbing interest rates are now set to hurt many homeowners who do not have the safety net of a fixed-term mortgage. Subsequently, charities are in demand and naturally – and they will want to spend more money to help.
Yet, the ramifications of the pandemic and the Ukraine conflict will have impacted how much they can spend to support people's struggles. The value of charities’ investments will likely have dropped in 2022 as the vast majority of assets have fallen this year.
Multi-asset portfolios will have fared better than those heavily exposed to equities, but returns will still be down in the high-single to low-double digits. Bond markets have suffered too as central banks have grappled with the economic turmoil by raising interest rates in a bid to curb inflation.
Herein lies the conundrum for charities. Falling asset values have coincided with runaway inflation, which has challenged the CPI+ typical return ambitions of many charities. Many will have a widening gap in their return profile – and little clarity on when and how this may begin to be resolved.
How charities solve the conundrum is dominating all the conversations we are having with our clients right now. For us, it is about balancing the dual responsibilities of meeting the long-term future needs of the charity and wresting with today's demand for their help and support. And as for all investors, the key is not to make knee-jerk reactions.
As for all investors, the key is not to make knee-jerk reactions.
We believe that most charities will not have to radically change their strategy just yet. Now is the time to stand back as we do not know what is going to happen. After all, who would have guessed we would have had three prime ministers in the space of three months or that average mortgage rates would rise by more than 4 percentage points in a matter of weeks?
The key for charities is their time horizon. If they have got 5, 10 or 20-year time horizon, then they will, in all likelihood, be able to withstand a couple of years of volatility because of a total return approach to investments. The reality is most portfolios are underpinned by income, even with a total return approach, and that in itself means many charities will be able to continue to take small amounts of capital out of their portfolio. Then it's a question of how much of the capital are they prepared to spend in the short term.
This year's market mayhem disguises the fact that many charities’ investments will have enjoyed have had a strong run over the past decade despite the volatility and uncertainty caused by the pandemic. The chances are high that many will have had several years of stellar returns and will have built up a buffer that can withstand the current inflation shock in the short term.
Indeed, some may be able to spend a little more than they first thought. We have one client that had built up such a big buffer that it has embarked on a five-year strategy to spend half of its money across various projects. It believes this will help it prosper over the long term, rather than rely on fundraising now. But there is no one size fits all answer. We have a client recently who is only prepared to spend a fixed amount each year. For them, they are, reluctantly, prepared to say "no".
Several clients have recently asked us whether now the time is to lower the risk of their portfolios – some have even raised the topic of investing in cash. However, we continue to believe that a diversified portfolio, made up of around two-thirds equities is a benchmark – with tactical allocations made alongside (we have reduced our exposure to small caps given the recessionary environment, for instance). We need charities to look to the future and neither cash nor bonds are going to beat inflation over the long term.