jpmorgan asset management charity survey 2006

JPMorgan Asset Management Charity Survey 2006

Better insight + Better process = Better results

Contents1 Foreword

2 Summary of key findings

3 Breakdown of respondents

5 Asset allocation

8 Investment returns

12 Socially responsible investing

14 Alternative investments

14 Hedge funds

16 Stewardship of assets

18 Trustee Board composition

19 General

20 Conclusion

Foreword

It gives me great pleasure to present the 2006 JPMorgan Asset Management

Charity Investment Industry Survey. The survey, which is now in its sixth

year, continues to be widely recognised as an essential guide to investment

changes and trends among the UK’s leading charities.

The survey continues to attract a high number of organisations, with over

100 charities from across the UK providing comments for this year’s report.

This represents over £11 billion of charity assets, which is less than in 2005,

but ahead of the total value of assets in 2004. As a result of the continued

high level of responses, the survey continues to provide valuable insights into

the developments in the charity industry, the products that are currently

being used and the performance and service levels that charities demand.

As in 2005, the findings of the survey cover the current approach of charities

to managing assets, the level of charity investment in each major asset class,

attitudes among charities towards risk and the level of returns they expect in

the future. We also introduced two new topics in the survey in 2006, with

questions on charities attitude to socially responsible investing and the

composition of their Trustee Board. By including these new questions, we

sought to gain even deeper insight into the current thinking of charities.

We would like to thank all those who took part for their contribution to the

survey’s continued success.

Jeremy Wells

Head of UK Charities


Charities remain optimistic about the future, but are more cautious. 40% of charities expectreturns over the next three to five years to be 8% or more. However, many organisations aremaintaining a diversified portfolio (45% of those who changed asset allocation did so in order toincrease portfolio diversification), with large allocations into equities and property as well as anincreased allocation into absolute return strategies such as hedge funds.

Heightened risk awareness has tempered confidence slightly. 80% of charities expect returns to meet future requirements and commitments of their charity, down from 90% in 2005.In addition, 48% of those who changed their asset allocation over the last year did so to controlinvestment risk.

Charities were net buyers of most asset classes, except UK bonds. Of those respondents whochanged their asset allocation, charities were net buyers of most asset classes, with the notableexception of UK bonds, where organisations were net sellers of the asset class for the second yearin a row. Charities also remain enthusiastic about alternative investments, with no charityreducing their exposure to hedge funds or private equity.

Use of investment consultants continues to decline. Only 19% of charities stated that they usedconsultants for their manager reviews. This is down from the 2005 and 2004 surveys where 23%and 30% of charities respectively used investment consultants.

Socially responsible investing is not high on charities’ agenda. Over half of charities (58%)stated that they do not have socially responsible/ethical constraints when investing, which is asimilar response level to when the question was previously asked in 2003.

Charities understand the benefits and value of hedge funds. 62% of respondents stated thathedge fund returns had met or exceeded expectations and 81% responded that hedge fundinvestments are good value for money. This is up from 72% in 2005.

Please note, wherever mentioned, survey data for 2006 covers the period 30 September 2005 to 30 September 2006 and survey data for2005 covers the 12 months to 30 September 2005.

Summary of key findings


In order to make it as easy as possible for respondents, charities had the option of submitting theirresponses either in hard copy format or via the internet. We received 102 responses to the survey,which is slightly down from the record number we received in 2005 but enough to ensure that wegained useful and interesting insights from the survey.

The value of charities’ assets under management varied even more widely than in 2005, withresponses coming from across the asset range, from under £1 million to £5 billion. This ensuredthat we continued to gauge the views of charities across the sector. The total assets undermanagement of all respondents was over £11.5 billion, less than in 2005, but up from the totalvalue of respondents in 2004.

As in 2005, over two thirds of charities (78%) saw their assets grow in 2006. The returns, however,were more evenly spread, with only a few charities seeing their assets grow by 21% or more. Morecharities (12%) experienced a loss than in 2005. Some charity portfolios were perhaps caught outby the sharp dip in equity markets in the middle of May to June 2006.

Looking in detail at how much charity assets have grown in the last two years compared toprevious years, 66% of respondents saw their capital grow by a handsome 21% or more between2004 and 2006. This compares to 51% over 2003-2005 and 23% in 2002 to 2004.

These results are not surprising given that equity market performance has been very strong overthe past two years, with the MSCI World rising 29.1% over the two years to December 2006, andregistering a gain of 24.5% between 2003 and 2005.

All in all, most charities seemed to have had a good year of returns in 2006 – a feature that hascontributed to charities continued optimism about the future.

Breakdown ofrespondents


Breakdown of respondents by assets under management (GBP million)

■ Under 5■ 5 - 10■ 11 - 20■ 21 - 49■ 50 - 99■ +100■ Not disclosed

3%

17%

16%

10%

13%

17%

24%

% response

Use of investment managers

When asked how many investment managers they use to manage their assets, 18% of charities stillmanage their assets in-house, which is slightly up from 2005 when 17% of charities managedassets internally.

When employing external investment managers, the majority of respondents still only use a fewmanagers irrespective of whether their assets were being managed on a pooled or segregated basis.However, fewer charities in 2006 stated they used one or two managers compared to 2005. Morespecifically, 40% responded that they used only one manager and 20% said they used two in 2006,while it was 47% and 21% respectively in 2005. Only 6% stated that they employed more than fivemanagers.

In order to discover which charities are most likely to use external managers, we examined theassets under management for the charities that responded. As in 2005’s survey, we found that ingeneral the larger the charity, the more likely they are to outsource their asset management anduse multiple managers. The average value of assets for charities with no managers was £10.6million, while those who used four or more managers had an average of almost £700.9 million,which is more than 10 times the value of assets of those using one to three managers and 70 timesof those using no managers.


Percentage change in investment returns in past two years

21% or more

11% to 20%

1% to 10%

No change

-1% to -10%

-11% to -20%

-21% or less

0% 10% 20% 30% 40% 50% 60% 70%

■ 2001-2003■ 2002-2004■ 2003-2005■ 2004-2006

Inve

stm

ent r

etur

n in

the

past

two

year

s

133

78

Average AUM of charities that use external managers

No managers used

1-3 managers used

4 or more managers used

2006 (£m)

10.6

69.6

700.9

14.7

158.6

590.4

2005 (£m)

248

4

3317

24

76

92

918

74

325

2412

1023

5166

As the chart above shows, UK equities are still the most popular asset class amongst charities andhave been for the past three years as we would expect. UK bonds also remain popular, with 61% ofrespondents investing in them, as are cash deposits, with 70% of organisations investing in them.

However, all three of these main asset classes have experienced a drop in their popularity, generallyin favour of property and hedge funds. Allocations made to overseas bonds and equities have alsofallen away slightly, following the trend seen in 2005.

As stated earlier, hedge funds and property (although a lower allocation than two years ago) werethe only asset classes to see some growth in terms of the number of charities that were investing inthem. More specifically, nearly half of charities (42%) invest in property and 20% in hedge funds.

We can conclude from these results that charities seem to be sensibly maintaining a diversifiedportfolio, spreading their risks across multiple asset classes, including traditional and alternativeinvestments. This highlights the ongoing theme of the 2006 survey that, although charities areoptimistic about the future, they are still cautious enough to want to reduce the volatility of theirportfolios and spread their risk across different assets.

When considering the asset allocation of charities that saw their assets under management rise, fallor stay the same, the survey found that the most successful charities had a greater allocation toproperty, UK equities and overseas equities – asset classes that performed well in 2006.

Those that suffered a decrease in assets under management had a heavier allocation into cash.Hedge funds were also prevalent with charities that experienced losses, highlighting theimportance for charities of picking a good hedge fund manager.

For those charities that saw their assets under management remain unchanged, their allocationwas quite evenly spread across asset classes, suggesting that poorly performing asset classescancelled out gains from better performing ones.

The table below shows the average AUM of those charities investing in property, private equityand hedge funds:

Asset allocation


Incidence of charities in each asset class

Resp

onse

%

76

0

20

40

60

80

100

UK equities

Overseas

equities

UK bonds

Overseas

bonds Cash/

deposits

PropertyPriv

ate

equity

Hedge funds

Other

Asset class

Asset class

Property

Private Equity

Hedge funds

Number of respondents

33

9

16

281

653

177

Average AUM £m

84 82

4250

5661

7175

10

1925

7075 73

4235

44

11 11

3

2013 16

11

■ 2006■ 2005■ 2004

As the chart on the previous page shows, property and hedge funds seem to be the most accessiblealternative investments for charities. Approximately a third of charities investing in hedge funds orproperty had assets under management below £50 million. Only one charity who invested inprivate equity fell into this category.

Bringing in the earlier finding that more charities seem to invest in hedge funds and property thanprivate equity, this perhaps reflects that there is a lack of suitable investment vehicles for smallercharities to invest in private equity. There are common investment funds providing access to hedgefunds and property, but not private equity.

Incidence of charities by management style for UK equity

When considering the returns that charities target from their investment into UK equities, themajority of respondents (69%) are targeting a return of 2% or less through enhanced indexmanagement or passive management. Only 41% are pursuing active management with a returntarget of between 2% and 4%, which is in sharp contrast to the 2005 survey, where 65% ofrespondents stated that they are pursuing active management in UK equities. This again ties inwith the overriding theme of the survey that charities are still optimistic about the future, but aremore cautious than in 2005.

Supporting this theme is the fact that only 6% of charities are using an aggressive style ofmanagement and targeting excess returns of 4% or more.

Changes to asset allocation in the last 12 months

Charities remain quite satisfied with their asset allocation, with the majority of charities (71%)not making major changes within the previous 12 months. There has been no change year-on-yearto the number of charities making asset allocation changes.


0

10

20

30

40

50

60

70

Aggressive management

(benchmark +4% or more

per annum)

Active management

(benchmark +2% to 4%

per annum)

Enhanced

Index management

(benchmark +0.5% to 2%

per annum)

Passively managed

(index tra

cking)

Resp

onse

%

■ % Response 2006■ % Response 2005

46

65

41

19

3027

39

Yes

No

2006

29%

71%

29%

71%

2005

Changes to asset allocation for those charities making asset allocation changes

For those charities that made asset allocation changes, the only asset class to see a significant decrease inallocation was bonds, which saw a 20% drop in allocation in 2006 compared to a drop of 12% in 2005.

The asset classes that have seen the largest change in asset allocation are hedge funds and privateequity, which saw a 100% net increase in charities that changed their asset allocation investing inthem. Property also saw a significant increase in asset allocation, with a net change in allocation of+34%. Equities and cash were also beneficiaries of the asset allocation changes.

We can draw several conclusions from these results. Firstly, the pursuit of absolute returns asopposed to relative returns seems to be clear from the large increase in allocation to hedge fundsthat charities have pursued. With charities a little more cautious than in 2005, making positiveabsolute returns seems to be more important to them than the pursuit of relative returns.

Tied to this and some of the findings we have seen earlier in the survey is the fact that charities haveincreased their allocation across virtually all asset classes. They seem to be much more focused onensuring that they have sufficient diversification in their portfolio and are concentrating oncontrolling risk. This is in contrast to 2005 where charities were more interested in pursuing returns.

Reasons for changing asset allocation

When considering the reasons for changing asset allocation, the majority of charities changedtheir exposure in order to control investment risk and to increase diversification within theirportfolio. This is in contrast to 2005, where the top reason for respondents to change allocationwas to increase/enhance returns.

These findings are further evidence that charities are more cautious than in 2005. Controllinginvestment risk and increasing diversification were not so important in 2005, but have moved tothe top of charities’ agenda in 2006. However, given that 38% of organisations changed allocationto enhance returns, charities remain optimistic.


■ 2006■ 2005

0

10

20

30

40

50

Closer matching

of assets to

liabilit

ies Controllin

g

investment ri

sk

To increase

diversificatio

n of

asset classes in

the portfolio

Volatility of

equity m

arkets

To increase/

enhance returns

A change in

overall

investment

strategy

Resp

onse

%

3

9

48

26

45

29

10 11

38

Other

46

10

29 28

-40% -20% 0% 20% 40% 60% 80% 100% 120%

Equities

Bonds

Cash

Property

Private Equity

Hedge funds

Net change – 2006 Net change – 2005Net change – 2004

72

1003

17

1009

54

3420

17

5014

-12-20

-228

6

Methods used to measure overall performance in your entire portfolio

When considering how investment returns are measured, the majority of charities (67%) prefer tomeasure returns against market set benchmarks. This figure has dropped slightly from 74% in2005 and 2004 in favour of measuring returns against cash/inflation and peer group/competition.After several years of steady decline, the number of charities measuring returns against peergroups/competition seems to have stabilised in 2006.

Actual absolute return of portfolio over the last 12 months


Investment returns

0

10

20

30

40

50

60

70

80

Other

Returns against

peer group/competiti

on

Returns against

liabilit

ies

Returns against

cash/inflatio

n

Returns against

market

set benchmarks

■ 2006■ 2005■ 2004■ 2003

Best definition of ‘investment risk’

Other 7%

Investment managers notmeeting their return targetover and above benchmark

11%

Not generating enoughincome return

19%

Capital growth notmeeting inflation over

the long term15%

Market volatility48%

Resp

onse

%

6774 74

37

29

1821

12

2 3 3

26

18

25

55

1310

0

10

20

30

40

50

60

70

80

4% or less

4%-5%5%-6%

6%-7%7%-8%

8% or more

■ 2006■ 2005

As expected, by far the most popular definition of investment risk was ‘market volatility’. This ispossibly because the survey was conducted quite soon after the spike in volatility in May and June2006 during which charities’ concerns over market volatility re-emerged. This is consistent withthe fact that charities made asset allocation changes in 2006 to increase diversification andtherefore reduce portfolio volatility.

% R

espo

nden

ts

913

1713

58

4 2 1

67

61

When asked to specify the level of absolute returns they achieved in 2006, 67% of charities repliedthat they received 8% or more. Most of the remaining respondents (28%) saw returns of 5% orless, which means that charities are either enjoying very decent returns or quite mediocre returnsdepending on their asset allocation. Those charities investing heavily into equities and otherpotentially high returning asset classes saw their portfolios rise significantly.

Annual percentage rate of return expected over next 3-5 years (entire portfolio)

Where changes were made, they were made as follows:

In terms of expected returns over the medium to long term, the survey results show confidence inthe future continues to rise. 40% of charities expect to earn 8% or more, which is up from 2005and significantly higher than in 2004 where there was only 9% expecting a return above this level.This indicates that charities’ optimism about the future continues to improve, with respondentshaving a reasonably optimistic outlook for returns over the next three to five years.

Studying the figures further, over half of charities expected a return of 7% or more in 2006. Bringingin the results from our analysis of the reasons for changing asset allocation on page 7, charities are more concerned with controlling investment risk than pursuing returns, we can conclude thatalthough charities expected more in 2006, they are trying to be more realistic. In addition, it ispossible that they have more confidence in their fund managers to add value and deliver returns.

Charities expecting a return of 6% or more continue to be heavily invested in real assets, bothequities and property.

Active excess return

In terms of expected excess return, the average return expected was 2.0% (compared to 1.8% in2005), with all responses falling between the range of 0% and 6%. This indicates that charities arecontinuing to expect their fund managers to perform for them and in some cases perform very well.


0

5

10

15

20

25

30

35

40

45

4%or le

ss

4% - 5%

5%- 6

%

6% - 7%

7% - 8%

8% or more

■ 2006■ 2005■ 2004

Resp

onse

%

9 10

14 1516

27

11

17

14

911

20

1516 16

40

30

9

■ <1%■ 1% – 2%■ 2% – 3%■ 3% or more

18%

38%18%

26%22%

29%32%

17%

2006 2005

% Respondents

Expected return for UK Equities

When asked about returns on specific asset classes, charities expected higher returns from UKequities than UK bonds. Expectations on average were for 7.1% per annum for UK equities. Giventhe returns seen over the past few years, it is not surprising to see that over half of respondents (52%)expected UK equities to deliver annualised returns of 8% or more over the next three to five years.

Expected return for UK Bonds

As for UK bonds, respondents were more bearish in their return expectations, with all respondentsexpecting 7% or less from the asset class, unlike in 2005, where 6% expected 8% or more. Thismore cautious return expectation probably reflects the disappointing overall returns from bondsover the last few years.

Year-on-year, for those charities expecting 6% or more from UK equities, they have increased theirallocation to UK equities in pursuit of these higher returns.

Annual income required to meet objectives


0

10

20

30

40

50

60 ■ 2006■ 2005

<4%

4%– 5%

5% – 6%

6% – 7%

7% – 8%

8% or more

Resp

onse

%12

16

6

11

63

15 14

9 8

5248

0

5

10

15

20

25

30

35 ■ 2006■ 2005

<4%

4% – 5%

5% – 6%

6% – 7%

7% – 8%

8% or more

Resp

onse

%

26

23

32

23

16

21

26 27

6

■ 0%■ >0% – 3%■ 3% – 4%■ 4% – 5%■ 5 or more

20%

18%

16%

33%

13%

Expected return

Expected return

When asked to specify the income returns charities have seen over the last twelve months, theresults revealed that the average income return was 3.5%, compared with 4.0% in 2005.The median result was 3.2%.

Over a third of respondents required an income of 3% or more to meet objectives, with an average income return requirement per year coming in at 3.1%. This compares to an averagefigure of 4.1% in 2005.

Meeting future commitments

80% of respondents expected the returns from their investments to meet their future requirementsand commitments of their charity. This figure is down from the 90% found in 2005, whichindicated a fall in confidence in charities’ investment strategy. This is in contrast to charities’increased confidence in future returns. The decline in bonds last year and the sharp dip in equitymarkets in May and June will probably have affected charities’ expectations that returns will meetcommitments going forward.

Solutions to remedy any return shortage

Of the charities that were expecting returns to not meet commitments, the most popular strategyto remedy the situation was drawing return from income and capital. This has seen a steadygrowth in popularity from 30% in 2004 to 46% in 2006. Conversely, absolute return strategies(hedge funds) have waned in popularity, with 35% of respondents in 2004 looking to adopt such astrategy, whilst no respondents cited this as a solution in 2006.


2006 2005

Yes 80% 90%

No 20% 10%

0

10

20

30

40

50

0

■ 2006■ 2005■ 2004

Draw return fro

m

income and capital

Look at higher

return strategies

accepting th

at it may

lead to greater v

olatility

Adopt an absolute

return strategy

Sacrifice fu

ture growth

for current in

come

Resp

onse

%

30

36

46

15

27

15

35

9

1

15

9

Socially responsible investing (SRI) is a topic that we investigated a few years ago and return to inthis year’s survey to discover if there have been any changes to charities’ attitude towards SRI.

Incidence of socially responsible and ethical constraints

Expected return will meet charitable commitments

Indicating that charities’ attitude towards SRI or ethical investing has not changed over the pastthree years, the majority of respondents (58%) do not have socially responsible/ethical remits wheninvesting.

Applying these principles to fund management

The traditional approach of negative screening is 10 times more popular than the modern methodof positive screening, with 91% of charities favouring this approach.

The sectors charities avoid the most when investing were, as expected, tobacco (68% avoidance),arms (34% avoidance), alcohol (18% avoidance) and gambling (16% avoidance).

Index for measuring returns against SRI benchmark

The majority of charities that replied to this question said that they did not measure against an SRIbenchmark, while only one charity mentioned using an SRI benchmark, but did not specify theindex used.

Incidence of use of an external research screening company

Only one in 20 charities used external screening companies, which ties in with the finding that theyprefer to use negative screening.


Socially responsibleinvesting

■ Yes■ No

46%

54%

2003

42%

58%

2006

■ Yes■ No

5%

95%

Plans to introduce new ethical or socially responsible investment policy

Having left the topic out of our survey in the last two years, it seems that charities’ attitudestowards socially responsible investing have not really changed. The issue remains an area of focusfor a minority of charities and 81% of respondents currently have no plans to introduce a newethical or socially responsible investment policy.

Amount willing to sacrifice in annual returns in order to invest in a SRI

The average amount that respondents would be willing to sacrifice in order to invest in a SRIpolicy is 0.2%. Among those charities not pursuing an ethical policy, the perceived loss in return isa major factor in not pursuing this policy.

However, amongst ethical charity investors, there is a body of opinion that suggests that an ethicalpolicy should not require any return sacrifice and in fact ought to be return enhancing.


81%

13%

6%

■ No, not at the moment■ Yes, within the next 12 months■ Yes, but no fixed time frame

80%

5%

5%

10%

■ 0%■ 0.5%■ 1%■ 2%


Attitude towards alternative investment vehicles

When considering alternative investments, property (UK) was the most commonly used assetclass, with 41% of respondents already actively investing in it which is broadly unchanged from2005. Of particular note, diversification into property (overseas) seems to be of greater interest tocharities, with 26% of organisations considering using it in the future.

Elsewhere in alternative assets, the popularity of hedge funds and long only strategies continues to build,with both asset classes seeing considerable increases in charities using these strategies year-on-year.

Asset class Already use Considering Already use Considering Already use Considering

Private Equity 17% 22% 15% 11% 19% 25%

Hedge Funds 24% 12% 16% 13% 26% 32%

Long only absolute returnstrategies 10% 12% 6% 9% 5% 19%

Commodities 3% 13% 3% 5% 9% 6%

Property 41% 24% 45% 12% 56% 28%

Alternativeinvestments 2006 2005 2004

The year started investing in hedge funds

Turning specifically to hedge funds, of the 24% of respondents who already invest in hedge funds,the vast majority began doing so within the last five years, with only 5% of respondents beginningtheir investment before 2002. The hedge fund phenomenon seemed to take off from 2002 (a timewhen equity markets were approaching their nadir), with take up of the asset class fairly evenlyspread over the next few years. Their popularity has continued over the last two years, with over athird investing in 2005 and 2006.

Reason for investing in hedge funds

Hedge funds

0

10

20

30

40

50

60

19992000

20012002

20032004

20052006

■ Recommendation from consultant■ Recommendation from investment company■ Recommendation from Trustee or Board

30%

22%

48%

%

5

10

25

20

15

25


When investing in hedge funds, 52% of respondents invested as a result of a recommendationfrom an investment consultant or company, which indicated the high influence of advisers whenconsidering alternative asset classes. Almost half of charities acted as a result of an internalrecommendation from a trustee or board, which is a sharp increase on 2005’s finding. Thesefigures suggest trustees are becoming more confident about taking the decision independently toinvest in hedge funds.

Returns achieved from hedge funds

The majority of respondents experienced higher returns from hedge funds in 2006 compared to2005, with only 8% stating that they had received less than 5% in 2006 compared to 40% ofrespondents in 2005. Three-quarters of respondents experienced returns between 5 and 10%, withthe majority falling in the upper half of this range. A not insignificant proportion (17%) ofrespondents saw even higher growth, replying that their hedge fund portfolio had returned inexcess of 10%. The average return achieved was 8.4%, compared with 7.5% in 2005.

Satisfaction with returns from hedge funds

A smaller number of charities (18%) compared to last year indicated that returns from theirhedge fund exposure had exceeded expectations. Just under half (44%) stated that they had metexpectations, indicating that the majority are satisfied, but a significant 38% indicated that returnshad not met expectations. This suggests that a growing number of charities are underwhelmed bythe returns received from hedge funds. In the year to September 2006, the average hedge fundreturn was 5.2% to 5.5%, according to leading recognised industry benchmarks.

Overwhelmingly respondents continued to regard their investments as good value for money,with 81% of respondents believing hedge funds are good value, up from 72% the previous year.This suggests that charities invested in hedge funds are fully aware of the costs associated withthem and why they should be included in a portfolio. Education around hedge funds has beenimproving, helping charities understand the asset class and what it has to offer.

■ Less than 5%■ 5% – 7.5%■ 7.5% – 10%■ More than 10%

20052006

40%

27%

13%

20%8%

33%

42%

17%

■ Returns have exceeded expectations■ Returns have met expectations■ Returns have not met expectations

20052006

24%

47%

29%18%

44%

38%


Last formal investment manager review

Turning to charities’ stewardship of assets, two thirds of respondents (69%) had carried out aformal review of their investment managers within the last three years, with only 12% having notdone so more than five years ago. The responses are similar to our survey in 2005 and 2004, whichimplies that most charities are carrying out their management review according to a regulartimetable.

Use of consultant for review

The prevalence of consultants in the review process has continued to drop, with less than a fifth(19%) of charities using them in 2006 compared to 23% in 2005 and 30% in 2004. This suggeststhat as returns from their portfolio have been increasingly positive, charities remain optimisticabout the future, and are becoming more relaxed about consulting advisers, preferring to reviewinternally instead. In addition, given returns have been relatively satisfying, charities could bemore reluctant to make changes and spend money making those changes.

Reason for using a consultant

Where they use consultants, charities seem to be using them for the right reasons. As in previousyears, respondents overwhelmingly cited the requirement of investment advice and the need forassistance in making objective comparisons of investment strategies as grounds for usinginvestment consultants.

Influence of consultant on choice of managers

Where consultants were used as part of the manager review process, most charities (88%)responded that they had a moderate or significant influence on their decisions. So, whenconsultants are used, charities generally try to take into account what they say and make decisionsaccordingly.

Stewardship ofassets

0

10

20

30

40

50■ 2006■ 2005■ 2004

Within th

e last

twelve m

onths

Between one to

three

years ago

Between th

ree to fiv

e

years agoMore th

an five

years ago

2006 2005 2004

Yes 19% 23% 30%

No 81% 77% 70%

Resp

onse

%

4338

35

26

32 33

1921 21

12

911

Next planned investment manager review

With regards to the next planned formal review, over half of respondents plan to have a formalreview in the next two years. Only 15% expected their next review to be more than three years away.

Future intentions to use investment consultant

Reflecting the decline in the use of consultants, 81% of respondents are less likely to use aconsultant than in previous years during their manager review. This is an increase on the resultsfrom 2005 and 2004, where 72% and 44% stated that they were not going to use consultants.

Reasons for not using a consultant

Of the reasons given for not using the services of an investment consultant, over half (57%) replied thatthe board now has sufficient investment expertise to make their own decisions. The second most popularresponse highlighted that the cost of using consultants would not justify the benefits of using one.


■ In the next twelve months■ Between one to two years■ Between two to three years■ Between three to five years■ More than five years

45%

22%

18%

11%

4%

0

20

40

60

80

100

2006

■ Yes■ No

20052004

0

10

20

30

40

50

60

Trustee Board

has sufficient

investment e

xpertise

Cost of u

sing

consultants does not

justify th

e benefit

Reviewing for d

ue

diligence and not

expecting to

change managers Not e

nough

informatio

n

on consultants Other

(please see below)

Resp

onse

%

57

34

7

2

34

Resp

onse

%

19

81

28

72

56

44


The survey found that the average number of trustees per Trustee Board was 15 with the averagelength of tenure for trustees being 6.3 years. The majority of charities (62%) have an investmentsub-committee, although the evidence from our survey indicates little correlation between havinga sub-committee and returns achieved.

Sufficient investment expertise on the Trustee Board

The majority of respondents (71%) were confident that their Trustee Boards have sufficientexpertise. The evidence from the survey suggests that this confidence is well founded.

Sufficient demographic diversification on the Trustee Board

There is a fairly even split among charities in terms of whether they think their Trustee Board isdiversified enough across age, gender and ethnic mix. Just over half (54%) believe that their Boardis appropriately diversified.

Trustee Boardcomposition

■ Yes■ No

71%

29%

■ Yes■ No

54%46%


■ Yes■ No

82%

18%

Adequate key charity representation on the Board

Charities are more confident about whether the key representatives of the charity are adequatelyrepresented, with 82% of respondents stating that they are well represented.

Finally, to ensure we had a full picture of charities’ views, we asked respondents to detail the keyconcerns they have about managing their assets over the next three to five years.

In contrast to 2005, where 13% of charities were sufficiently confident to have no concerns, 2006sees a decline in those organisations with no concerns to 7%. This highlights the ongoing themewe have seen in this survey that charities are cautiously optimistic in 2006 compared to beingbullish in 2005.

In addition, after a year of more moderate returns than in 2005, charities are again highlightinginvestment returns as their key concern in managing their assets over the next 3-5 years. Perhapssince returns in a broad sweep of asset classes in the six months before the survey was conductedwere weak.

However, on a more positive note, charities largely feel that they have a suitable asset allocationstrategy for the next three to five years, with only 7% citing this as a concern in the latest survey.Also, charities are generally less concerned about market performance or income, again perhapshighlighting a level of tempered optimism.

Key concerns about successfully managing charity assets over the next 3-5 yearsGeneral

0

5

10

15

20

25

30

35

Investment

returns

■ 2006■ 2005

Income

Market

perform

ance

Volatility/ris

k

No concern

Selecting

correct a

sset

allocatio

n Property

market

Miscellaneous

Resp

onse

%

31

1110

8 7 7

3

25

21

1516

9

13

17

5

26


Conclusion From the survey, we can draw some key themes from the charities’ responses, many of whichcontinued the trends observed in 2005, but also some that offered different views from those seenin 2005.

The key theme of the 2006 survey is that charities have remained relatively optimistic, but areacting with some caution. In 2005, the survey results revealed that charities were willing to take onrisk and were much more bullish about the future than in 2004, perhaps because they wereanchoring on the strong returns they had seen from their portfolios and income over the previoustwo and a half years.

In 2006, charities indicated that they were still quite optimistic, but have tempered theirconfidence 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 bemore realistic and aware that markets can change direction suddenly.

Tied in with this theme is the finding that charities are increasingly concentrating on maintaininga diversified portfolio. In particular, they continue to increase their exposure to alternativeinvestments. Property still remains a very popular choice amongst charities and features as one ofthe main asset classes in charity portfolios alongside UK equities and UK bonds. Of particularinterest is that some organisations are starting to consider diversifying into overseas property.

Charities also continue to increase their exposure to absolute return strategies, which isappropriate given their higher risk aversion. Hedge funds are particularly popular amongstcharities, with many stating that returns from their allocation into the asset class has met orexceeded expectations and overwhelmingly that they represent good value for money.

An ongoing theme from 2005 is the decline in the popularity of investment consultants. Withcharities remaining relatively positive about the future and feeling generally satisfied by the returnsthey have seen, many organisations are comfortable with their current asset allocation andinvestment managers, so do not feel they need the advice of consultants. They are also increasinglycomfortable with making decisions independently, as illustrated by the confidence they show intheir own Trustee Boards.

Turning to charities attitudes towards socially responsible investing, a topic that we touched on in2003 and re-introduced this year, charities’ stance on ethical policies does not seem to havechanged. Over half of respondents indicated that they do not have socially responsible constraintswhen investing and 81% of charities stated they are not planning to introduce an ethical policy inthe future.

In summary, charities continued to be generally happy with their investments and returns they are earning. They are still looking to the future with confidence, but with more caution than seenin 2005.

For further information contact Katie Delacombe in our Charities Team on020 7742 5307 or by email at [email protected]

JPMorgan Asset Management is one of the five largest

active asset managers in the world. We manage assets of more than

£1.3 billion for more than 300 UK charity clients.

Globally, JPMorgan manages charitable assets of more than

£7 billion – a responsibility that gives us clear insight into what

charities want from their asset manager.

We combine disciplined processes with team-based decision-making

and rigorous risk control. Our focus on innovative thinking means

we are constantly finding new ways to capture sources of

investment return across financial markets.

JPMorgan Asset Management is part of JPMorgan Chase & Co,

the global financial services group.

JPMorgan Asset ManagementFinsbury Dials20 Finsbury StreetLondon EC2Y 9AQ

www.jpmorgan.com/assetmanagement/uk/institutional

The information in this brochure is based on our understanding of law, regulation and Inland Revenue practice as at 03/06. JPMorgan AssetManagement is a trading name of JPMorgan Asset Management Marketing Limited, which is regulated by the Financial Services Authority.Registered in England No. 288553. Registered office: 125 London Wall, London EC2Y 5HA.

GB H743 03/07

jpmorgan asset management charity survey 2006

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