Time and Money

March 2018

Kate Rogers

Charity Investment Forum

Background

Researchers

Kate Rogers

Richard Jenkins

Previous research on:

Spending

Mission and investment

Key research question

In what ways might organisations investment and governance time horizons work for or against trustees’ charitable intentions?

Assumptions

1. Long term investing brings benefits

2. Stuff gets in the way of it

Barriers to long term investing for Foundations?

3

Foundations Long term

Companies Long term

Short termism

Investment time horizons have fallen dramatically

Chart source: LPL Financial, NYSE, 8 June 2012

Average holding period for US listed stocks is less than 6 months

4

0

1

2

3

4

5

6

7

8

9

1940 1950 1960 1970 1980 1990 2000 2010

Average holding period for US-listed stocks by decade

Benefits of long term investing Companies focused on the long term perform better

Financial benefit of long term thinking

Social benefit of long term approach; job creation, economic impact, environmental and social factors – focus on sustainability

Behavioural factors Short term decision making usually unhelpful

5

1900 10 20 30 40 50 60 70 80 90 2000 10 14

Equities: return 6.5% per year Equities: capital gain 2.2% per yearBonds 2.0% per year Bills 0.9% per year

Long term investing

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook 2009 and Triumph of the Optimists, Princeton University Press 2002. Past performance is not a reliable indicator of future results, prices of shares may fall as well as rise and investors may not get the amount originally invested.

Cumulative returns on US asset classes in real terms 1900 – 2014

6

1,396

12.8

10.1

2.7

10,000

1,000

100

10

1

Post WWI recovery:

1919 – 1928

World 168%; US 372%

Post WWII recovery:

1949 – 1959

World 392%; Germany 4373%

Expansionary 1980’s

World 261%; Japan 431%

1990’s/tech boom

World 112%; US 279%

WWI: 1914 – 1918

World -31%

Germany -66%

Wall Street crash:

1929 – 1931

World -53%

US -79%

WWII: 1939 – 1948

World -11%

Japan -96%

Oil shock:

1973 – 1974

World -47%

UK -71%

Tech crash:

2000 – 2003

World -44%

Germany -65%

Credit crash:

2007 – 2008

World -53%

Ireland -70%

-66%

-60%

-71%

-42% -42%

-50%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

World War 1(1914-1918)

Wall Street Crash(1929 - 1931)

Oil ShockRecession (1973-

1974)

Nineties tech boom(1990 - 1999)

Internet 'Bust'(2000 - 2002)

Credit Crisis (Oct07 - Feb 09)

Equities… not without risk

Source: Dimson, Marsh and Staunton

…times of large equity market losses

7

Germany US UK Japan US US

The long term is a series of short term experiences

Source: FactSet, FTSE, J.P. Morgan Asset Management. Returns are based on local price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 1986 to 2017. 2018 YTD data to 9th February 2018.

FTSE All Share Calendar year returns and intra-year declines

2018 YTD

22%

4% 6%

30%

-14%

15% 15%

23%

-10%

19%

12%

20%

11%

21%

-8%

-15%

-25%

17%

9%

18%

13%

2%

-33%

25%

11%

-7%

8%

17%

-2% -3%

12% 9%

-9%

-37%

-8%

-14%

-22%

-12%

-18%

-4%

-18%

-4% -6%

-10%

-25%

-11% -12%

-30% -31%

-17%

-6% -7% -10%

-13%

-43%

-23%

-17% -19%

-12% -12% -10%

-15% -12%

-4%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 -8%

-9%

8

Volatility; noise or risk?

9

Long term investors

Source: Schroders, ACF. Charity investment expenditure survey 2013, 19 questions, 226 respondents

A common charity investment objective?

10

Charity investment expenditure survey 2013

79% felt maintaining real capital value of investment portfolio over the long term very important

Majority aimed to preserve or grow the real capital value over the long term

Median spend rate 3 – 4%

Translates into a long term investment objective of inflation + spending rate

Delivering inflation plus 4% Making the best of the journey #1: Diversification

Source: Cazenove Capital, graph for illustrative purposes only. *The target return is not guaranteed.

11

100

110

120

130

140

150

160

170

Time

Global Equities Multi-Asset Portfolio

Inflation +4%

Making the best of the journey

Source: Schroders, DataStream. Charity Multi-Asset Fund S-share class (0.40% p.a.). Estimated risk and return data is based on our own analysis. Risk, return or yield characteristics of the above portfolios or constituent asset classes are not guaranteed to be achieved in the future. We define risk as standard deviation of annual returns. UK equities are represented by the FTSE All Share. This analysis is based on broad market forecasts. Risk, return and correlation assumptions are shown in Appendices. Forecasts are not a reliable indicator and do not guarantee future performance. The value of investments can fall as well as rise and you may not get back what you originally invested.

Benefits of a diversified approach

Diversified (CMAF) forecast

7% return 11% risk

UK equities 38%

Overseas equities 25%

Bonds 10%

Absolute return 15%

Cash 2%

Property 10% Traditional Approach forecast

7% return 13% risk

UK equities 40%

Overseas equities 40%

Bonds 20%

12

CMAF

-5

%

Trad

ition

al

Appr

oach

-7

%

UK

equi

ties

-9%

UK

Equi

ties

-10%

Trad

ition

al

Appr

oach

-7

%

CMAF

-5

%

UK

equi

ties

-9%

Trad

ition

al

appr

oach

-6%

CMAF

-4

%

10 – 26 August 2015 30 January - 11 February 2016 12 January – 9 February 2018

80

100

120

140

160

180

200

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Aiming for inflation plus 4%

Source: Datastream/Lipper, bid to bid, in GBP, net income reinvested. 30th September 2008 to 31st December 2017. A Share Class, 0.65% p.a. net of fees. Past performance is not a guide to future performance. 5 year discrete performance figures are shown in Appendices.

Charity Multi-Asset Fund

13

-5% +9%

-1% +5%

-13% +2%

Labels show rolling 12mth returns

Charity Multi-Asset Fund RPI +4%

Making the best of the journey #2: Set expectations Monitor against long term target within expected ranges

Source: Datastream/Lipper, bid to bid, in GBP, net income reinvested. 30th September 2008 to 31st December 2017. A Share Class, 0.65% p.a. net of fees. Past performance is not a guide to future performance. 5 year discrete performance figures are shown in Appendices.

14

– Long term target of inflation +4% – Expect oscillations around this target as it

is a non-investable ‘benchmark’ – Market fair value at RPI +4% mid line – Performance base date Sept 2008 where

FTSE All-Share at historical average valuation

– Range: Upper and lower boundaries represent two standard deviations of the strategy from the central return expectation (RPI +4%)

– Equity like returns with reduced volatility over an economic cycle

Performance 5 years: +8% p.a. vs RPI+4% +7% p.a. 3 years: +8% p.a. vs RPI+4% +7% p.a. 1 year: +8% vs RPI+4% +8%

40

60

80

100

120

140

160

180

200

220

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Charity Multi-Asset Fund RPI + 4% Range

Making the best of the journey #3 Spending is expression of mission

15

Have a spending rule that smooths ups and downs

Source: Schroders.

Spending Policy Low spending volatility

Countercyclical spending

Maximise long term real value in

strong market

Maximise long term real value in

downturn

Minimise liquidity risk

Income 3 3 3 2 1

Market Value 4 4 4 1 2

Constant Growth 1 1 1 4 4

Hybrid 2 2 2 3 3

Characteristic (1 = best, 4 = worst)

– Smoothing policies are valuable to both reduce spending volatility and maximise long term real value

Long term investment approach brings benefits

Conflict between long term goals and short term experience?

Volatility: noise or risk?

Making the best of the journey

1. Diversification

2. Setting expectations

3. Spending rule to smooth ups and downs

So far

17

Governance and behaviours

Source: Cazenove Capital, Time and Money survey, September and October 2017

Survey findings: Charity investor time line

— 230 survey participants – September - October 2017 — Majority respondents rely on investments to fund >50% activity — Median spending rate 3 – 4% — 81% aiming for perpetuity; 15% describe themselves as ‘open ended’; 4% spend out Is this a true representation of practise?

18

0 1 2 3 4 5 10 50+ years

Organisation age 50 -100 years View long term as

10- 30 years Trustee tenure

5 -9 years

Strategic plan 3 years Grant commitments

1 – 3 years

Monitoring 4 x per year

Investment policy review Annually

Investment mgr review 3 years

Retain investment manager Set investment goals over 5 - 10 years Meeting managers

2 x per year

There’s a risk of change for change’s sake

Trustees: talent and tenure

Managers: monitoring and meetings

Exploring governance further

Source: Focus group participants, Autumn 2017

People matter

19

Investment meetings are ‘groundhog day’

Monitoring as a ‘displacement activity’ Using professionals as a

‘comfort blanket’

What happens on your watch matters as a

trustee Boards can be fearful

about their legacy Anxiety and duty can be confused

Over servicing feeds the addiction

Trustees?

Managers?

What do you think? Focusing people on the long term

20

Survey findings Effective use of time: conflicting messages

21

Survey findings Meetings: is this the right amount of time?

22

Time and Money

Report out June 2018

Appendix: Charity Multi-Asset Fund Performance summary – 31st December 2017

Source: 31st December 2017. DataStream / Lipper, bid to bid, in GBP, net income reinvested. A Share Class, 0.65% p.a. net of fees. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

24

Total returns 5 Years

to 31 Dec

2017

(p.a.)

3 Years

to 31 Dec

2017

(p.a.)

1 Jan

2017 to

31 Dec

2017

1 Jan

2016 to

31 Dec

2016

1 Jan

2015 to

31 Dec

2015

1 Jan

2014 to

31 Dec

2014

1 Jan

2013 to

31 Dec

2013

Charity Multi-Asset Fund +8.1% +7.6% +7.9% +14.2% +1.0% +4.0% +13.7%

RPI +4% +6.5% +6.7% +8.3% +6.6% +5.2% +5.7% +6.8%

Excess return over RPI +4% +1.6% +0.9% -0.4% +7.6% -4.2% -1.7% +6.9%

RPI +2.4% +2.6% +4.1% +2.5% +1.2% +1.6% +2.7%

Excess return over RPI +5.7% +5.0% +3.8% +11.7% -0.2% +2.4% +11.0%

Cash +0.5% +0.5% +0.4% +0.5% +0.6% +0.5% +0.5%

Excess return over Cash +7.6% +7.1% +7.5% +13.7% +0.4% +3.5% +13.2%

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Disclaimers, risk warnings and regulatory status

25

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Disclaimers, risk warnings and regulatory status

26

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