Charities feeling financial squeeze demand more proactive asset management
Increasing running costs, turbulent global markets and declining voluntary incomes are putting charitable organisations under more financial pressure than ever, driving them to rethink the role of their investment portfolios
In a challenging macroeconomic environment, charities are exploring ways to make assets work harder to advance their philanthropic goals. While giants like the Wellcome Trust have long enjoyed access to sophisticated private market investments, charities of all sizes are now demanding more bespoke products and active asset ownership from managers.
Increasing running costs, turbulent global markets and declining voluntary incomes are putting charitable organisations under more financial pressure than ever, driving them to rethink the role of their investment portfolios.
"Over the past 20 years, I've seen a real sea change in how people look at their missions and investments," Carol Mack, chief executive at the Association of Charitable Foundations, tells MandateWire Analysis.
"It used to be that [charities] made the investments and then the money was spent on missions. Now there is a growing recognition that what you're doing with your investments can help you to achieve your mission."
As they embrace a new approach to mission-aligned investing, and reimagine fiduciary duty, charities are demanding a new set of opportunities from their asset managers.
Portfolio construction
The size of a charity has a significant bearing on the investments available to it and the degree to which it might fine-tune its asset allocation.
"Larger charities [are more likely] to have a bespoke strategy, be more diversified across their asset classes and have more in-house staff," says Lisa Stonestreet, head of communications and charity impact at the Eiris Foundation.
More investment know-how, and more assets to play with, often enables larger organisations to design more adventurous portfolios.
"[They] have a greater awareness of the benefits of some less liquid assets like private equity or specialist property or infrastructure," says Celia Waring, client investment director at CCLA Investment Management. However, she adds that "smaller charities often have limits on illiquidity in their investment policies".
Similarly, she says, larger charities might be more prepared to take on complex investments such as derivatives, "whereas smaller charities will often just preclude them from their investment policies".
The UK's largest charity by investments, the Wellcome Trust, operates an investment portfolio of more than $52.6bn in assets.
"Our scale allows us access to some great funds that might not be directly available to a smaller-scale investor," says Fabian Thehos, the charity's co-chief investment officer. "[It] also means we can wholly own some high-quality assets, such as the developer Urban&Civic."
Venture capital, an asset class many charities steer clear of, has long played an important role in Wellcome's investment strategy.
"To keep meeting over $2bn a year of spending in a higher inflationary environment, we need some investments that will deliver outsized returns," Thehos says. "[That is why] we have significant exposure to venture capital."
On the other hand, smaller charities are more likely to make use of simpler, pooled, multi-asset strategies, Stonestreet says, as well as maintaining a sturdy allocation to cash.
Impact investment opportunities
However, scale need not be a limiting factor when it comes to aligning investments with a charity's philanthropic goals. There is growing interest among charities of all sizes "to use their whole toolbox to invest across the spectrum of capital", driven by increasing pressure on resources, according to Mack.
Waring says: "In the past 10 years... we are seeing many more investment policy statements with agreed objectives, risk tolerances and, critically, how they want to reflect their mission."
As many charities move away from relying solely on the traditional mechanisms of exclusion and divestment, more are leaning into proactive manager selection and engagement.
In 2021, the Eiris Foundation tendered a £1mn responsible investment mandate, stipulating a positive focus, negative screening, public benefit, high-impact social investments, engagement and stewardship, and environmental, social and governance integration.
"Part of our reason for doing that was to show smaller organisations that they can be just as engaged as larger organisations," says Stonestreet. The investment was divided equally between Castlefield Investment Partners and Snowball Impact Management.
Waring explains that asset managers are now expected to demonstrate "active ownership", meaning "investment managers actually engaging with companies and prompting them to change how they behave".
While performance factors used to dominate the selection process, she says, "now we are asked about active ownership in every discussion with a prospective client".
"We are asked: do you subscribe to the UN [Principles for Responsible Investment]? What's your voting track record? Are you a member of any investor coalitions? Have you created any? Can you give us the engagement stories?" she says.
"It is now one of the main determinants [in manager selection], and I think that is a trend that will continue."
“We are asked about active ownership in every discussion with a prospective client”
Even while ESG concerns have come under fire in the US in the past year, "quite the opposite" trend is occurring in the UK, she observes: "It's almost prompted investors to be more committed and more vocal about what they want to see their investment managers doing on their behalf."
Private equity is also attracting more attention. While typically most accessible to the largest investors, private markets offer the appealing ability to laser-focus on certain sectors for any organisation with a specialist interest.
"More charities are exploring the private equity space, because of the opportunities for direct investment in really impactful companies or projects," Stonestreet says. "That's definitely a direction of travel."
The appointment of in-house impact or social investment managers indicates the increasing desire among charities to scrutinise their portfolios, fine-tune their investments and explore more direct opportunities. The $323mn Shaw Trust is one charity that this year has created an in-house investment manager position to drive its new impact programme.
Scope for bespoke strategies
As a greater number charities take an interest in more complex and tailored investment strategies, there is increasing demand for impact products.
"As a result, there's a growing range of investment opportunities," says Mack. "We're seeing commercial investors entering this space, and seeing the opportunities to offer impact products that I think will accelerate the use of the main endowment for impact investing."
In its 2024 report, the Impact Investing Institute showed that the overall UK market for impact investing increased by $25bn, to $101bn between 2020 and 2023.
And with "a rise in charities asking their investment consultants about [direct opportunities]... we've seen the creation of different vehicles, including more pooled impact vehicles", Stonestreet says.
These strategies can commit to longer-term, illiquid investments, including in pure impact funds or projects, than might otherwise have been available to smaller organisations.
"For smaller charities, the due diligence aspect is an issue when looking at some of the smaller, more bespoke impact strategies," says Stonestreet. Pooled funds can help overcome these issues.
These strategies can also be highly targeted in their investments. For example, Big Issue Invest — an investment company focusing on social impact investing — is soon to launch its $33mn Growth Impact Fund, which aims to support social purpose organisations that have been previously "shut out from social investment".
Reach and returns
The bottom line remains essential for charities, especially at a time when resources are tight. However, an organisation's values are starting to be considered in the same breath as its financial returns.
"[We're] expanding our understanding of what fiduciary duty is," says Stonestreet. "In the past, that might have been almost purely from a financial perspective and longevity of the organisation." Now, though, ethical concerns and ESG topics are an integral part of an investor's long-term planning.
For example, Stonestreet says: "It's part of risk management to consider climate risk to stranded assets, as much as values alignment." In fact, "there's increasing evidence that mission-aligned portfolios or sustainability-aligned portfolios deliver competitive returns".
"A responsible approach to investing is becoming the norm, and trustees are no longer, by-and-large, narrowly focused on financial return," says Mack.
"There's a spectrum: at one end you've got finance-first investment and at the other end you've got pure philanthropic gift. In between, you've got much more nuance and interesting opportunities."