This year’s charity investment survey from Newton gives some insights into the world of charities as investors, highlighting that 2022 has been a challenging year.
Many charities continue to feel the impact of the pandemic, while widespread concern over inflation, a cost-of-living crisis and geopolitical uncertainty have provided a challenging backdrop for investment strategy and performance.
A key statistic is that 12% of charities have seen their portfolio lose value during 2022 – 10% higher than the previous year.
As a result of this backdrop, there has been a rise in returns of 3% or lower, while charities seeing a rise of more than 15% has declined to just 3% from 30% in 2021.
Like other institutional investors, inflation is the main concern for charities, and by a significant margin. More than 75% state that inflation is very concerning, and almost all (99%) charities are at least somewhat concerned about the subject.
Despite this, putting alternative investments in charity portfolios is not seen as attractive, continuing to fall this year – the seventh consecutive year – with only 31% of charities using alternatives.
The proportion of charities that would consider alternative investments in the future has also declined. Only 35% of charities who do not use them would consider including them in their portfolios in the future – a 5% fall from the previous year’s survey.
Although Bfinance found that those charities that have embraced alternatives this year saw their portfolios hold up better compared to those peers who rejected hedge funds.
In charity investment portfolios overall, overseas equities remain the most commonly held asset, accounting for an average of 37% of portfolios. The second biggest is UK equities with 32%, meaning charity portfolios have an average equity holding of 69%.
There has though been a decent decline in the holding of property – down from 11% in 2021 to 7% – and a proportionally similar fall in overseas bonds, down to 3% from 5%.
Interestingly, allocations to UK bonds has remained stable at 8%.
Positive outlook
Despite the gloomy economic and investment outlook, charities nevertheless remain positive over the medium and long term, with higher return expectations for the future.
More than 80% of charities expect an average return of more than 3% during the next three to five years, while 36% expect returns of between 6% to 9% per annum during the next 10 years, and the number expecting returns higher than this has also grown.
In other areas, some investment trends remain unchanged. Responsible investing and ethical considerations continue to be important topics for charities as they come under increasing pressure from stakeholders.
Charities continue to acknowledge the importance of environmental, social and governance (ESG) factors in the management of their portfolios.
In 2022, 87% of charities felt that ESG factors are either very or quite important in the management of their portfolio.
Engagement is the most popular way of considering ESG factors – chosen by 59% of charities, compared to only 27% that prefer divestment.
Although fossil fuels remain a key area of contention within sustainable investment, and 2022 marked a significant change in how charities are approaching the topic.
The proportion of charities excluding the area has remained relatively stable at 29% after last year’s increase – but the number debating the issue and considering future action has risen to a third of charities.
On the issue of diversity, this year marked the second consecutive year in which the proportion of charities feeling that diversity is adequately reflected on their board has fallen.
After rising to 44% from 38% between 2018 and 2020, it now stands at 36% – down 3% from last year.
Charities are now increasingly likely to demand that their business and investment partners demonstrate diversity within their organisations. This has risen to 62% this year – up from more than half in 2021.
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