Endowments, charities and foundations have objectives beyond the financial returns of their investments, but that does not mean investment performance should be relegated to a secondary concern. For many organisations, the scale of their assets can give them real financial clout when it comes to the investment services and specialisms they receive – and, they should use it.
By Maria Johannessen, Head of UK Investment at Aon
The UK’s not-for-profit sector is a significant financial force. The UK’s 300 largest endowments have an estimated £84 billion in investments; adding other charity assets to this figure takes the total to well over £100 billion. With this kind of investment capability, not-for-profits have considerable leverage when negotiating fees – but I worry that some organisations with sizable investment portfolios may not fully realise their own bargaining power.
The definition of a not-for-profit organisation under UK law is an organisation with a purpose that is of public benefit, which includes a wide range of objectives from poverty relief or improving education to environmental or animal protection, among many other causes. What fuels and enables this work is assets.
When it comes to managing and investing the assets, these organisations should expect – and certainly deserve – the same sophisticated and cost-effective investment advice as any hedge fund, billionaire family office or global insurance giant.
Trustees understand this and are bound by regulations to ensure sound financial and asset management of the funds they oversee. But are they always served as effectively as possible in this endeavour by their commercial advisers and investment managers?
Financial ambition supports public objectives
As a member of the investment committee at a well-known charity I know that efficient financial management and advice is available to not-for-profit organisations and that many apply rigorous investment strategies. But effective financial management requires eternal vigilance from trustees and their advisors; to do otherwise risks undermining the financial ambition that allows not-for-profits to sustain and expand their work.
Investment challenges faced by these organisations are, in most respects, the same as those faced by institutional investors – most obviously higher inflation, higher interest rates, financial market volatility and uncertain economic growth.
Endowments, charities and foundations of all sizes should seek out, and be able to access, the absolute best in investment advice and services, allowing them to achieve the same standards of capital preservation and income generation expected by the most profit-driven professional investors.
Naturally there are caveats to this, as not-for-profit organisations often have objectives that extend beyond solely generating a financial return. Aligning investments with purpose is a core focus and, under UK law and in certain circumstances, some can make ‘social investments’. These are investments that directly further their public benefit and are made with the full understanding that that may not achieve an optimal financial return – or may even deliver a negative return.
Of course, investments aligned with a non-financial purpose don’t automatically lead to poorer investment outcomes. However, this does not undermine the core point, as social investments that may not be financially optimal are only made possible by effective investments elsewhere.
Whether or not organisations wish to make such social investments, they will often invest with broader Environmental, Social and Governance (ESG) issues top-of-mind, aiming to invest in alignment with their charitable mission. In my view, such an approach is complementary, not contrary, to optimising financial returns.
Additionally, the availability of ESG-focused investment offerings is rapidly advancing and the ability to properly scrutinise and evaluate any non-financial impacts of these funds often requires expert opinion. Not-for-profit investors deserve the same level of due diligence and oversight from their advisers on these matters as received by other institutional investors.
Aim high for investment success
While not-for-profit organisations have a mission that brings extra dimensions to their investment strategy, they can still aim for the very best in investment performance like other profit-focused investors.
Each organisation has its own unique objectives, need to increase capital or generate income, investment timeline, risk tolerance, governance budget and responsible investment goals determined by the nature of its charitable mission. Advisers and managers should be able work within these parameters and still deliver the highest standards of investment advice and execution.
The valuable work they undertake should be supported with the best possible value from their investments. And, the best investment solutions combine their circumstances and bespoke objectives with sophisticated solutions, aligning investments to produce a cost-effective outcome that meets the organisation’s needs.