Charities need to think more broadly about risk, says Barber

Risk can keep us awake at night, so being told we need to embrace fresh risks is probably unwelcome news.

However, burying our heads in sand – or pillows – is not an option. We have a responsibility to identify and continually monitor the risks facing the organisations we represent.

Market risk

A core risk occupying the minds of charity investors has been around equities and capital volatility risk. Six years into a bull market it is not surprising if we have reached the “wall of worry” stage, where investors feel they cannot afford to ignore equities, but fear the future.

For the record, we still think equities have further to go, but we have recently reduced exposure to the US, which is the most expensive of the major regions on valuation grounds and where headline earnings and share price momentum have started to deteriorate. We see opportunities to benefit from quantitative easing in regions like Japan and Europe – though structural problems remain in Europe.

Of more concern to us is what has traditionally been perceived as the much safer fixed interest space, which has experienced a sustained and unprecedented period of strong real returns (*UK government bonds have risen + 6.3% p.a. on average between 1980 and 2010 compared with -0.5% p.a. for the preceding 80 years).

Interest rate risk is probably one of the greatest risks that portfolio managers face at the moment. We do not expect all-out panic in the bond markets but rate rises (or their imminence) could build selling momentum and there is a serious risk of negative real returns.

Income risk

Is your investment strategy aligned with your commitments? Most obviously does your charity depend on the income or total income and capital return of your investments to fund its activities? The Charities Commission now allows more freedom for you to take a total return approach but do you have flexibility in your expenditure levels if your income or total returns do not meet expectations?

Liability risk

For those with pension schemes, how confident are you of meeting your anticipated pension liabilities? This is a serious issue at the moment and one the Pensions Regulator is examining. It is concerned that charities are not giving sufficient thought to aligning their overall investment strategy, combining a strategy for the assets as well as a strategy for the liabilities. An over-reliance on just one side of the equation may raise some concern.

Currency risk: If you have a global portfolio are you happy that your manager has appropriate hedging and exposure strategies in place to exploit favourable currency movements and mitigate unfavourable ones? Typically, we hedge the currency back to the base currency (GBP) of the portfolio to reduce the risk of adverse currency movements undermining positive performance.

Inflation risk: Inflation does not seem so threatening at the moment, but many economists fear that the price of quantitative easing will be inflation further ahead. This will affect asset allocation decisions – you may need assets that are inflation resilient. It is also important to consider the impact of inflation on the costs of a charity. The overall headline government figure may not be representative of the true inflation costs in your particular organisation and this may influence investment decisions.

Concentration risk

Is your portfolio sufficiently diversified to reduce the risk associated with a particular security (individual corporate bonds or equities), a sector (for instance, energy) or asset class (like fixed income) imploding? If you invest in funds, it is useful to understand your aggregate exposure to an asset or asset class; holding multiple funds does not necessarily equate to diversification if there is overlap in the underlying holdings. Equally important is the cross correlation between asset classes. A classic example is that some high yield and emerging market bond funds move in close proximity to equity markets.

Credit/counterparty risk

It is also worth pressing your manager to look at what checks and balances are in place within your investment portfolio to ensure that you are not overexposed to any single bond issuer or deposit-taking institution.

Reputational risk

One word will suffice to illustrate this risk: Wonga. The Church of England’s controversial exposure to the payday loan business was through a fund. It is a further reminder to those responsible for investment decisions to be well informed and aware of the underlying investments you hold, and to consider if an ethical investing policy would be in the best interests of the charity.

Fee risk

Finally, an often-overlooked risk is that of hidden fees. Over the long term they have a significant impact on returns. Do you know all your investment management costs? Is your manager being remunerated for each transaction? Are you getting what you pay for – or still getting what you agreed to pay for – from your investment manager?


Catalogued like this, these risks can look daunting. Perhaps it is easier to think of them as agenda items to be addressed with your investment manager. Remember, too, risk is not always bad. Without it there is little reward.

Nicola Barber is Head of Charities at James Hambro & Partners. She is also a trustee and chairs the investment committee of the Citizens Advice pension scheme.

*Source: Global Investment Yearbook, Elroy Dimson, Paul Marsh and Mike Staunton

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The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.

James Hambro & Partners