Article last updated 28 January 2026.
Investing with an eye on the future
As investment managers to c3,000 UK charities, with over £9bn charitable funds under management, Rathbones is acutely aware of the concerns of its trustee clients in this difficult financial climate. As James Ayre, fund manager at Rathbones, says trustees are increasingly having to do more with less, and this is affecting the way they approach their investment strategies.
“In the face of inflation, the chief battle charities face is preserving spending power in real terms and, preferably, being able to grow. As they tend to spend their income, they don’t have the capacity that some investors, eg pensions investors, have of reinvesting that income, so effectively need their asset base to generate income to pay the bills but also to grow the capital long term, in the most efficient manner.”
He says that a standard mandate might aim for CPI+4%. But “if we expect inflation to be noisier in the future than it was in the pre-pandemic world – and we have just experienced an extraordinary bout of high inflation – the investments made by charities have to work that bit harder.”
In light of this, are trustees still maintaining a focus on responsible investment (RI)?
Recalibration around RI
Kate Elliot, head of research at Rathbones Greenbank, says she is seeing a recalibration of trustees’ concerns but not a wholesale throwing out of responsible investment.
Trustees need to look at ESG factors and where they present financial risk and opportunities. “There is a refocusing on areas that are of critical importance to individual organisations, and their values and mission. And ensuring that RI policies and any restrictions imposed by them are appropriate. Trustees know they must balance the financial returns needed for the continued day-to-day operation of their charity with the need to make sure they manage risk, particularly reputational."
“Charities are operating in an increasingly scrutinised environment and need to ensure they are not alienating their beneficiaries and supporters. We have seen a re-evaluation of where some of those policies might fit and a sharper focus on the elements that are of core importance to each organisation.”
Ayre says this is definitely leading to a shift in how lots of charities are structuring and managing their long-term portfolios; particularly noting a growing trend to favour pooled products over segregated solutions. “That’s not to say that large endowments, and indeed smaller ones, don’t maintain segregated portfolios. But we have seen a growth in pooled funds designed specifically to meet charities’ needs – and with Charity Authorised Investment Funds (CAIFs), a requirement for managers to calibrate strategies around a total return approach, particularly in how income is delivered.
“In terms of asset allocation, these things evolve slowly although we have seen a trend over the last decade towards a more global approach to investment management. It is increasingly rare to see significant home bias in charity portfolios. Equities generally form the largest part of an allocation. Historically, bonds would have possibly been a smaller element given the real-return focus of the mandates. Fixed income prior to the pandemic was generating meagre returns relative to a CPI target. But today you can access the bond market for attractive returns. Therefore, fixed income is likely to feature more in a portfolio. However, I would note that fixed income is a poor proxy in a long-term sense to a CPI plus real-return type mandate because of the nature and structure of the asset class, so real estate and infrastructure are increasingly used. Finally, private assets and access to alternative strategies that offer genuine diversification are also key.
Current versus future
There is an ever-present challenge for trustees in managing the tension between current and future beneficiaries. How can trustees strike that balance, while appreciating that it will be different for each organisation?
Charities with high income needs should think about how best they can access a strategy like that over the long term, advises Ayre. “That might be through a focus on natural income and a direct investment in stocks and assets that are able to generate consistent and growing income – and certainly income is an important overall component of total return investing. But reaching for income where companies are high-yield can sometimes signal distress. It is not wise to have a strategy that reaches too high for that income only to suffer an impairment of the capital base. It is quite an important trade-off for any charity to consider when setting an income target."
“A total return approach which distributes income and a portion of capital, but doesn’t necessarily preserve the underlying investments when reaching for that income, is an unhelpful approach for charities. Managers love to talk about total returns, but actually charities should be focused on what income they receive and what their capital return is, because that is ultimately where the growth in their underlying capital base is. It comes down to financial maths. You can’t have your cake and eat it.”
Systemic risks
What about systemic risks? Elliot considers that these are very important, particularly for long-term investors. There has been growing awareness building over recent years of systemic risks that impact whole economies, and potentially whole financial systems globally. These are impossible to diversify away from. They are not idiosyncratic company-specific risks that can be managed within a portfolio. When boards have a long-term view of investment, it is imperative that these risks are built into their thinking.
Says Elliot: “If we take climate change as one of these systemic risks, a report published by the International Chamber of Commerce looked at the economic impact of extreme weather events, which over the decade to 2023 was more than $2tn in economic damage. We know from the science that global warming and climate change are increasing as a severe risk. The frequency and intensity of these events will only rise. Regardless of your views about climate change, and any value or ethical considerations you have, the financial imperative and materiality of it is absolutely clear. The same can be said for broader systemic risks such as biodiversity and nature loss, and inequality. There is a growing understanding in investment communities of the need to build these into long-term risk management.”
Aligning investments with mission
How can RI approaches help trustees align portfolios with mission and values? For Elliot, it is fair to say that there’s a growing toolbox that charities can use for RI. “It is not necessarily one-size-fits-all,” she argues. “It is about identifying the elements which will align to a charity’s ethical or sustainability objectives
in addition to their financial ones. Absolutely core and a minimum requirement across any RI strategy is ESG integration. Trustees need to look at ESG factors and where they present financial risk and opportunities for investors. It’s just taking a broader lens to analysing long-term potential, but other tools are available as well.
It is increasingly rare to see significant home bias in charity portfolios. “These include activity-related exclusions such as no defence or tobacco, or qualitative operational exclusions such as avoiding breaches of UN global compact principles. Another tool many charities would like to use is engagement and stewardship – mandating their managers to have dialogue with companies, policymakers or with wider industries to address issues of concern or push for positive change.”
Future trends
Finally, what emerging trends or themes will shape the next decade or so in charity investment? Ayre suggests that societal needs and pressures will mean that there is greater onus than ever on charities to deliver support and provide services and critical infrastructure.
Elliot says that fundamentally, charities exist to make the world a better place, and they can do this through the whole range of their activities. “Perhaps they can have a really deep impact on the social and environmental challenges that they are helping to solve by recognising the potential, through partnership
and building coalitions, to amplify their voice and push for the systemic changes that will make the responsible choice the default choice – whether that be from investors, businesses, or individuals. That systemic change will only happen and will only be bedded in when those in the ecosystem of change-making align. They may have different individual priorities, but at a high level (ie improving social and environmental outcomes and the objectives of charities themselves), they should all be aligned and be broadly pushing in the same direction. Finding partners, whether they be investment managers or peers, within the charity community who are aligned with their values, is important for charities to accelerate and amplify that change.”
This article was first published in Charity Finance.