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Leading charities are increasingly turning to active fund management as they seek to support long-term return objectives. This is according to a new study* from Rathbones Group, a leading UK wealth and asset management firm, and one of the UK’s leading charity wealth managers.
The survey of senior executives at charities with a collective £5 billion of stock market related investments found 71% say allocations to active strategies from their investment portfolios will increase over the next three years, with 11% predicting a dramatic increase. Around 29% say allocations to active will remain the same over the period and none plan to reduce allocations.
Key reasons for the shift include the potential for stronger returns, increased transparency among active managers and the role active strategies can play in helping charities manage volatility, according to respondents. Nearly seven out of 10 (69%) cited the potential for stronger returns driven by the technological and data revolution, which is equipping active managers with greater insight, as one of their three main reasons for increasing allocations.
Nearly two out of three (63%) highlighted greater transparency and volatility management among their top three, while 55% said ongoing volatility could create opportunities for active managers to outperform passive strategies and 49% pointed to the drop in fees at active managers as a reason to switch.
Rathbones research found that on average charities questioned currently have around 40% of their investment portfolios allocated to active strategies. Around a fifth (22%) have between 50% and 75% of their portfolios in active strategies.
The findings suggest the move towards active management is taking place alongside a broader reassessment of asset allocation, as charities seek a balance between capital growth, diversification and risk management.
Almost all (99%) have some of their investment portfolio allocated to UK equities with an average of 20% allocated to the asset class. Around 62% have increased allocations to UK equities over the past two years while 63% have done the same with non-UK equities.
The research found that allocations to private markets and alternatives have seen the most charities increasing allocations – almost nine out of 10 (89%) have boosted private equity allocations while 86% have done so with hedge funds and real estate. Nearly three out of four (72%) have increased allocations to renewables while 70% have done so for UK fixed income and 78% have done so for non-UK fixed income.
Respondents expect the shift to continue over the next two years, with almost all (98%) increasing allocations to private equity and 92% to hedge funds. UK equities are more mixed, with 68% planning to increase, 4% planning to maintain, and 28% planning to reduce allocations to the sector.
Changes to asset allocations are being driven primarily by a drive for capital growth, chosen by 56%, and improved diversification, chosen by 55%, while 31% are changing to reduce volatility.
James Ayre, Head of Investment for Charities at Rathbones, said: “Investments are central to the finances of many charities, and organisations are increasingly focused on how portfolios can support long-term returns while continuing to reflect their ethical objectives.
“The current investment environment, together with developments in active management — including better data, technology and research tools — appears to be strengthening the case for active strategies. For many charities, this is also taking place alongside a broader reassessment of risk and diversification.”
The findings also suggest risk appetite among charities is increasing. More than half (53%) of respondents say their risk appetite has increased in the past two years, compared with 25% who say their appetite has decreased. Over the next two years, 63% believe their risk appetite will increase compared with 27% who say it will decrease.
The main reasons given for an increased risk appetite are the need to generate stronger returns and an expectation that increased volatility will present opportunities, both chosen by 56% of respondents. Almost half (49%) are expecting strong market performance.
Among those saying their risk appetite is falling the main reasons given by 67% was their focus on ESG restricting where they can invest, while for 63% it was volatility with more than half (52%) braced for a market correction.
The table below shows how the charities surveyed plan to change allocations to asset classes over the next two years, with most increasing allocations to private equity and hedge funds.
| Asset class | Increase allocation by up to 5% over next two years | Increase allocation by between 5% and 10% over next two years | Increase allocation by between 10% and 20% over next two years | Increase allocation by more than 20% over next two years | Maintain allocation | Cut allocation by up to 5% over next two years | Cut allocation by between 5% and 10% over next two years |
| UK equities |
11% |
36% |
15% |
6% |
4% |
28% |
Zero |
| Non-UK equities |
31% |
19% |
16% |
4% |
3% |
3% |
24% |
| Private equity |
24% |
40% |
21% |
13% |
2% |
Zero |
Zero |
| Hedge funds |
27% |
29% |
24% |
12% |
8% |
Zero |
Zero |
| Real estate |
33% |
27% |
19% |
9% |
10% |
2% |
Zero |
| Renewables |
20% |
29% |
23% |
4% |
18% |
2% |
4% |
| UK fixed income |
19% |
32% |
20% |
6% |
13% |
5% |
5% |
| Non UK fixed income |
9% |
35% |
24% |
7% |
13% |
10% |
2% |
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