Whose money is it anyhow? James Brooke-Turner Nuffield Foundation

Agenda What are our duties and obligations? What is ‘risk’ for us charities? Deciding what to spend?

Part 1: our duties and obligations

It’s not our money It’s for someone else What’s best for them?

Some important insights Prudent and loyal Perpetuity is usually a choice, not a default Use entire balance sheet for beneficiaries Beneficiaries, not donors, matter Take advice, if it can help Trustees are supreme in deciding what’s best

It’s not our money It’s for someone else What’s best for them?

Pension funds and charities are different – so should be our approaches

Part 1: summary Charities start and end with spending Other investors start and end with money Only charity trustees can (and must) decide when it is best to spend, and when to save

Part 2: what are the risks for us charities?

Source: The Onion

Is risk a person?

“It’s like herding cats” “They change their minds very easily. On the one hand they say they want an extremely safe option because they’ve got to start building work in September, but at the same time they feel they should have their money in Chinese equities because they read it in the Daily Mail.” Source: Third Sector: “What investment managers really think about trustees” 20 April 2010

Is risk a number?

On the other hand... “Investment managers don’t make it easy for trustees. We stand there in pin stripe suits and braces waffling about alpha returns and price/earnings ratios, while the trustees sit around without the slightest idea what we’re talking about.”

Is risk a financial model?

For a long term investor the “riskiest” assets are the safest Short term Long term Safe assets Bonds Equities Dangerous assets and they return the most too...

Nuffield Foundation’s investment objectives - Make as much money as possible Don’t run out of cash when we need it Keep our nerve

Liquidity Risk Annual spend 4% Yield on portfolio 2% Annual capital sales required Period of required spending certainty 5 years ‘Liquidity reserve’ 2% capital sales x 5 years = 10% Investment strategy 10% Gilts; 90% global equities Result Liquid, high returning, volatile portfolio

A fundraising charity Reserves policy: “to fund six month’s expenditure” thus anticipating a catastrophe by assuming all income stops overnight. Investment policy: 70% in equities thus anticipating a benign outlook so is this the best way to invest this money? Armageddon or a benign outlook? Which is it? Reserves and investment policies should be consistent if they are to be credible.

Risk is difficult to define. We should: Part 2: summary Risk is difficult to define. We should: think about risks that make sense to us be careful of definitions provided by others who are less familiar with our world be explicit about what we are trying to do

Part 3: Deciding what to spend....

“How much should we spend. 3%, 4%, 5% “How much should we spend? 3%, 4%, 5%?” Is the WRONG question “How much do we need to keep” Is the RIGHT question

Nuffield’s benchmarks

Perpetuity, like unicorns, doesn’t exist

Don’t obsess about preservation At least we preserved the endowment

Part 3: summary We often misunderstand our own risks, and use someone else’s instead A symptom is using the wrong benchmark Only we are in a position to explain to advisors what are our actual risks They should be able to devise the right benchmark, and investment policy

What makes us charitable is what we spend, not what we keep. We need to know why we keep money from our beneficiaries

We should be able to reject these options: We need not spend out, but we must ask if the money we retain is being used effectively. We should be able to reject these options: preserving nominal, not real, values setting deficit budgets growing our endowment in real terms investing in assets closer to our beneficiaries

It’s not our money It’s for someone else What’s best for them?