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

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

3. Part 1: our duties and obligations

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

6. 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

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

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

9. 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

10. Part 2: what are the risks for us charities?

11. Source: The Onion

12. Is risk a person?

13. “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

14. Is risk a number?

15. 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.”

16. Is risk a financial model?

19. 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...

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

21. 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

22. 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.

23. 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

24. Part 3: Deciding what to spend....

25. “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

26. Nuffield’s benchmarks

27. Perpetuity, like unicorns, doesn’t exist

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

31. 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

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

33. 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

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