Interview – Nuffield Foundation
society will have bigger problems – and we expect that to help us ride out short- term volatility.
The next part: 70% in global equities, we have no particular insights into which part of the world is going to do better, so we choose global managers. We cannot diversity away from equities because of inflation, so we try to diversify within the asset class. So, we have five equity managers who are appointed because they have completely different styles of investing to each other. When we look for a manager, we look for someone who is orthogonal to other man- agers, so none of the managers should be correlated with each other.
They should be uncorrelated but not nec- essarily negatively correlated. We keep them the same size and rebalance annually. We take profits from one to give to underperforming managers. This has worked against us recently because growth investing has attracted a premium and value investing has suf- fered penalties, but that is the process we use. We benchmark all this to 90% equity, 10% short-dated gilts and have beaten that over 19 and 10 years, respectively. We put private equity in because the extra returns compensate for the low returning cash we have to hold. Effectively, the whole portfo- lio is trying to deliver as much as it can, because of our volatility tolerance. And the important point here is we do not have liabilities, we just hand out grants. If we want to stop paying money, we can stop paying money. For us, it is better to have trustees who can hold their nerve in a crisis than a lower volatility, lower returning portfolio.
Do you see any reason to change your approach?
Because we have done it the same way for so long, I keep thinking we must change it. A few years ago, we put a small amount in a hedge fund portfolio to see if it would return more than our gilts. It didn’t. It
14 | portfolio institutional | February 2022 | issue 110
We do not have liabilities, we just hand out grants.
was quite complex to manage as well, so we dropped it.
When you look at inflation, which is our main worry, the answer is going to be equities and real assets. It is difficult to see how we would change our current equity dominated portfolio, unless bond yields really change.
How do you view the current inflationary environment? We tend to think about the portfolio in terms of its duration, not just the bond component. We aim to be neither long nor short duration. Inflation is clearly a worry, because it is going to affect our cost base, but what is confusing about infla- tion is it is a relative question. You have UK inflation, which affects how much we have to pay to do our charitable work, then there is inflation in other countries, notably the US, and they are different numbers that affect how we earn our money. The combined effect is on how we spend and invest and is driven by our assets basically being 70% nominated in dollars. It is a non-UK portfolio, and we hope that holding non-UK assets might be some form of mitigation against high UK inflation. Benchmarking our assets against infla- tion is central to what we do. What we did a few years ago was important: we chose a number that represented the foundation’s wherewithal and set an objective to main- tain that number as the real value of the
foundation. We indexed that number against our experience of inflation – and we have a number now which we know the portfolio should be worth had it kept pace with inflation. If the portfolio is higher, than that it is okay and we can spend more. If it is lower than that it is okay, as long as it is within a volatility boundary of 16%, otherwise we will have to spend less.
As long as the assets are within that range we are happy. If inflation reduces the level of assets we have, we might have to think more about our spending. Or if the index line goes up a lot, because of inflation, that also affects how we spend. It is deter- minative about how we think about our spending. At the moment, we are so far in excess of where we ought to be. And what makes a charity is what you spend. It does make our tolerance volatil- ity very high, because we do not regard the highest value of our portfolio as our normal value. In a sort of Boris Johnson way, many peo- ple seem to believe that the most money you have is also the normal money to which you are entitled – the point being believing two contrary things at the same time. We get away from that by regarding a different number, and that is what we should have.
Are you looking at anything new in your portfolio going forward?
Like everybody else, we are looking at how to incorporate ESG. We are not looking at new asset structure.
classes. We have a
But you adopted an ESG investment approach about 20 years ago. Why was that important?
It was just before I arrived at Nuffield. We adopted it because the Charity Commis- sion required charities to specify if they had an ethical policy. We decided not to invest in tobacco. Interestingly, not because tobacco was bad for people, but because the industry had abused the
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