Charitable foundations – Feature “Diversification remains important,” he adds, “especially

between the value and growth investing styles. But we will stick to our long-term asset allocation and our general agnosticism about the market outlook.” Joy says that diversification is key here. “Covid-19 has clearly had a huge and devastating impact on the way we live, but nothing material has changed in our investment approach,” he adds. “We aim to be genuinely long-term and rely on genuine diversification to help manage shorter term risks. This strategy helped us navigate the volatile markets we experienced in 2020 as a result of Covid-19.”

The impact of the pandemic may not be completely negative, Joy says. “We think that Covid-19 has had a positive effect on our engagement efforts and enabled us to develop stronger links with other investors who we collaborate with on engage- ment and the companies we invest in.” And on the political and economic developments to shape the investment outlook over the next year, Brooke Turner says: “Climate change will become ever more built into markets. Inflation will remain a topic of concern, but investors need to be clear whether they are worried by global or UK inflation, and why.”

Case Study – The Nuffield Foundation RETURN MAXIMUS

The Nuffield Foundation aims to improve social well-being by funding research and innovation projects in edu- cation and social policy and building research capacity in science and social science. As the end of last year, the foun- dation’s investment portfolio was worth £466m.

The approach behind its investments is simple: 10% in short-dated gilts, 70% in global equities and 20% in private equity. “We think of it as a 90/10 portfo- lio,” says James Brooke Turner, Nuffield Foundation’s investment director, who sums up the approach as “return max- imising, volatility tolerant”. “Making as much money as possible must be a natural ambition for any char- itable investor, constrained only by their risk appetite,” Brooke Turner says. “We spend a lot of time thinking about our risk appetite and how we can maintain it at a high level. When bad times come, we rely on having sufficient liquidity to see us through, hence the gilts, and robust governance.”

Moral liabilities But he stresses that foundations are not the same as insurers or pension schemes. “Endowments are different to other investors because they only have moral liabilities, not legal ones. We are

free to expand or contract our pool of beneficiaries as circumstances dictate. We are never subject to actuarial reviews or triennial valuations, so asset stability is unnecessary. We spend about 5% of a smoothed asset value which we review every five years or so.” Looking at Nuffield’s approach in more detail, Brooke Turner notes the impor- tance of equities. “We think that as a long-term investor, equities are the only asset that we can afford to hold because they will give us a degree of inflation protection and a reasonable amount to spend – about 5%. “Other assets do this too”, he adds, “but our governance budget is limited so we stick to a few asset classes and try to understand them well. “We delegate as much as we can to man- agers who we trust and who we think are benchmark agnostic long-term inves- tors. I sometimes think the portfolio can be segmented as 10% in returns to safety [gilts], 20% from ingenuity [private equi- ty/venture capital] and 70% from global economic activity [public equity].”

High risk “People often think of our portfolio as very high risk, but we don’t,” Brooke Turner says. “So long as we hold our nerve through difficult times – which we

have so far – it should perform well.” The underpinning of the portfolio is hav- ing absolute safety in its cash holdings. “Hence, we directly hold short-dated UK gilts from which we expect no return, insignificant capital loss and no counter party risk. With that core in place, we are prepared to take plenty of risk with the rest of the portfolio,” he adds. Brooke Turner looks for diversification in global equities by using five manag- ers, all appointed because their styles are “orthogonal” to each other. “We rebalance from the best to the worst per- formers – which has been painful recently with the value/growth hiatus. We do not hedge currencies back to the British pound, in part, because we see an unhedged position as a good counter- weight to higher UK inflation.” Such an approach has existed to benefit the foundation’s aims and objectives. “We have used roughly the same policy now for about 18 years, through peaks and troughs. It is very settled, as is the governance, which, is critically important.”

The proof of the pudding is in the eating as they say, and this policy has proved highly effective: returning about 10% a year for the last 10 years. “We are cur- rently spending at about 5%,” Brooke Turner says. “Our charitable purpose runs across four main policy areas: bio- ethics, data ethics and inclusion, the UK family legal system and education policy.”

Issue 102 | April 2021 | portfolio institutional | 51

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