Charitable foundations – Feature

success of active management. We focus our research efforts on inefficient parts of the market,” Joy says. “We seek to cap- italise and extract value from our long- time horizon, our ability to tolerate short-term volatility, our strong balance sheet and our governance structure. “As long-term investors we can engage in opportunistic or contrarian investing, buying assets when others are forced to sell and prices are falling, or by selling when prices are rising. Our tactical asset allocation strategy is aimed at adding value to the fund by improving long- term returns and, in particular, mitigat- ing the risk of drawdowns.” Although a strong part of the process is to be disciplined in implementing a con- sistent investment approach grounded in a clear set of investment beliefs, there has been some evolution in the portfo- lio. “We have evolved over time as a result of the investment landscape. Since the global financial crisis, mar- kets, in our view, have been fragile and prone to bouts of volatility and sell-offs,”

Joy says. “This is the result of a number of factors. For example, the changes in regulations which means investment banks cannot provide the level of liquidity they used to, the growth in algorithmic and quantitative trading and also the fact that interest rates have been anchored at, or close to, zero, lim- iting the ability of central banks to stim- ulate growth in the event of a set-back.”

As a result, the commissioners have created an internal derivative capability to manage investment risk dynamically through time, in what Joy calls “a con- trarian way.”

The health of its financial returns ena- bles the Church Commissioners to con- tinue supporting the church’s vital work in communities throughout Eng- land. In 2019, it contributed around 15% of the Church’s annual running costs. “Our returns were used to sup- port the mission and ministry of the Church, including grants for mission activities, bishops and cathedrals.”

The long view Joy’s focus is on the longer term. “Over a 10-years plus horizon, we think valuation, or the price you have to pay today for an investment, is the most important deter- minant of future returns. We assess long- term return forecasts across asset classes to assess what it is realistic to expect our portfolio to deliver, including and exclud- ing the impact of active management.” Although he offers caution on the invest- ment prospects. “Return prospects are low and delivering our CPIH +4% target in the next decade will be challenging. This is made worse by the whole fixed income spectrum offering low, and in many cases negative, prospective returns, which makes diversification harder.” Therefore, looking to this year, Joy says: “Most commentators and market partic- ipants expected equity markets and risk assets to make further gains in 2021. It would not be a surprise to us if 2021 was a mirror image of 2020, that is strong economic activity but weaker financial markets.”

Case study: Esmée Fairbairn Foundation THE LONG HORIZON

The Esmée Fairbairn Foundation the is

focused on the arts, children and young people,

environment and social

change. Its £1.12bn portfolio is diversi- fied across asset classes, geographies, investment managers and investment strategies, based on a global approach, looking for the best funds, with a target of UK inflation plus 4%. “We try to have half the risk of equity markets roughly. We avoid big draw- downs if possible,” says Matthew Cox, Esmée Fairbairn Foundation’s invest- ment director. “We find active managers with concentrated positions – a fund with 20 positions rather than eight and illiq- uid investments over the longer term.” The key thing for the foundation is this

long-term horizon. “We talk about a 10-year time horizon and things in the endowment that have been there for more than 10 years. Being patient, investing for the long term,” Cox says. “That also means we are happy to invest in things that are illiquid. About a third of our portfolio is in illiquid funds: ven- ture capital mainly and a little bit of pri- vate equity.”

Quite a big proportion is in the US, where it is locked typically for up to 10 to 15 years. “We have been doing that for more than 10 years now and that has been a strong performing part of our portfolio,” Cox says. “That style of investing is probably closer to a US pen- sion scheme than a UK charity. Harvard

and Yale would have a high allocation of illiquid things, so we are not typical of a lot of UK charities. We do not own a lot of property, for example. “We need a high allocation to equities to hit our targets. Our cash levels are the top end of the range, which is about 8% to 9%, and that may come down. We see more correc- tion in the equity markets, which are currently pricing optimistic growth.” The Covid pandemic and other financial challenges should not present the port- folio with problems, Cox says, as it is designed with a 10-year time horizon. “We are less concerned about perfor- mance and volatility during any one cal- endar year – we are much more focused on making sure we are not forced sellers of assets to raise cash at those times. We need cash to fund our grant-making pro- gramme. So, we haven’t changed our allocation as a result of the pandemic.”

Issue 102 | April 2021 | portfolio institutional | 53

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