Investment
A downward spiral?
What does the downgrading of the UK by credit rating agencies actually mean? Does it spell disaster? Caroline Jarvis looks at the detail to understand what it might mean for investment opportunities
Recently, when waiting to be seated in a restaurant, I observed someone in the queue looking around the packed dining room and remarking to her companion: “So this is what a bad economy looks like.” Several weeks prior, on 22 February, Moody’s credit rating agency downgraded the UK from AAA to AA1 with a stable outlook, citing a weak mid-term forecast for growth, slow change in debt reduction, and high and rising Government debt to GDP ratio. However, now that our rating has been downgraded, rather than the cataclysmic shift across the global economy that some might have anticipated, any change seems, thus far, lacklustre.
Bricks and mortar
Commercial property has been a feature of many school endowments and charitable portfolios for a long time. Heather Lamont reviews the prospects of investment opportunities in what is currently a healthy market
While some institutions own and manage substantial property portfolios directly, most investors thinking about commercial property for the first time, or those who want to keep the proceeds of a building sale in the property sector, are likely to seek broader exposure to the sector through one or more pooled funds giving access to a diversified range of individual properties. But even taking this indirect route to investment, you still need to understand fully why you’re buying it, what you’re getting, and whether you’re buying at the right time.
Stormy weather?
The outlook for investment may be showing signs of sunnier days, but the clouds still hang heavy in the sky. Heather Lamont forecasts a patchy improvement, with a mix of sustained sunshine and bursts of heavy rain
What can investors expect in 2013? As ever, it’s impossible to give a confident forecast of how most individual markets or investment assets may perform. But what we can and should do as investors is consider the big questions facing the UK and world economies; how various assets may respond depending on how those uncertainties are resolved; and ensure that our own funds are positioned to reflect the risks that are relevant to our particular circumstances.
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New ventures
Bob Cook reports on how he became involved in the setting up of Radnor House
An invitation arrived to set up and front the UK’s first venture capital independent school: feelings of excitement, challenge and the unknown arose. The investors, who had poured £9 million into the project, had bought a historic building on the banks of the Thames in Twickenham, formerly the site of Alexander Pope’s mansion, with the unique feature of Pope’s Grade 1 listed Grotto for good measure.
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Doing the right thing?
After the negative fallout from investment choices that have severely damaged global finances, can socially responsible investment restore confidence and bring strong returns to your portfolio? Ian Allsop reports
The debate over socially responsible investment (SRI) has been a healthy but sometimes polarising one in the charity sector over the last twenty years. What was seen initially as a matter of negative screening – alcohol abuse charities not investing in drinks companies, cancer charities avoiding tobacco stocks – has moved into other areas such as mission-related investing (MRI). This can range from, for example, an environmental organisation investing in renewable technology to endowed foundations lending money to Charity Bank, where they expect a return but also want to see their money being used for charitable ends by other charities. While some charities have embraced SRI and MRI as an integral part of not only fulfilling investment but also charitable objectives, for some there is a clear desire to keep mission and returns separate.
The investment clinic
The quantitative easing programme has put more than £375 billion into the financial system to bolster the UK economy. Some schools are concerned about the effects on their investments. Caroline Jarvis answers their queries
Q1: What is quantitative easing (QE) and how can it help the economy?
Private concerns
The UK is among the highest spenders on private education at secondary level.
Almost a quarter of all public and private spending combined is channelled
privately. Danny Dorling queries Britain’s investment in independent schools
A couple of years ago, there was only one OECD country that spent a higher proportion of its education monies in this way: Chile. Chile is not often listed as a country whose education system one might choose to emulate. But Chile is a very economically unequal country, and so is the UK. In the UK, the best-off 10 per cent take roughly 40 per cent of all income.
The balance of risk
How much risk should you take to meet your financial objectives? This question is especially important for schools and other charities where their portfolios provide vital income to fund operating costs and bursaries, writes Chris Hills
The most important thing to understand is what risk truly is and how it can be differently interpreted. Once this is established, you can then decide the optimum structure to meet your capital return and income requirements.
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The investment clinic
In his latest case of a financial and investment problem faced by an independent school, Chris Hills reviews the likelihood of a solid income from Government bonds in the light of a possible rise in interest rates
Q: Our investment portfolio is heavily skewed towards Government bonds to provide an income for bursaries. One of our governors has questioned this policy in the light of higher rates of inflation and what might happen if interest rates rise. Is this something we should worry about?
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For the greater good
When the financial markets are unsettled, is it still possible to get good returns when investing responsibly? Amanda Young examines the key factors in environmental, social and governance issues that you should consider
A responsible approach is vital for investors who wish to maximise long-term returns in today’s challenging investment environment. Put simply, companies that identify and manage corporate governance and social responsibility issues on a consistent and holistic basis are well placed to meet investors’ long-term financial objectives.
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The investment clinic
In the next in his caseload of financial and investment problems faced by independent schools, Chris Hills considers the options for a school hoping to maximise its returns on its substantial cash holding
Q: We have historically held a fairly large cash reserve for the school which used to give us a steady stream of income and a rainy-day fund in case of any difficulties. With interest rates so low, the income has fallen substantially and we need to look for different ways to generate higher returns on our money. There is reluctance among governors to invest the assets in a traditional, balanced portfolio as we are aware that this would expose us to the risk of losing capital. What are the options open to us?
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The weather with you
Signs of improvement in the markets offer some cautious promise for investments. Tracy Collins provides an overview of global markets and identifies some of the strengths and weaknesses for investors
The past three years have seen the worst global economic crisis since the 1930s. However, the extraordinary stimulus initiated by western governments in 2009, by way of aggressive fiscal and monetary easing, paved the way for 2010 to turn out to be perhaps a surprisingly good year for investors, given the wide swings in sentiment the year entailed.
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The investment clinic
In the first of a new series of specialist investment advice in response to queries posed by independent schools, Chris Hills outlines the different ways that a school could allocate the proceeds of an unexpected windfall
Q: Our school has been left a legacy of £500,000. Governors are torn between using the funds for one-off building repairs and investing them to give a regular return in the future. Is it a good time to be investing and what returns would be achievable if we did?
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Bidders required for investment in two new schools
Education investors are being sought to invest in two new schools to be built by The Ballymore Group in creatively regenerated areas of London Docklands.
A new nursery and prep school is due to be constructed alongside the River Thames, opposite the O2 Arena at the property developer’s Leamouth Peninsula development in the London Borough of Tower Hamlets. While in nearby Newham, a school potentially catering for pupils aged four to 18 will be built close to the heart of the new Minoco community.
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Jump in the pool?
When implementing an investment strategy, what are the pros and cons? of taking a pooled or a segregated approach? Richard Maitland explains which of the different strategies will be most appropriate for your school
While there should be a clear distinction between a “pooled” (using funds to implement investment policy) and a “segregated” (owning positions in individual stocks, shares and bonds) investment, in the charity sector the water has been muddied. Specifically, many charity investment managers offer what they call a segregated service when what they really mean is a “semi-segregated” service. This typically involves investing directly in Government bonds and UK equities and in a selection of unit and investment trusts, where allocations are made to overseas equities, corporate bonds, property and other peripheral asset classes such as hedge funds and private equity.
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Budgeting for investment income
How easy is it to predict investment income receipts from the coming year? Heather Lamont explains what might be in store for your school
For many schools, income from investments makes up a vital supplement to fees, whether it’s to fund bursaries, operational or development costs. But it is harder to forecast than fee income. What can you expect for the year ahead – and if you don’t like the answer, is there anything you can do about it?
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The real deal
The battle against climate change in real estate construction is an economic opportunity as well as a necessity, writes Jakes Ferguson. Investment opportunities in the sector will bear fruit for shrewd investors
The real estate sector offers the biggest potential for reducing energy consumption and preventing greenhouse gas emissions, and therefore the sector can play a key role in combating climate change.
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Across the pond
Many UK charities have been attracted by the returns achieved by some US universities, in particular during the 2000-03 bear market. But how has the most recent bear market affected portfolios? Richard Maitland reports
The majority of the larger US endowment funds has significantly higher exposure to hedge funds, private equity and other illiquid but “real” assets than their British and European counterparts. During the 2000-03 bear market, this served them well.
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Opportunities for sale?
Despite poor market results in other sectors, UK property still holds an attraction for charity investors. Andrew Allen reports on the opportunities and explains why it should form part of every charity’s investment portfolio
The UK economy has had a difficult period in the last 18 months, with a sharp and deep recession impacting across all parts of the market. The UK property market has been hit hard and values have tumbled across all property sectors. There are signs of stabilisation with potential recovery emerging, albeit commercial property prices are now around 45 to 50 per cent lower than June 2007 (Investment Property Databank or IPD, the independent performance measurement company).
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Jam tomorrow?
While economic woes appear to be getting deeper as 2009 wears on, how will school investments fare? John Kelly reads the long-term signals and assesses the impact of the recession on the UK and global economies
The current downturn in the economy has surprised observers by its speed and severity. Since the end of the third quarter of 2008, output levels have simply plunged and although forecasts have been reduced in an attempt to keep pace with the new reality, these changes have been late, reacting to events rather than anticipating them.
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Doing the right thing
Ethical investment keeps pushing its case despite economic pressures to chase profits at any cost, writes John Kelly
Ethical investment strategies have not historically been a major concern for independent schools. In substantial part this is because the obligation to work limited assets hard to achieve the required level of return has been paramount. Trustees may have sympathy with ethical objectives, but a concern that a portfolio with its opportunities reduced due to ethical exclusions might not achieve the best possible returns, has meant that such considerations have not been adopted as part of the investment strategy.
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The hunt for income
Lower interest rates will ultimately help the economy and so benefit charitable schools. However, lower rates means lower returns on cash and so will put more pressure on generating income, says John Hildebrand
Charities hold cash for a variety of reasons, ranging from those needing it for working capital to those building reserves for tougher times. The reasons for holding the cash will influence what charities can do with it, but for all charities often the best way of generating higher returns is to take more risk. So, what are some of the options available to charities and how risky are they?
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Stand firm
Financial forecasts don’t look very promising for the next few months, possibly years. So, for schools with investments, is it a time to be cautious? On the contrary, writes Andrew Bell, now is the time to be bold
A year on, the credit crunch seems no closer to ending and has proved far worse than expected, so far defying attempts to call an end to the resulting economic squeeze. Global economies have been poisoned by the toxic interaction between this credit contraction and the recent oil shock. The sustained crisis of confidence in credit
markets has led to pressure on investment banks and other holders of securitised debt instruments to sell them, into
illiquid and unreceptive markets.
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The world in your hands
Many investors will be aware of the concentration of capital within the UK equity market. Is that the place to invest? Richard Maitland dispels the myth of the distinction between UK and global markets
Of the 670-odd companies in the FTSE All-Share Index, the 50 largest make up 76 per cent of the total UK equity market value. But of particular importance to charity trustees is the concentration of the income stream: just 20 companies pay out 72 per cent of all UK equity dividend income.
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All to the good?
Is socially responsible investment an irrelevant distraction for school bursars or a cause for concern? Mike Goddings reviews some significant investment precedents and suggests setting an active strategy
Investing a school’s assets appropriately might reasonably be considered a simple matter of choosing between various financial alternatives. However, the increased emphasis on socially responsible investment deriving from the introduction of the Trustee Act 2000, combined with recent events and greater public awareness, may mean that schools are neglecting this important aspect of their investment policy.
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The money garden
How can schools use their charitable investments and manage them to best effect? Ruth Murphy outlines some of the investment approaches and balancing acts available to schools when reviewing their options
The extent to which a school’s investments contribute to the long-term expenditure plans and annual budgets varies considerably across the sector. But whether the investments are there to fund bursaries, capital projects or make a contribution to the annual core costs (or all three), some of the same considerations and principles apply to all.
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Bricks of debt
Securing the funding for a school purchase can be a fraught process. The lender will want to see evidence of research along with strategic plans for the future business. David Yeadon runs through the options
So you have found a school you would like to buy? The hard work starts here, as you must now assess the viability of the business. If you are investing in a school as a going concern, you need to be assured of its financial stability. There should also be an evaluation of the quality of management, areas with potential for further development and any weaknesses that need to be addressed. What is its financial position, general management and overall potential? Lenders will look at the quality of the loan applicant: your own school should provide evidence of an effectively managed enterprise.
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The common good
Common investment funds offer a wide range of tax-efficient investment choices for charitable investors. Ruth Murphy provides the background to CIFs and reviews the possible strategies open to independent schools
The concept of the common investment fund (CIF) was defined by the Charities Act 1961 (and 1992), as a means of providing charitable investors with a method of pooling their investments alongside other organisations, and of providing a diversified portfolio appropriate to the charity’s objective.
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Many happy returns
High street banks have a history of providing uncompetitive interest rates on many of their accounts, yet they remain a favoured option for many schools. Michael Quicke suggests alternative homes for your money
Historically, busy administrators have tried to find a balance between the convenience of a high street bank, with cheque book or telephone facilities, and the attractions of a money fund which provides a fair rate of interest. In an economic era of falling nominal interest rates, where the amounts earned over shorter periods can appear modest, the temptation for many is to pay the price of no income and opt for ease. But although this siren’s call of convenience can be appealing, it may not be the best solution. Assets are hard won, better returns easily achieved and any loss of service can be kept to a minimum.
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Crunch time
Over recent months, the headlines have contained more than the usual news about financial markets, much of which has been unsettling. James Bevan considers what this means for schools that are investing in UK markets
One of the UK’s largest mortgage lenders, Northern Rock, has had to seek emergency help from the Bank of England to remain in business, huge losses have been reported at some global financial giants such as Merrill Lynch and Citigroup, and unfamiliar terms such as “credit crunch” have become common currency among pundits. So what does this mean for those concerned with the management of investments for schools? After several years of benign economic conditions and strong returns from global markets, is a new course of action now required to deal with more uncertain times?
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Liquid air
The growing derivatives market and the birth of new and complex financing structures are the culprits for the unease in the markets, according to Chris Hills. The victims are likely to be private individuals rather than institutions
Like most readers, this writer grew up in an era when many car drivers, faced with a malfunctioning engine, would think nothing about lifting the bonnet and getting their hands dirty to rectify the fault. Today’s highly complex computer-driven technology found under an almost identical bonnet is an entirely different proposition. Most drivers would not dream of attempting to solve any such problem themselves.
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With uncertainty, comes opportunity
Markets have been buffeted by an astonishing chain reaction of events in recent months, complicating the usual uncertainties over the outlook for economic growth with deeper questions about the functioning of financial markets, writes Chris Hills
The nationalisation of a UK bank, an emergency rescue from near failure of a US investment bank and widespread evidence of failed risk management models across the global financial system have rattled already jangled nerves in financial markets, leading to contagion from the areas seen as higher risk, such as sub-prime US mortgages, to assets previously viewed as near to government bonds in credit quality terms.
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