Investment
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.
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?
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.
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.
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).
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.
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.
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?
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.
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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