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Oxbridge Colleges and Eton raise long-term finance to generate additional returns

Date: 08 Oct 2015

Bumblebee Design

Charles Mesquita, senior director at Stanhope Consulting, talks about the challenges trustees face when setting a sustainable investment strategy for their charities.
 

What are the problems charities face when trying to improve their investment management?

Despite the fact that the investment industry is a lot more professional now than it was thirty years ago, the challenge for most trustees is how to select the right investment strategy and manager to implement that strategy. Unfortunately, it has become increasingly hard to differentiate between one firm and another. Investment managers have become better at communicating their offering and their promises sound ever more similar. Trustees can end up focusing too much on a manager’s personality rather than concentrating on the most important trait, investment ability.

So what should trustees or charities focus on when agreeing their investment strategy?

Charities should not devolve their decision-making powers to investment managers without thought because they may need to set different strategies to reach their goals, be they short, medium or longer-term objectives. Not all asset classes are suitable for every time horizon. For instance, unlisted private equity will serve only longer-time horizons, since a period of over nine years may elapse from subscription to realisation of all the investments.

Wellcome Trust, Oxbridge Colleges and schools such as Eton have raised long-term finance at what appear attractively priced loans to generate additional returns. Such a route is limited, unfortunately, to those who have strong asset-backing, long time horizons and, importantly, can call on the necessary financial expertise when appropriate.

What about more risky asset classes. Should charities consider these as they become more institutionalised like hedge funds?

In theory, all assets class es should be considered by trustees, although they must be mindful about the rationale behind any investment. A key part of setting the investment strategy involves identifying the long-term return target that is required and working out how much risk one is prepared to take to meet that aspiration.

Here, trustees have a legal responsibility to take professional advice from someone who is suitably qualified. As part of this advice, their investment managers should be advising on the suitability of particular assets classes and how each asset class fits within the overall risk-return profile of the portfolio. As a safeguard, my advice to trustees is not to be frightened about questioning anything they do not understand and not worry about continuing to challenge an investment idea until they are completely comfortable.