How charities can diversify return drivers in a volatile world

Maximising financial returns and charitable impact starts with an intelligent investment strategy, but how can charities achieve this in a volatile world?

In this blog, William Platt and Ian Gamon explore the key issues that charity finance professionals need to bear in mind when it comes to getting the best investment outcomes.  

It's not an easy task for charity finance professionals to navigate the investment landscape. There is a lot of juggling to do to ensure the right balance between financial performance, legal obligations, ethical considerations, and mission alignment. From managing risk and ensuring liquidity to complying with regulatory frameworks and safeguarding reputation, the stakes are high. There is increasing social and regulatory pressure on charities to demonstrate both fiscal responsibility and social impact. In this blog we set out a few key considerations.

Diversification is the key to success  

A well-diversified investment strategy is the key to setting an intelligent investment strategy in volatile markets. Any strategy should be tailored to reflect each charity’s risk and return preferences, with regular updates based on market conditions. 

Investment strategies typically have three key components, equities, fixed income assets (bonds) and alternatives.  Equities are expected to drive returns over the long-term, but come with higher volatility and bonds can help generate regular income to meet spending requirements. 

Alternatives (i.e. everything else) can diversify growth drivers and offer stable income. For example, real assets can further diversify the growth drivers with investment in tangible assets, like property and infrastructure, that typically offer stable income and good inflation-linkage.   

So what does this look like in practice? The chart below is an example portfolio that targets annual returns of 4% above inflation over the long term. 

Risky business?  

Getting the right diversified asset mix is one thing, but it’s incredibly important to mitigate risk in the quest for maximising returns. Within fixed income, we’ve been collaborating with some clients to introduce an allocation to working capital finance. This asset class offers attractive return potential with a risk profile that is arguably lower than similarly rated corporate credit. It also provides strong diversification benefits and low volatility, although liquidity can be more limited in stressed environments.   

Working capital finance is a broad asset class, and we’re primarily allocating to working capital, financing short-term needs for mid to large-sized companies. Our preferred approach is to select fund managers that have only a small allocation to international trade, insulating them from tariff uncertainty. Our buy-rated managers have successfully navigated past supply-chain and trade disruptions, such as during the pandemic, and we expect demand for trade finance to stay high even amid macroeconomic unrest.   

An explanation of how this works is below.  

When it comes to public equity portfolio, at the time of writing this, the US equity market pricing remains at relative highs and the top five stocks representing over 25% of the US index.  

We believe it is important to actively consider the risks associated with market concentrations; be it megatrend, geography, sector or stocks. Our clients are looking beyond market cap indices to get the diversification they want. 

Some the ways we are managing this risk with charities are: 

• exploring a more regionally diversified approach.  
• considering moving from passive to active management 
• reducing equity exposure in favour of other asset classes – this has included money market cash, floating rate bonds and index-linked gilts while interest rates remain favourable. 

Within alternatives, we’ve helped to develop a tail-risk protection strategy to help manage risk. This was designed during the more benign market conditions in 2023 and 2024, noting that many markets seemed expensive, and there were geopolitical risks on the radar that could spark a risk-off market event.    

We launched this strategy last year and it will provide mitigation from the risk of a significant shock to asset prices such as from a major geopolitical event. You can read more about this here.   

Getting the right impact  

The new guidance on investments issued by the Charity Commission in 2023 gave further impetus to the increasing drive for ‘impact investing’ – which means investing in products, infrastructure and services that are aligned with the objectives of a charity, endowment or foundation. The guidance states that trustees are empowered to invest with the dual objective of financial return and furthering their charitable purpose. You can read more about this in our blog here. As a result, we are seeing increasing demand from charities and foundations to invest in this way.  

We’ve recently worked with a client to align their strategic allocation to private equity with their purpose. Following an assessment of the range of implementation options and robust selection process, leveraging our private equity manager research platform, two managers were appointed for their diversified exposure and ease of implementation: one managing a dedicated impact strategy, and one focused on sustainable private equity investing. The outcome reflected the client’s goals of financial performance and positive real-world impact. Some of the key client objectives achieved from this process were:  

• A range of practical options to access impact private equity.  
• The ability to target different social / environmental objectives to align with their objectives.  
• The need to accept higher risk / illiquidity / costs but with potential for strong total returns over long term and additionality of social / environmental outcomes.  
• A tailored approach required.  

The key message for charities is that a diverse portfolio investing in assets with impact that can maximise returns but where risk can be mitigated is not an unreachable utopia. In an increasingly volatile macro environment, with the right strategies and expert advice, the correct balance can be achieved.