Developing a bespoke strategy for a charity with a 10-year drawdown​

How we helped a charity to solve complex drawdown challenges by designing a tailored solution based on their specific requirements, allowing them to meet cashflow requirements without sacrificing returns.​

Background

We undertook an investment strategy review for one of our charity clients. The investment strategy posed an unusual challenge as the charity was due to spend out the entirety of its assets within 10 years, with the majority of assets to be disinvested in the first 5-6 years. ​

Our objective when designing an investment strategy for the charity was to ensure that assets would be available to meet cashflow requirements with a reasonable amount of certainty, whilst maximising net return on investments. ​

Our approach

Using forecasted cashflows produced by the charity, we created a bespoke model to compare a number of investment strategies that evolve over time to meet the charity’s changing risk, return and liquidity needs.

Our objective was to maximise return, whilst ensuring that risk was controlled so we did not jeopardise the charity’s abilities to meet its commitments in a market downturn. To test the charity’s risk tolerance, we carried out scenario analysis on a range of potential investment strategies. We modelled different market shocks and considered the effect these could have if they occurred at different points along the charity’s 10-year business plan.

The value we added

• A bespoke portfolio, tailored to the client’s needs – Based on our advice and modelling of the charity’s reserves over the 10-year investment period under the various ‘risk’ scenarios, the trustees were able to agree on a dynamic investment strategy with an appropriate level of risk for the charity, which is flexible enough to allow for changing market conditions and spending. ​
• Reduced costs – When we were first appointed the Total Expense Ratio (“TER”) for the portfolio was relatively high at 0.85% pa. The main driver of these costs was that one of the investment managers was invested in third-party active funds, causing a layering of fees. We reduced the TER to 0.20% pa through a combination of identifying better value funds, negotiating for lower fees, and avoiding “fund of fund” structures. ​
• Making the approach to responsible investment more robust – We also helped the trustees to review their responsible investment policy, which was agreed to be a strict exclusion for any company that derives more than 10% of its revenues from tobacco. Through discussion with managers, we pushed hard – and succeeded – in having the tobacco exclusion firmly incorporated into the guidelines of all the funds in which the charity invests. ​
• Improving efficiency of the portfolio and enhancing returns – When we took on the charity as a client, 50% of investments were managed by a discretionary manager targeting a CPI return, with 40% of the volatility of global equities. We found that the manager was holding a large cash allocation to reduce the volatility of the portfolio, which was inefficient from both an expected return point of view and because our client was paying active management fees on the whole portfolio. For the charity in question, all cash required for liquidity purposes is now kept within a separate low-cost liquidity fund.​