Widening performance gap between charity multi-asset funds prompts call for investment manager 'health checks' – LCP
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The widening gap in performance between charity multi-asset funds means charities should conduct a regular ‘health check’ of their investment arrangements, according to LCP.
Pooled multi-asset funds are a popular choice for charities, offering a relatively low-governance way to gain exposure to a range of asset classes. Through a single fund, charities can access investments across equities, bonds and alternatives, including property, infrastructure and commodities, with the manager responsible for both asset allocation and stock selection decisions.
However, this active management approach relies heavily on manager skill, creating significantly different outcomes across these funds. As a result, performance has varied widely across the charity multi-asset fund universe.
A new LCP blog highlights that the gap between the best- and worst-performing charity multi-asset funds has widened over the last five years compared with the previous five-year period. While market conditions have played a role, fund-specific investment decisions have also been a significant driver of results and are factors on which charities can challenge and engage with their managers.
What is causing the widening performance gap and how consistent are the top-performing charity funds?
LCP’s analysis shows that asset allocation has been one of the key differentiators. Managers maintaining higher allocations to equities, while also making greater use of diversifying assets such as gold and precious metals, have generally outperformed those taking more cautious asset allocation approaches.
The strongest performers have also tended to run more balanced and diversified equity portfolios, avoiding strong style biases and generating additional returns through successful bottom-up stock selection.
By contrast, some underperforming managers have favoured higher-quality companies with strong balance sheets, stable margins and dependable cash generation – exhibiting a ‘quality’ style bias. While many believe the quality style will perform well over the long-term, it has struggled in recent years amid a persistent ‘risk-on’ environment, market concentration in AI and technology stocks, and strong returns from some more highly leveraged businesses.
Recent years have been shaped by higher inflation and interest rates, heightened geopolitical tensions, energy price shocks, and growing concentration in global equity markets. With many of these themes expected to remain influential, LCP believes charities should reassess whether their current investment arrangements remain fit for purpose.
What actions can charity investors take?
LCP suggests charities consider the following questions when reviewing their multi-asset manager:
- Has your manager delivered competitive returns, net of fees, relative to comparable multi-asset funds, rather than simply meeting a CPI + X% target?
- Do you understand the key drivers of recent periods of underperformance or outperformance?
- Do your manager's responsible investment and stewardship practices align with your charity's values and objectives?
- Are you receiving good value for money when considering fees, performance, service and expertise?
- Do you have confidence in the individuals managing your assets and in the long-term stability of the wider firm?
If charities find these questions difficult to answer, it may be time to take a closer look at their arrangements and consider independent oversight to ensure they remain fit for purpose.
We have seen a marked increase in charities seeking an independent review of their investment arrangements against this challenging economic backdrop. The widening dispersion in returns means manager selection decisions are having a greater impact on outcomes, making it increasingly important for charities to understand exactly what is driving performance.
