Pointers from the past, lessons for the future

The challenges of running a charitable institution have been amplified by the current crisis. The need to spend money is greater than ever, the provision of services has become harder and at the same time many sources of income – from overseas student fees, commercial revenues and rent from property to donations – are under pressure.

Income from investments has become doubly important to those charities which have them. But in many cases those investments have also been found wanting. It is expected that income from the UK equity market will fall by over 40 per cent in 2020, and it is often the highest yielding stocks which turn out to be the most vulnerable in times of crisis. Such businesses have tended to be well-represented in charities’ portfolios. Some charities’ investments are managed on a total return basis, but even they will have to consider how much capital they can sustainably spend in the face of considerable uncertainty. The challenge of ‘inter-generational equity’ or, put another way, the risk of supporting today’s beneficiaries at the expense of tomorrow’s, has been heightened for everyone.

That challenge is not a new one, but neither is the solution. From 1921 to 1946, the economist John Maynard Keynes was bursar of King’s College in Cambridge, and managed its investments with notable success. Over that time, he learned from his mistakes and changed his approach, evolving away from attempts to time markets and becoming instead an accomplished long-term investor. As he wrote in 1934:

“As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”

In Keynes the Stock Market Investor: A Quantitative Analysis*, David Chambers, Elroy Dimson and Justin Foo chart this evolution and evaluate Keynes’s approach and success. This was built not just on having a fairly concentrated portfolio (eventually around 60 stocks) with low turnover and an international flavour, but also on investing in equities in the first place.

While this was a radical step for charities in the 1920s, it is now widely accepted that equities should represent the bulk of a charity’s investments. When charities own shares, they own slices of real, cash generating businesses, and if they own shares in companies which can grow their cash flows over time, then the dividends they receive will also grow, and this in turn will lead to capital growth as well. This ability to deliver both income and growth is what makes equities such a good fit for charities with a long-term timeframe.

*Chambers, David and Dimson, Elroy and Foo, Justin, Keynes the Stock Market Investor:
A Quantitative Analysis (26 September 2013). Journal of Financial and Quantitative Analysis.