Charity income: smooth the journey not the market

As with any investment, your capital is at risk and any income is not guaranteed.

 

After years of prudent stewardship, many charity trustees expect an investment portfolio to provide reliable support for their organisation’s work. In reality, it requires a different kind of discipline: funding today’s spending needs while preserving the capital base for tomorrow.

The ‘hero’s journey’ is the familiar arc: set out, face trials, hit a low and return stronger with the prize. In investing, it becomes “stay brave through the storm and you will be rewarded in the end”.

Sometimes that is true, but it assumes charities can sit through large drawdowns, or valuation declines, without changing course.

For charities, those drawdowns can mean less income arriving when grants, services or long-term commitments still need funding, for reasons outside trustees’ control. That understandably prompts action. Most charities are trying to fund real-world impact, not win a medal for staying calm.

 

Even heroes struggle in a storm

Markets have always wobbled, but more of today’s wobble comes from the machinery rather than the market mood. A growing share of short-term trading is run by rules, risk limits and algorithms, computer programmes that buy and sell based on preset instructions.

When conditions change, those shared rules and constraints can push many participants to act in the same direction at the same time: like dominoes, one slight push can trigger a chain reaction that travels much further than you would expect.

Another reason the journey feels bumpier is that some of the tools designed to smooth risk can end up doing the opposite at the wrong time. Many funds and strategies aim to keep overall risk steady by automatically reducing exposure when markets become more turbulent, including:

Risk parity: a strategy that spreads risk across asset classes, often using leverage, meaning debt or financial derivatives used to increase potential returns, to target a steadier overall risk profile.

Volatility control: strategies that dial exposure up or down to hit a volatility target. When volatility rises, those rules can translate into selling, often into a falling market.

Passive funds and exchange-traded funds: these have made investing cheaper and simpler by letting investors buy a basket of shares as if they were a single stock. That is a genuine improvement for the end investor, but some of this trading can be less price sensitive at the margin, meaning that inflows into these funds can push prices up, and outflows can lead to prices falling.

If many investors are using similar approaches, the system can amplify itself. Selling increases volatility, which triggers more selling.

This is not about panic. It is about design. When lots of investors try to change direction together, the movement itself becomes the problem, a bit like a crowd funnelling through a narrow doorway.

Due to events in 2020 and 2022, investors have become far more sensitive to that sensation. It is not just that markets move a lot. It is that people now carry markets in their pockets.

With minute-by-minute portfolio updates, fewer investors are ‘investing it and then forgetting about it’ for the long stretches necessary to allow returns to accumulate, despite the advice received.

Trustees and investment committees, quite rightly, pay attention to the journey as much as the destination. Most are not looking for a heroic roller coaster ride. They want steadier progress, responsible stewardship and some flexibility, without being forced into difficult decisions at the worst moments.

 

Trading capes for a game plan

So, if volatility is likely to remain elevated, what is the practical response for charities that rely on their investments to support spending, grant-making or long-term obligations?

If we accept that higher volatility is here to stay, the question changes from “how do we avoid price swings?” to “how do we avoid being forced to act on them?”

Stop treating every bump as a problem to be eliminated and instead build a plan that can support spending through the bumps. Capital preservation still matters, but the bigger danger is being forced to sell assets at the wrong time because cash is needed.

That is where sequencing risk bites. If markets fall early in a spending period and a charity funds commitments by selling investments, it locks in losses by selling more units at lower prices. That permanently shrinks the base that could recover later. A resilient, growing income stream, to mitigate inflation risk, can reduce that pressure by giving trustees spending power without constantly dipping into capital.

A portfolio that prioritises income that can grow, ideally faster than inflation over long periods, gives charities a rising income stream and reduces reliance on selling assets to meet regular spending needs. Over time, the same approach can also help with the long-term risk that today’s spending erodes tomorrow’s charitable capacity.

The key is to avoid selling the cow to buy milk. If a charity can generate a dependable and growing stream of income, it does not need to liquidate assets simply because markets are having a tantrum.

Trustees still need to protect the herd, as long-term capital growth remains important. Tomorrow’s capital is the engine of tomorrow’s income. But a resilient income stream can do more of the heavy lifting from year to year. That is how charities can blunt sequencing risk and lower the probability of eroding future spending power.

For many trustees, sustainability is part of the same discussion. A portfolio built for durable income should consider whether the companies, issuers and assets it owns are capable of adapting to a changing world. Income that looks attractive today is less useful if it rests on an unsustainable business model, weak governance or assets poorly prepared for environmental and social change.

 

The right support, no heroics required

The Baillie Gifford Monthly Income Fund is designed to deliver the highest level of income that is resilient and sustainable over the long term, focusing on the actual income amount and protecting spending power against inflation.

Over shorter periods, it prioritises reducing income volatility so that the monthly distribution can be reliably incorporated into real-world spending plans.

What that means is that over the past five years, the Fund has paid a consistent monthly income and the annual income level has increased each year. That same period included several bouts of market volatility and double-digit drawdowns.

Simply looking at short-term yield can be misleading. In pounds and pence, if a fund holder received circa £100,000 in income payments in 2020, they would have received circa £123,680 in 2025.

This also embeds a practical discipline around income drawdowns: our risk guideline states that the fund’s income production should not decline by more than 10 per cent in any given year.

We also recognise that preserving the long-term capital base matters because tomorrow’s capital is the engine of tomorrow’s income. The Fund draws on a broad opportunity set, backed by risk management that prioritises income resilience over short-term capital smoothness.

Sustainability is also embedded in how we think about long-term income. The best income payers of tomorrow are likely to be companies and assets that can keep adapting to the needs of a sustainable economy. That means looking beyond headline yield and asking whether an investment is compatible with durable income, responsible ownership and long-term capital growth.

That matters because the problem is not that the ‘hero’s journey’ is wrong, but that it no longer fits many charity investors’ needs.

Stories reward endurance because the ending is written in advance; real trustees do not have that certainty. What matters is not simply surviving the storm, but avoiding being forced into hard decisions at the worst moments.

That is why smoothing the journey, using a reliable income component, rather than the market, has become essential. A dependable, flexible income can reduce behavioural risk and help trustees stay invested without relying on heroic resolve.

The modern structure of markets means heightened capital volatility will likely remain a feature, not a bug. That means prices can lurch around for reasons that have little to do with long-term fundamentals. We believe a strategy engineered to keep the income delivered more stable can be the difference between riding out volatility and being forced to crystallise it.

That is why we believe the Baillie Gifford Monthly Income Fund has a meaningful role to play in a charity investment solution.

 

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Important information and risk factors

This article was produced and approved in May 2026 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, and Baillie Gifford and its staff may have dealt in the investments concerned.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Investment markets can go down as well as up and market conditions can change rapidly. The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.

The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced.

Further details of the risks associated with investing in the Fund can be found in the Key Investor Information Document or the Prospectus, copies of which are available at bailliegifford.com.

 

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