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What happens to charities in poor markets?

November 30, 2020
clock 4 MIN READ

Charities may believe they are benefitting from customised advice on how to align their growth targets with spending requirements. However, evidence suggests that many charities adopt an inflation plus 3% to 4% framework as a proxy for a target return from their investment portfolios. This is a suboptimal situation because every charity is different, especially with regard to the income sources they have access to. Each charity should have a customised investment strategy that aligns with their specific financial situation, taking into account all sources of income and expenditure on their balance sheets, and subsequently synchronising the target risk, return and spending from their investment portfolio. Any investment strategy needs careful analysis of the overall balance sheet and financial position and should take into account the relative reliance the charity has on the income from investable assets. At SEI, within our outsourced chief investment officer (OCIO) framework, we call this ‘enterprise risk management.’

In 2018, SEI examined the spending habits of over 200 UK charities1 and found that of those with listed assets, over half had the same investment targets of inflation (as measured by either CPI or RPI) plus 3% to 4%. While this target return may be reasonable and sustainable in the long term, it could be challenging to sustain in the short-to-medium term. As COVID-19’s impact has shown in 2020, charities may require flexibility during periods of financial stress, when listed assets can fall in value. A holistic view of a charity’s financial position, along with a detailed analysis of its balance sheet, could lead to more appropriate short-term goals. Charities may also want to consider how COVID-19 could lead to an increased demand for their services and, therefore, the potential to increase spending to expand their mission.

Case Study: Short-term and long-term planning

(The following cases are hypothetical and do not reflect actual data.)

  • To demonstrate short-term downturns on a charity’s portfolio, we have analysed the financial situations of two sample charities, which we’ll refer to as Charity A and Charity B.
  • Both have initial assets of £50 million.
  • Within their investment objectives, trustees for both charities have decided to:
    • Draw down £1.5 million a year or 3% from their investment portfolios
    • Target a return of inflation plus 4% (6%). 


The liquidity of a charity’s invested portfolio is another issue. If Charity A needs to draw down ready money for operating activities, are its investments liquid enough to allow for this? If most liquid investments are taken out of the portfolio, the remaining assets may be over-allocated to illiquid assets in the following years, which could be undesirable. Since it is impossible to predict market returns, it is prudent to prepare the portfolio against the impact of market downturns. One way is through a coverage ratio2, which considers a charity’s current portfolio value and how it can ensure that sufficient resources exist over time to meet the planned levels of spending.


It is important to consider short-term flexibility, potential long-term effects and the need to adjust spending in volatile markets.

Enterprise risk management calls for identifying any risks a business (or charity, in this case) might face and planning for how to mitigate those potential risks. Coverage ratios, described above, are one way of mitigating financial risk. An experienced OCIO program can help you adequately prepare for these and other risks inherent in your business operations.

All charities plan for the long term; however, spending requirements are typically taken in the short to medium term. Ultimately, charities need to consider a few key questions to decide on a risk management plan. What is your charity’s investment target, and how reliant are you on this? For instance, when the market falls, do you have additional sources of income and diversified sources of revenue? If not, do you understand the inherent risks of relying on a one-size-fits-all investment strategy? Is it possible you need to take more or less risk? Perhaps you are not optimising your spending enough, and you could do more?

For answers to these questions and how they apply to your charity, contact Pradeep Kachhala at SEI for a free demo at or 02038107602.

1How Charities Could Use Dynamic Management to Optimise Their Spending: 


  • Recovery time – Time taken to return to the original portfolio amount.
  • Coverage ratio – A metric used to determine a company’s ability to meet its financial obligations.

Important Information

This case study has been created, issued and approved by SEI Investments (Europe) Ltd (“SIEL”). This case study is not intended to constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any particular product. 
While considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. 

The information is for general information purposes only and does not constitute investment advice. 

The value of an investment and any income from it can go down as well as up. Investors may not get back the original
amount invested. 

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