The pandemic has been as challenging to the Trustees of charitable funds as it has to most people everywhere. There has been the need to organise remote meetings, ensure continuing supervision of investments already made, dealing with donor and recipients’ queries and keep everything running smoothly from the homes of all responsible.
Most have coped well, continuing to provide a good service. Many have lost out on charitable fundraising as in-person events have been cancelled. More people have faced uncertainty, making them more reluctant in the short term to give. You can only do so much by digital camera and broadband link.
Let us hope that progressive unlocking of economies goes to timetable. Soon, charities will once again be playing a full part in the social world, bringing people together for good causes in person as well as online.
Those of us who help charities with our investments now need to assist by advising on what the investment future may have in store. The pandemic has changed the landscape for everything from bonds to properties – and has changed the valuations and forecasts for many companies and their shares.
The world of bonds has seen two big developments. Governments worldwide have issued many more bonds to enable them to compensate people and businesses that could not work in lockdowns. They also needed to spend more on healthcare to keep people safe.
Despite this big rush of new issues, bond prices in the early part of the pandemic rose further. Central banks kept interest rates low, cut them where possible, and decided to buy huge quantities of state debt to stabilise the markets. Today, we see large numbers of European and Japanese bonds at such high prices you lock into a negative yield should you hold them to maturity. It does not look worthwhile to put longer-term investment monies into government bonds at these very low levels of return.
Equities have recovered well from the large falls at the outset of the virus crisis. In the early stages, the shares of all the winners from lockdown excelled. As people stayed at home, online retailing, downloaded entertainment and digital conferences took off.
As people were only allowed to go to a food shop and could not eat out, so the supermarkets sold more. More recently, attention has switched to impending relaxations of the controls, so the shares in companies such as hotels, airlines and live entertainment have been the focus of more investor enthusiasm.
As we move out of lockdown and through the early stages of recovery, equity markets will become more discerning between the winners and losers, company-by-company – and make longer-term assessments of what the future holds. A growth or recovery theme has all been a bit indiscriminate over the last year.
Attitudes to property investment are likely to change in the UK. This recession has undermined the idea that rent is a prior charge and upwards-only rent reviews help landlords. We have seen many companies decline to pay rent whilst they are stretched, with landlords having to accept. We have seen retail companies put themselves into voluntary administration to walk away from rental agreements, and we have seen landlords accept zero rents just to ensure a tenant pays the taxes and maintenance costs.
The new world has too many shops, so there is much work to do to convert some of them or redevelop them. Shops values have fallen a lot, but the property is only worth its alternative use value minus the conversion costs. Offices will change too. Many companies will accept more homeworking, so they will be looking for less, but more flexible, space.
It is true faster-growing and new companies will need to find extra space, whilst existing businesses will probably look for something with higher standards of environmental control and great wiring for digital services. Commercial property overall is less attractive now than before the pandemic. The accent will, even more, be on location and quality, whilst much fringe and older space will struggle.
Returns on shares have been so good since the bottom of the market in spring 2020 it is difficult to think they can sustain recent rates of return. There will be an increasing focus on the ability of the underlying companies to generate cash and to find the popular goods and services that will allow them to grow.
Governments worldwide, led by the US, will be looking to take more money away from shareholders in taxation. They will also be pushing for higher wages for lower-paid staff, eroding profit margins. In the next year, there will continue to be a good pace of growth, flattered by the poor comparative figures in the second quarter of 2020 when so much of the advanced business world was shut.
Charity Trustees need to think through their approach to the issues raised by Environmental. Social and Governance (ESG) investing. There will be more concentration on investments helping governments meet increasingly exacting targets to cut carbon dioxide from their processes and products.
There is growing concern that companies should be good neighbours, caring employers, and have strong internal arrangements to avoid bad practices or criminal activity. There are now better systems to monitor investments from this standpoint and to evaluate a portfolio on these criteria, as well as the traditional issues of income and total return from the investment.
Trustees are still under a prime duty to ensure worthwhile investments, but issues such as a company policy towards the environment or employee welfare can be an important part of that company trading well and gaining a good rating in the market.
Investment advisers are equipping themselves to take all this into account.
Charities are especially vulnerable to outside interest in how they are ensuring responsible investments, particularly in areas close to their own purposes.
The immediate worry of some in markets is an increase in inflation. The leading central banks and investment advisers have warned that there will be a sharp, short-term increase in prices on both sides of the Atlantic.
Commodity prices have risen rapidly as the industry gets back to work and needs to stock up for a bigger order book. There are shortages in key areas – from microchips to timber and from shipping capacity to cement. When more capacity is introduced and stock levels adjust, inflation might come back under better control.
A little bit of inflation is alright for shares. Many companies in such conditions have some pricing power and can hope to make a better margin despite the cost increases. Inflation will only become a big problem were there then to be a major round of pay rises and a change in public attitudes, with a leap in the amount of inflation people expect from around the 2% of current targets to something materially higher.
So far, markets think central banks have it under control.
To keep persistent inflation at bay there will need to be withdrawals of the large sums of money creation and bond buying as the recovery lifts off and, in due course, some rate rises. This is not helpful for bonds but will be manageable for equities as long as central banks move in good time to balance lower inflation with a decent recovery.
Investment managers will need to keep their eyes focused on this important trade-off. In the long run, a charitable endowment needs decent investments in real assets to give it a combination of income and capital growth so it can beat inflation and do more in future years from a well-run portfolio.
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