It is a topic that is increasingly pressing for charities; is sitting on cash still a ‘safe’ option? As interest rates fail to keep pace with inflation, charities sitting on their cash reserves are actually seeing negative real returns, effectively losing money over the long term. In today’s climate therefore, we believe that charities will reap greater reward from investing their cash in yield generating assets such as equities, rather than keeping it in a bank account.
To help visualise this, we modelled the real value of £5m invested in a Bank of England base rate deposit from 2011-2019 versus the same amount invested in EdenTree’s Amity Global Equity Fund for Charities. As the deposited money steadily decreased in value over those eight years, the invested cash, although experiencing volatility due to systematic risk, rose significantly (although past performance is not necessarily a guide to future returns). The lost opportunity factor here is potentially huge. This erosion of cash diminishes a charity’s ability to carry out its mission and deliver the essential services so greatly needed, especially in times of austerity. How could that un-invested cash that was lost to inflation have worked harder for your charity? Put into perspective, the additional capital gained in investment returns, whether it is from £5m or £1,000 invested, could help to fund vital projects, increase the number of grants awarded or contribute towards your staff salaries.
At EdenTree, we have seen a notable increase in charities investing their cash for the first time. It is a process that requires appropriate consideration, and many charity trustees and key stakeholders often have questions about the investment process or the suitability of investing for their charity’s size, situation or strategy.
A common concern is often around fees. Whilst arranging investments and all the administration associated with managing your own portfolio can be expensive, collective investment funds can provide a fitting, cost-effective solution for charities. Administration costs are being shared proportionally with other charities who are similarly investing. These ‘pooled funds’ also provide effective diversification of risk and provision of liquidity.
Charities are also seeing the importance and opportunity in aligning their mission and values with their investments. Collective funds can also have ethical investment policies, making them an attractive and viable option for charities. This is an area of specialism for EdenTree, having launched one of the first ethical equity funds in the UK, in 1988. We regularly support charities to incorporate their ethics and values into their investment policies. An ethical investment approach helps to identify sound investment opportunities with limited business risks, supports long-term returns and helps charities to avoid reputational risk. With this approach, your invested cash can benefit both your charity and society in more ways than one.
As interest rates fail to keep pace with inflation, charities sitting on their cash reserves are actually seeing negative real returns, effectively losing money over the long term.
We appreciate that, for any investor, there is always the question of ‘is this the right time to invest?’ and this is only amplified as Brexit dominates the headlines. However, looking at cash’s steady decline in value since the Global Financial Crisis in 2008 helps to paint a likely picture. As long-term value investors, we believe that ‘time in the market will always beat timing the market’ and so being overly cautious about when to invest can actually be more risky than investing itself.
So how can charities move forward, closing the funding gap in a low yield, negative rate world? Firstly, trustees that are supportive of investing the charity’s cash should introduce the topic in their next board meeting. If you’re the ‘lone voice’ in the room, try turning the conversation towards the present impact low interest rates are having on the value of cash. Views tend to shift once the issue is put in real terms. Secondly, don’t feel pressured to invest all your cash at once. We’ve seen great examples of clients undertaking a progressive learning exercise, investing some of their long term cash, building experience along the way and adding investment at a later date. Thirdly, don’t make size an issue. Charities often tell us they don’t have enough money to be considered by an investment manager. This isn’t always the case. EdenTree’s charity funds, for example, have a minimum investment size of £1,000, designed to allow charities of all sizes to invest, so there are solutions out there.
Don’t let cash, a once sensible asset to hold, be the reason your charity can deliver less in the future.