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“It is about giving something back”

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22 Jan 2018

Andrew Wauchope talks to Mark Dunne about charities and their pension schemes, the secret of being a good trustee and what to expect from the markets in 2018.

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Andrew Wauchope talks to Mark Dunne about charities and their pension schemes, the secret of being a good trustee and what to expect from the markets in 2018.

Most trustees are risk adverse. Is that how you would describe yourself?

You have to be risk adverse. A trustee has to invest on the basis of what a sensible person would do. There is being risk adverse in two ways. One, is reputational risk, which I would be very adverse to. Then in terms of making the most of your resources sometimes you have to look more broadly. We held a seminar a little while ago for various livery companies to talk about borrowing. Quite a few livery companies have borrowed and you will see that Cambridge has issued an enormously long bond.

There are a few charity trustees that would say under no circumstances would I borrow. What we are looking at is to ask: “How can you make the most of your endowment?” If you have this money you need to make the most of it. So if you can be in a position where you can provide better benefits for your current beneficiaries by borrowing, particularly if you can borrow at what is a lifetime low, why wouldn’t you if you could get better investment returns and do more with the money.

After all, the more money that you have working for you the better your returns should be. Universities see it as a good way to provide student housing. It is instant income, it improves their conference businesses, it improves their income and it improves the money that it can put back into academia. It is horses for courses.

That is also where sometimes a trustee like me can help in that we can quantify risk for people. Yes, that is a risk but if you don’t take any risk and keep the money on deposit at the moment you are going to make sub 0.25%. So you have to take some risk and once you have taken that risk you should get a better return, but you have got to balance it out. If you are not a good steward of what you have got people will not give you anymore.

If I am presenting to someone who has money to fund a charity, I have to be clear that I am going to look after the money that they give to me and that I am making good use of all my resources.

What are the biggest challenges for someone in your position at the moment?

There are three significant challenges. One is balancing return with risk. When we look forward, increasingly people are seeing lower market returns. Returns tend to be built off the risk free-rate of return and if that is almost nil then obviously everything else’s returns come lower. The first reaction to that is people are moving up the risk curve to try and get the returns.

The second is to say: “If we don’t want to take additional risk we must cut our cloth.” That is quite a difficult challenge because you have people who are depending on you, you don’t want to drop spending. Equally you have to look at how you might make sure that at least there is a smoothing of that spending, or you can build up a reserve or get to a position where your spending might be lower but you will do more over a period of time.

That is a significant challenge after a time when we have had some quite good returns from the markets. In the past two years the returns have been extremely good, but we are 10 years away from the last crash. In terms of instinct we ought to feel that we are closer to the next problem than we are to the next major uptick. That makes logical sense.

Markets are quite highly valued, particularly in the US. Economic growth is okay, but again it isn’t stratospheric.

That major first risk is where do we go now? My approach has been two fold. One, take some risk off the table by de-risking your portfolio by holding more asset classes and having less exposure to volatile assets.

Second, review your cash reserve plans. Yes, cash reserves are lower but look at what your stopping time is. If you have committed to things for three years you would be in trouble if you had less money for that period, so don’t have a cash reserve policy that is four months. If things start to go wrong you will be running through your cash really quickly.

So consider holding more cash, but it may even allow you to take slightly more risk in the rest of the portfolio because if something goes wrong you have a year’s money, or two year’s money. So look at the risk and make sure you have those reserves.

People have portfolios at the moment that are 70% to 75% equity. Equity returns have been good, but we could run into volatility, so wind it back a bit. Go back to 60%, make sure you get some more asset classes in so there are more legs to your stools, so there is less volatility.

Both of those are sensible things to do and you should do them while the sun shines rather than wait until the next rain storm.

What you don’t want to do as a trustee is say: “Oh crumbs, the market has fallen 20%, well we had better do something about it.” You want to do something about it before the market falls 20%.

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