Asset Allocation For Philanthropists Gets Tough

Tom Burroughes Group Editor London December 20, 2022

Asset Allocation For Philanthropists Gets Tough

Rising inflation, falling stock markets, pleas for help and donors' own financial constraints mean that charities' coffers are strained. How should asset allocation and liquidity be managed at such a time, or should philanthropists ride out the storms as best they can?

Markets have tumbled this year, the financial news has often been tough and for some philanthropists, the desire to make even more donations clashes with what they can afford. 

This “perfect storm” of forces – falling markets and rising inflation, potentially lower donations, and more pleas for help – makes asset allocation difficult. Even so, while the past few years have thrown up extraordinary challenges, the squeeze that charities face is not new, and can be planned for over the long term.

That, at any rate, is the kind of analysis this news service was given when it spoke recently to Nick Rees, managing director in the Private Client Practice at Cambridge Associates

“Markets are down heavily, inflation is a problem, and we have higher costs of capital because of rising interest rates…inflation is one of the greatest challenges for any portfolio because there is no silver bullet, especially this year,” Rees said in a call. 

Finding ports in a storm has been hard. 

Commodities are the exception to problems of market falls because they have generally risen this year, Rees said, but gold is flat; real estate is not straightforward – REITs have fallen; and TIPs (inflation-protected US Treasuries) haven’t protected against inflation, given the swift change in inflation expectations.

“There has been nowhere to hide from inflation,” he said.

“Clients are constrained by risk tolerances and liquidity. We advise all clients to keep enough cash for two to three years of spending so that we don’t have to fire-sale assets. You therefore have some time to weather the storm,” Rees continued. 

Different models
Adding to the woes caused by adverse markets, the recent pandemic ratcheted up debate on whether philanthropists spend more resources in the short term or stay with paying out funds steadily over decades. For example, in spring last year, Rockefeller Philanthropy Advisors in the US published a two-volume guide about the pros and cons of whether to donate resources rapidly or cap such transfers to ensure that they continue indefinitely.

In philanthropy, a time horizon is the length of time over which a donor or foundation seeks to engage in philanthropic giving. It can be in perpetuity – meaning that there is no end date foreseen – or it can be time-limited, defined by a predetermined end date or triggering event. Time-limited philanthropy is also referred to as “limited-life,” “spend down,” “spend out,” “time bound,” “giving while living,” or “sunsetting.”

These differences make liquidity management and asset allocation a delicate balancing act.

“Charity endowments which make annual distributions [of, say, 5 per cent], from their investment portfolios have an annual liability to manage – they need to be able to commit to being able to make that distribution regardless of how the markets perform,” Rees said. “They are therefore likely to have a lower risk profile; in other words, a lower allocation to equities. They will also be conscious of liquidity so will have a cash buffer and a skew to more liquid asset classes.”

“Charities with strong visibility on inflows and medium-term liabilities, can afford to take a bit more risk, or be a bit more opportunistic with new cash as it comes in. 

There is evidence that philanthropists have had to dig deeper into their wallets as inflation has risen. A study by Vanguard found that almost one in four American donors with a charitable giving budget increased their giving due to rising inflation. And in Europe, this news service spoke in June 2020 to a range of managers in the philanthropy space about how their financial positions were affected by the Covid crisis.

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