Is 2025 the year for charities to optimise investments and ease pressures?

Charities have been having a tough time with increasing financial pressures initially from the pandemic, subsequent high inflation and the ongoing cost-of-living crisis.

Now add to that the increase in employer National Insurance Contributions and minimum wages announced in the Chancellor’s Autumn Budget, and the outlook doesn’t look full of sunshine or rainbows.  

At least global equity markets have been providing some respite over the last couple of years by providing excellent returns, albeit from a narrower group of “magnificent” stocks. As we look forward to 2025, we set out below some ideas and good opportunities to improve investment returns, to alleviate stress of some of this bad news. 

Background 

Pandemic: Covid-19 hit both supply and demand with deep, and likely long-lasting, consequences for the global economy. The IMF described the “Great Lockdown” as the worst recession since the Great Depression. Along with the rest of the world, charities were put under pressure by the Covid-19 pandemic. Research from The Charity Commission shows that over 90% of charities were negatively affected by the pandemic, including loss of income, increased demand for services and a shortage of volunteers.  

High inflation and cost-of-living crisis: no sooner had global growth surpassed its pre-pandemic level and economic momentum began to wane, inflation rocketed and interest rates jumped. Add to that some geopolitical uncertainty and wars in Europe to make things even more difficult. The cost-of-living crisis has had a significant impact on the not-for-profit sector – increased demand for services, increased running costs and lower donations. Research from The Charities Aid Foundation shows that more than 3.2m people said they reduced or stopped a regular payment to charity because of increasing living costs. 

Autumn 2024 UK budget: The increase in employer National Insurance Contributions (both the increase in rate and reduction in threshold) and increase in minimum wages will have a direct impact on charities, endowments and foundations from April 2025, increasing cost pressures further. On the positive side, strengthening existing charity tax rules aim to help prevent abuse. Also, changes to inheritance tax may mean the inheritance tax incentives in place for individuals who choose to leave a legacy gift to a charity could become more impactful.  

Investment returns and market background: Although both equities and bonds delivered negative returns in 2022, global equities (GBP investor, unhedged) delivered stellar returns of +18.0% in 2023 and +20.6% over the year to 30 November 2024, helping drive investment returns for charity assets. However, equity markets have approached or are approaching all-time high levels, with recent returns driven by the Magnificent Seven stocks and the artificial intelligence (AI) megatrend. In addition, credit spreads appear relatively expensive by historical standards. With heightened geopolitical tensions on various fronts globally, increasing US/AI concentration and idiosyncratic risks, we believe there is an increased short-to-medium risk of experiencing a market shock “risk off” event that leads to a sharp fall in many types of growth assets.

How could your investment portfolio help to support your charitable objectives? 

As we look forward to 2025, we believe it is more important than ever to optimise your investment arrangements to support your charitable objectives – consider whether it is possible to increase risk-adjusted returns, focus on income generating assets, or explore options to improve value for money regarding ongoing investment fees. We set out further considerations below. 

Increasing investment income 

Make sure your investment strategy delivers your income requirements without being over-reliant on having to sell volatile assets at an inopportune time. Increasing investment income can also help reduce the frequency of cash drawdowns and lower ongoing governance. 

We’ve recently worked with a charity where we’ve increased the annual income on their investments to over 4% pa (whilst maintaining the total expected returns). 

We’ve also helped charities review their short-term liquid holdings to maximise expected returns. Short-term interest rates are still relatively high compared to the recent past and we encourage you to make sure your assets are benefitting from this.

Improve value for money regarding ongoing investment fees 

We suggest looking at your net of fee investment returns versus a passive benchmark and comparing the share of any outperformance versus the fees your paying to see whether you’re getting value for money.

Moving away from a multi-asset manager approach and/or investment mandate with two layers of fees could help improve value for money on ongoing investment fees.

Some charities haven’t fully appreciated they’re paying fees to both the single manager they have a relationship with, and underlying managers used for some/all of their investments. 

We’ve recently worked with charities where we’ve reduced annual management fees by considering other investment arrangements.

Diversifying the drivers of investment returns 

Adding or increasing your allocation to alternative investments can help diversify the drivers of investment returns to benefit from other opportunities and mitigate risks – we have lots of experience helping to implement allocations to alternative assets.

We’re also helping our clients protect their assets given the recent good news from strong equity returns. This has ranged from simply rebalancing (reducing) equity allocations to adding explicit protection strategies – these have included allocations structured equities (selling some upside to fund downside protection) and tail risk mitigation strategies (ie those that aim to deliver positive returns when markets fall).

Get in touch to see how we can help you enhance your investment arrangements to help with charitable objectives, within your risk and responsible investment framework.