In honour of Trustees’ Week, here’s a cautionary tale.
So there I was, sitting in front of the Investment Committee of an established foundation, when I simply said “with such a long time horizon as yours, you can take a great deal of risk”. One of the Committee members looked at me and said in a stern voice “[young man] this is a charity and we want to avoid risks”. We were both right, but we were talking about quite different things.
What I had meant was that as a long-term investor it was possible for the charity to tolerate considerable volatility in the value of its portfolio, and if they did that, they were likely to achieve much higher returns. But what my respondent meant was that Trustees shouldn’t be reckless with a charity’s asset.
The problem was that we were using the same word ‘risk’ to describe very different things – long term and short term risk. We would be better off if we had completely different words for ‘risk’ rather than carelessly using the one word to describe two time frames. We could invent two German-like words longtermrisk and shorttermrisk so we were clearer about what we meant.
I blame pension funds for mis-appropriating ‘risk’ to mean ‘volatility’. Volatility is only a risk to pension funds because every three years they need to demonstrate what their portfolios are worth. If the portfolio is worth less then the employer will have to contribute more, reducing its profits, so a volatile portfolio is a risk to the sponsoring company’s Finance Director. If it wasn’t for this need to measure every three years, then pension funds could invest as a long-term investor would. For many investors, volatility presents opportunities.
At Yoke, we believe that most charities will always have at least two time frames, one of which is going to be subject to shorttermrisk. The only charities that will be ‘medium risk’ will be the ones that only have a single medium-term time frame, and no other.
So there I was, sitting at another Investment Committee when one of its members announced that because it was a charity “it couldn’t take any risk at all and should keep its entire fund in cash, and although I’m happy to take risk with my own money, we can’t with charitable funds”. And that’s another type of risk: Trustee risk - which is why providing governance support to Trustees is so valuable – it enables Trustees to use their risk appetite to deliver much higher long-term returns.
To find out more about the financial governance support we offer and how we can help you make better financial decisions, read more about our approach, including a recent case-study.