A report issued yesterday examines one of the most testing questions faced by charity trustees. 'How much can we safely spend on our charitable activities year on year while preserving the value of our investment assets for future generations?'

This concept of intergenerational equity is based on an idea proposed by renowned economist James Tobin of Yale University. He said in 1974: 'The trustees of endowed institutions are the guardians of the future against claims of the present. Their task in managing the endowment is to preserve equity amongst generations.' Is this sustainability achievable? For Good and not for Keeps, published by ACF (Association of Charitable Foundations), examines this balance and how investing charities approach the decisions of how much to spend and how much to retain for the future.

Research undertaken for the report suggests that many charities with long-term assets want to spend as much as they can while preserving the value of their assets against inflation. Alas there is no single magic number to achieve a sustainable spending rate. Predicting future investment returns remains beyond even the best investment managers so being able to achieve preservation of the investment portfolio in perpetuity will only ever be a probability.

For Good and not for Keeps suggests that the most helpful question for trustees is not 'how much can we spend while preserving the real value of our investment portfolio?' but instead:'When determining our spending and investment policies, what risk are we prepared to take with longevity?'

To help answer this, trustees should reflect on what sort of long-term charity theirs is. The research suggests there are three main types:

  • Legally permanent organisations that are obliged to safeguard the original capital sum
  • Indefinite preservation organisations that choose to maintain their activity indefinitely and will strive for intergenerational equity; and
  • Open-ended charities that have expendable endowments and are prepared to take more risks over longevity to allow higher spending.

If the trustees consider that achieving intergenerational equity is their favoured option then perhaps a fourth type could be added. Similar to the approach of Yale and other American educational endowments, trustees should not just rely on the original endowment, but look for additional donors and encourage other philanthropists to their cause, thereby giving charities a better chance to be around for the long term.

Addressing the question of what spending rule to set is one of the key questions facing trustees managing long term endowment type portfolios and this report is a welcome addition to the debate. It is appreciated that lay trustees may not have the background investment knowledge to make these decisions themselves and so they must look to their investment advisors for guidance. One responsibility of the investment advisor that is too often overlooked and underestimated is to be able to discuss these matters with trustees and explain the challenges in a language that is clearly understood. This report should act as a useful starting point for trustees and advisors to reconsider this question.

We’re always happy to discuss things further.
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