Benign environment hides risks for UK charity investors
August is traditionally the quietest time of the year in financial markets as traders, brokers, fund managers and journalists all head for the beach, families in tow. With worrying Greek headlines receding, the US recovery strengthening and continued monetary stimulus in Europe and Japan, investors could be forgiven for switching off assuming all is set fair for the second half of the year. But charity investors reliant on UK equities and bonds should beware complacency.
Despite the constitutional uncertainties caused by the EU referendum and the rise of the Scottish National Party, the outlook for the UK economy is benign if uninspiring. However, it is a mistake to assume the outlook for UK bond and equity markets are directly linked to an improving backdrop.
UK government and corporate bonds have benefited from falling interest rates but the increasing likelihood of rises next year may signal the end of a 20 year bull run. Price falls of recent months may only be the beginning and clearly show that such investments are not risk free in the way they are often perceived.
It is said the economies and stock markets live in the same house but not in the same room. This is certainly true of the FTSE 100 as over half the earnings of the constituent companies come from outside of the UK and around 20% of the index consists of multi-national oil and gas and resources companies. These firms are particularly exposed to falls in commodity prices like those we are currently experiencing, as the Chinese economy slows and it moves away from large scale industrialisation.
Traditional UK portfolios tend to be dominated by FTSE listed companies and domestic government and corporate bonds. This is particularly true of charities where yield is often of great importance. We would encourage investors to question historic norms and invest globally in order to spread risk and access more opportunities. Less conventional investment strategies can also use instruments that protect against rising interest rates or falls in equity markets. Unfortunately, protecting capital in this way normally results in a reduction in income – a tough balancing act for charity investors.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.