State Street survey shows strong asset performance for charities

UK charities hit the heady heights of 15% returns for the 2013 calendar year, according to figures from State Street’s UK Charity Fund Universe.

Returns were made up of an estimated 3.2% yield and capital gains of about 12%.

The strong performance was largely because UK equities – the biggest single component of most funds – gained 22.1% over the year, with small and mid-cap issues outperforming the mega-cap stocks.

UK equities make up 37.7% of assets in charity universe portfolios.

The charity universe is made up of 240 individual funds with a combined asset value of around £9bn (€10.8bn).

The results are actual up to end-November, with estimates for December.

Some 26.3% of charity portfolios are invested in overseas equities.

The best performing regions last year were North America and Continental Europe, returning 30.2% and 26%, respectively.

David Cullinan, vice president at State Street Investment Analytics, said: “There was more optimism over the US economy than other developed region.

“In Europe, pessimism has been lifted, with certain of the ‘troubled’ periphery economies, such as Spain, coming out of recession.

“Japan was actually the strongest performer, but the weakness of the yen halved observed returns for UK investors.”

Meanwhile, some of the steam seems to be coming out of emerging markets, which returned only 2.3%.

Cullinan said China’s lower demand for commodities had hit markets supported by their exports, while economies reliant on cheap money were hit by the US Fed’s decision to ‘taper’ its asset-buying programme (quantitative easing).

On the fixed income side, UK bonds – which lost 0.4% – performed badly, as an improved outlook for the UK economy hit Gilt prices.

Bonds as a whole make up 10.4% of UK charity universe portfolios.

Cullinan said equity exposure had grown within the charity universe in recent years, but claimed this was due to their superior performance compared with monetary assets.

However, he has also seen a shift towards funds investing in absolute return and diversified growth-type products.

As at 31 December 2013, alternative investments made up 13.5% of charity universe portfolios.

Turning towards the outlook for 2014, Cullinan said: “A continued measured recovery in global markets, combined with an orderly unwinding of artificially loose monetary policy, should see charity funds perform well again. But shocks cannot be ruled out!”

Meanwhile, the State Street UK Defined Benefit Pension Fund Universe returned 11% over calendar 2013.

The five-year performance for pension funds was around 10% per annum and 10-year returns were 8%, which State Street said comfortably exceeded most actuaries’ assumptions for asset growth.

Cullinan said: “Broadly, pension funds have a much lower exposure to equity than charities and a correspondingly higher proportion in bonds, reflecting the fact pension funds are increasingly moving to better match their liabilities.

“Charity funds tend to have a much longer time horizon and so can ‘afford’ a much greater exposure to real assets.”

But he added: “Interestingly, there is a sizeable portion of the pension fund market, the Local Government Pension Scheme funds, which also has a much longer viewpoint and maintains equity exposures not hugely different from that of the charity sector.”