The purpose of Esmée Fairbairn Foundation’s investment portfolio is to generate funds for our grant-making, through which we have made over £560m in awards since 1961. This is particularly important at a time when we have increased spending to meet additional need.
Our approach to investment
We recognise the importance of responsible investment, and have made a number of significant steps to support the development and implementation of sustainable, long-term investment policies. We use our grant-making to fund organisations advocating for systemic change, including ShareAction, ClientEarth and Global Justice Now; we are actively investing in new, innovative and alternative social and environmental models, such as community energy and land purchase initiatives, through our social investments ; and we are a signatory to the United Nations' Principles for Responsible Investment (UNPRI).
The UNPRI Initiative has quickly become the leading global network for investors to publicly demonstrate their commitment to responsible investment, to collaborate and learn with their peers about the financial and investment implications of Environmental, Social and Governance ("ESG") issues, and to incorporate these factors into their investment decision-making and ownership practices. To date, we have contacted all our managers to better understand how they consider ESG factors when making investments and we have worked with our advisers to make a consideration of ESG factors a standard part of our selection process when appointing managers. We now also monitor and rank our managers on an ongoing basis.
We are currently in the process of reviewing how best to implement these Principles across all of our investment activities. Divestment from fossil fuels remains an option but is not currently a commitment. At present, our managers divest from fossil fuel holdings on a case by case basis if they believe there is a financial reason to do so.
UNPRI brings together an international network of investors who are committed to putting six key principles into action. As signatories we will:
- incorporate ESG issues into investment analysis and decision-making processes
- be active owners and incorporate ESG issues into our ownership policies and practices
- seek appropriate disclosure on ESG issues by the entities in which we invest
- promote acceptance and implementation of the Principles within the investment industry
- work together to enhance our effectiveness in implementing the Principles
- each report on our activities and progress towards implementing the Principles.
The market value of the Foundation's investments at the end of 2015 was £907.6million (2014: £869.4 million), an increase of £38.2 million after spending. The portfolio’s annual total return of 8.9% (2014: 9.2%) outperformed the Foundation's long-term investment objective by 3.7% (2014: 3.5%).
Looking back on a one-year, three year, five year and since inception annualised basis, the performance of the portfolio against our against our long-term investment objectives is as follows:
|Annualised performance over||Actual return %||Target return (UK RPI 4%) %||Over/(under) performance %|
|since inception (2000)||6.3||6.9||(0.6)|
Our strategic target is to have 75% of our holdings in investments which will drive the long-term returns on the endowment (return drivers); 20% in holdings which will help to mitigate volatility over time (diversifiers); and a 5% allocation to cash for liquidity purposes.
The steady rise of asset prices since the financial crisis has left stock market valuations looking stretched on a number of measures. As a consequence, where appropriate, we have been taking profits in our return driver holdings and reinvesting the proceeds into new diversifying investments.
Much of the outperformance in 2015 was driven by our holdings in private equity and venture capital funds. These funds have been maturing for a number of years and added value as the valuations of the underlying investments were supported by buoyant public equity markets, particularly in the technology sector. A number of our managers were able to exit their holdings at attractive prices and distribute cash back to us. However, valuations can be subject to significant volatility in the short term and we remain focused on identifying those managers who can best manage our capital over the long term.
Our return from global equities was neutral overall and our emerging market managers were better able to hold their value than the wider market. Despite strong performance from individual managers, our hedge fund investments detracted from performance as a whole. However, the portfolio benefited significantly from the strength of the US dollar relative to the pound.
We have some exposure to fixed-income investments to help with managing portfolio liquidity but remain reluctant to increase our exposures due to the high valuations of bonds versus their historical averages.
The portfolio’s asset allocation at the end of the year was as follows:
|Asset class||2015 %||2014 %||Change %|
|Fixed income investments||5.9||4.4||1.5|
|Other investment balances||(0.2)||0.7||(0.9)|
|Derivative financial instruments||(0.4)||(0.5)||0.1|
Investment Review from Foundation's Annual Report and Accounts 2015