The prime purpose of our investment approach is to ensure that we can continue to fund work which improves the quality of life for people and communities in the UK for decades to come. We aim to align our investments with our charitable objectives, whilst maintaining a consistent real value for the endowment over the longer term.
Our portfolio is diversified across a broad range of asset classes, geographies, investment managers and investment strategies. All of our portfolio is invested via pooled funds, which means that we invest in a large range of companies, which changes from day to day.
Our investment advisors, Cambridge Associates, manage the day to day running of our investment portfolio, under instruction of our Investment Committee, working with our staff.
We aim to be proactive asset owners by engaging with companies on issues that are aligned with our funding priorities. We work with other foundations and investors through the Charities Responsible Investment Network and look for opportunities to promote corporate behaviour which is in the interests of long term shareholders. Examples include becoming joint signatories with other investors to an initiative asking global food producers to focus on sustainability in their sourcing practices and another initiative asking corporates to commit to renewable energy sources over time.
We do not rule out any investments, but avoid investing in any new funds which might directly conflict with the outcomes of our funding.
We use our grant-making to fund organisations advocating for systemic change in investments, including ShareAction, ClientEarth and Carbon Disclosure Project. 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.
We have recently agreed to trial a new approach to investing in strategies with enhanced environmental, social and governance (ESG) impact through a portion of our main investment portfolio. These will be investments in funds which are looking to achieve impact alongside financial return, but which don’t currently fit our criteria for mainstream investments due to size, focus or risk profile.
The Foundation is also a signatory to the United Nations’ Principles for Responsible Investment (UNPRI). This initiative brings together an international network of investors who are committed to putting six key principles into action. As signatories we will:
The UNPRI Initiative has 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 ESG issues, and to incorporate these factors into their investment decision-making and ownership practices.
The market value of the Foundation's investments at the end of 2016 was £1.0 billion (2015: £907.6 million), an increase of £92.4 million after spending. The portfolio’s annual total return of 15.9% (2015: 8.9%) outperformed the Foundation's long-term investment objective by 9.3% (2015: 3.7%).
Looking back on a one-year, three-year, five-year and since-inception annualised basis, the performance of the portfolio against our long-term investment objectives is as follows:
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 fall in the value of sterling following the UK’s decision to leave the EU had a significant impact on investment performance during 2016. The S&P 500 index, for example, was up 12% in dollar terms but rose 33.6% when converted back into sterling.
The portfolio was an overall beneficiary from the decline in the value of the Sterling as the majority of its investments are denominated in currencies other than sterling.
The fund benefited during 2016 from private equity and venture capital funds holdings although to a lesser extent than 2015. These funds have been maturing for a number of years and the valuations of the underlying investments were supported by buoyant US equity markets, particularly within the technology sector.
In terms of public equity markets, prices continued to rise during 2016 and stock market valuations appear stretched on a number of measures. While the low interest rate environment remains very supportive, the cycle will eventually turn and there are increasing signs that the bond market, in particular, is unlikely to perform as well in the coming years.
As a consequence, where appropriate, we have been taking profits in our return driver holdings and reinvesting the proceeds into new diversifying investments. We remain focused on identifying those managers who can best manage our capital over the long-term.
Our global equities were up 28% in sterling terms but lagged behind their benchmark slightly. This was also the case for our investments in emerging markets while our hedge funds were broadly in line with their targets.
The portfolio’s asset allocation at the end of the year was as follows:
21 March 2018
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Charity No. 200051