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 2017 was £1.03 billion (2016: £1.0 billion), an increase of £30 million after spending. The portfolio’s total return of 7% in 2017 (2016: 15.9%) under-performed the Foundation's long-term investment objective (RPI+4%) which was 8.3% for the year (versus 6.6% in 2016).
Looking back over one-year, three-year, five-year and since-inception, 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.
Return drivers rose by 8.8% during the year while our diversifying assets grew by 0.3%. Our portfolio typically benefits from rising equity markets, although increases and decreases should be less marked than those of the main global stock market indices. Our global equity funds were a key contributor to performance while performance amongst our diversifying funds was more mixed.
Short-term results need to be seen in the context of progress over longer-term horizons and the strong performance of our global equity funds in 2017 follows a lacklustre result in the preceding year. Similarly, the relatively weak performance of our private investments this year (up 2.8%) follows a rise of 22.1% in 2016.
The majority of the Foundation’s investments are denominated in currencies other than sterling and the relative strength of the pound versus the dollar was a detractor to performance over the period.
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 private equity and venture capital managers, in particular, focus on investments which take a significant time to mature. The last return of capital from a fund is typically 10-15 years after the first investment.
We hope to find managers making investments in businesses which will be the success stories of the next decade. Technological advances in areas such as artificial intelligence, autonomous vehicles and renewable energy are providing interesting opportunities for early-stage investors.
Current market conditions remain challenging. Economic conditions have improved and both the Fed and the Bank of England raised interest rates from their historic lows. But the current equity bull market is now one of the longest on record. Stock market volatility in 2017 fell to extremely low levels, something which has historically been an indication of investors becoming overly complacent with regards to risk.
We find it difficult to identify assets which are significantly undervalued versus their historical averages and continue to be cautious on areas such as fixed income in particular.
The portfolio’s asset allocation at the end of the year was as follows:
18 June 2018
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Charity No. 200051