Charitable funds may not have to cut or suspend grants during down markets to maintain long-term sustainability, according to a new proposal from boutique consultancy firm, Makao Investments.
The Makao paper says while charities have typically defended core capital during difficult times by either stashing away reserves or anchoring grants to asset size (or ‘smoothing’) both approaches come at the expense of fund objectives.
“Whether it is reserving or smoothing, these investment policies are designed to protect organisations from overspending and ensure their long-term viability,” the report says. “That is a laudable objective, but we believe it is crucial not to overstep the mark. The goal of a purpose-driven organisation is typically not to grow the investment portfolio, first and foremost. The primary objective should be to achieve the mission – the purpose for which the organisation was originally set up.”
Instead, Makao says charitable funds might consider a “mission-first” policy that maintains grants at set levels during most market conditions with changes to giving or investment risk policies only necessary if asset values fall “well outside the range of normal fluctuations”.
Under its slated mission-first style, charities can keep spending money “through a difficult period in financial markets, thereby ensuring that beneficiaries are not suffering from the volatility of investment returns”.
“And while the trust ultimately ends up with a smaller asset value than under the ‘Reserving’ and ‘Smoothing’ models, the trust has been more effective through its granting – without threatening the long-term viability,” the Makao paper says.
The report says many “purpose-driven” charitable funds are likely staring down significant losses this year with investment policies often requiring granting to stop or slow.
However, the rigid asset defence mechanisms might be unnecessary in many cases, Makao says.
“We do not argue that the mechanics of reserving and smoothing are completely flawed. However, we believe that the long-term mission of an organisation should be the focus. Therefore, our mission-first approach may be an attractive alternative for some purpose-driven investors.”
Former Russell Investments consultants, Noah Schiltknecht and John Horrell, established Makao in 2019.