Charity Connections

Charities have been in the news for all the wrong reasons lately, with controversy surrounding the finances of Kids Company and the Halo Trust and vulnerable elderly people being inundated with pleas for money.

The negative press comes at a difficult time for the charities sector given the backdrop of funding cuts, increased regulation and choppy investment markets. It is the job of Smith & Williamson partners Willie Hartley Russell and Gerry Wright to help guide charities through the current morass.

‘A very small number of charities have been seen to do the wrong thing and it is worrying for other charities who fear that they will all get tarred with the same brush,’ Wright says.

‘Small charities are already seeing a reaction from people when they are knocking on their doors collecting. We think it will blow over. Where we can assist is by giving guidance to trustees on what their role is.’

The pair both joined Smith & Williamson in October 2013 after leaving BlackRock (where they were senior directors) when it stopped offering bespoke investment management to charities in the wake of the retail distribution review (RDR).

Hartley Russell is a veteran of the sector, having previously overseen the £250 million Armed Forces and £150 million Charifaith Common Investment funds at his old firm.

Wright is a more recent convert, having moved over to the charity side in 2012 after a career predominantly spent running institutional money, including a prior stint at the helm of the Schroder European Growth fund.

When choosing a new home after deciding to leave BlackRock, the pair say they were attracted to both the structure of Smith & Williamson and co-chief executive David Cobb’s commitment to building the business.

‘Smith & Williamson is the last independent investment manager of its size running over £1 billion and our interests are very much aligned with our clients’,’ Wright says.

‘We are both partners and the fortunes of our clients are at the forefront of our minds. We live or die by how we do for our clients.

‘Our remit is to raise the profile of the charities team and we’ve been to a lot of conferences and have been playing our part in charity investor groups. The aim is

that if a charity wants to change manager, we’re up there and being considered, and we’ve had great support from the board.’

Although the pair have only been at the firm for less than two years, asset growth has been steady, with the £1.1 billion the firm ran when they joined now up to £1.3 billion. This has helped push Smith & Williamson up from sixteenth to thirteenth in the charity manager league table.
Hartley Russell says that growing a charity business is a marathon rather than a sprint, with the Charities Commission encouraging members to review their arrangements every three to five years, even if they are happy with the performance of their existing investment manager. This means charity money is ‘sticky’ in terms of asset retention, albeit ‘not as sticky as private client money, but more so than retail’, he adds.

The pair stress that the core of Smith & Williamson’s offering is bespoke investment management, which they believe sets them apart from most of their peers who more typically service their charity clients with pooled funds.

‘It’s very important to talk about why we feel we’re different. A charity might have four or five investment managers come in to pitch to them. Our unique selling point is that we offer bespoke investment management,’ Hartley Russell says.

‘If you take on a charity client with certain income and drawdown needs, these might change massively over time. Charities going into common investment funds won’t get that. A lot of the larger investment houses won’t give a bespoke personal service. Charities want someone to guide them along the way.’

The majority of the company’s charity clients are long-term endowments, many of which were recipients of legacies, and they generally tend not to rely on public fundraising.

Most mandates are therefore able to take a long-term approach with traditional balanced strategies the most popular option. These are typically run as segregated mandates, based around a 70% equities, 20% fixed income and 10% alternatives asset allocation to which a tactical overlay is applied.

Each portfolio is customised in line the client’s needs, which can often involve ethical or religious considerations and the firm uses ethical screening specialists Eiris to help ensure these are met.

Wright says an increasing number of clients are now segregating their money into short, medium and long-term investment pots to diversify their funding.

Underlining the different approaches different charities take, she says that endowments are often run in perpetuity, enabling them to hold more illiquid assets. As a case in point, she points to the Wellcome Trust’s decision to buy the Co-op’s farming business to diversify its asset book. On the flipside, disaster relief charities do not have that luxury, as they need to raise cash quickly and put it to work where needed.

The pair says this underlines the need for a bespoke service rather than going into a common investment fund (CIF). Wright says there are around 60 CIFs, which run a total of £13 billion in assets under management, reflecting just how much charity money is run in pooled vehicles.

Draft legislation currently going through parliament will see the creation of charity authorised investment funds (Caifs) as part of a regulatory overhaul of the charity sector.

‘The old ones [CIFs] were overseen by the Charities Commission, not the Financial Conduct Authority, although the custodian and investment manager had to be regulated,’ Hartley Russell says.

‘The new Caifs will be regulated, which will provide greater oversight, and the other benefit is that they will be VAT-exempt on fees. We expect most CIFs to convert to Caifs, probably next year.’

This change is one of many issues that charity trustees are having to deal with, and alongside investment management, Smith & Williamson runs a series of events and initiatives to help them understand what is required of them.

‘There are a lot of issues if you are a trustee, such as auto-enrolment, Statements of Recommended Practice (Sorps) for accounting, ethical concerns and conflicts of interest, and we are in an environment where the Charities Commission’s budget has been cut quite savagely over the years,’ she says.

‘We carry out three to four trustee training sessions a year. There is still a huge lack of knowledge among them. It is very important not to talk down to them. We invite them along and bring in an external speaker, who can talk about legal responsibilities, for example, and then someone from the tax team talking about fraud.’

She says this is one of the benefits of the group having tax, corporate finance and accountancy functions under one roof. This, allied to significant personal experience of working with charities, enables them to better understand their needs.

Hartley Russell says: ‘Most trustee boards are much more about providing guidance and they like to have people with investment experience. You need a good cross-section of people on the board.

‘A lot approach us worried that they don’t have the experience or knowledge and are concerned about their liabilities. At the end of the day, the buck rests with them and they are personally liable.’

Hartley Russell himself has had a seat on the investment committee of a national almshouse for the last 30 years, giving him the inside track on the inner workings of charities and similarly, Wright serves on the investment committee of a London hospice.

‘Ten of the 20 oldest charities in the UK are almshouses and they tend to be run by churches or individual benefactors. They were the first form of social housing. Most were focused on the elderly – people of retirement age and good character living in the area on limited means,’ Hartley Russell says.

‘There are only 35,000 almshouse charities and on average they have five or six properties. Their impact is quite small but nevertheless, they are historic organisations and they add a bit to the local housing stock.’