Brought to you by Wilmington Charities

An analysis of UK charity investment performance

In 2017, Teknometry, in conjunction with the Charity Investors Group established the Teknometry CIG Charity Fund Universe, to provide a representative peer group for the analysis of UK charity investment performance...

An analysis of UK charity investment performance

Now in its third year, Teknometry collects data from its participant asset management firms, calculates and analyses that information and then makes it available through its quarterly reporting service and online portal. The Teknometry CIG Charity Fund Universe is the most comprehensive peer group of UK charity funds in the multi-asset sector and is the only one to provide statistics on return, asset allocation, risk and income yield. 

On 30th September 2019, the Teknometry CIG Charity Universe comprised of 1,298 portfolios representing over £12.4 billion of UK charity fund assets and the key return statistics from the third quarter universe report are shown in the table below.

3-month average return 12-month average return 12-month average income yield
1.69% 4.8% 3.05%

We continually look for new ways to analyse the information we possess. This article will describe how we set about to determine whether there is a link between the size of a charity in terms of monetary value and the returns achieved by that charity.

Background

In Q2 2018 we introduced the “Size Band” chart to the universe report. This chart breaks down the current quarter’s asset allocation to group together charities with similar AUM. The following bands were chosen to show the percentage of the portfolios in the universe with an AUM between the following bands; “less than 5 million”, “in between £5 - £20million” and “greater than 20 million”. In this article we refer to these size bands as "small", "medium" and "large".

The latest Q3 2019 percentages:

We wanted to discover if there was any correlation between the wealth of a charity and the performance of its investments.
Participant managers supply returns and asset allocations for different charities at various levels on a monthly or quarterly basis. This information enables us to determine the relative weights in each asset at a high level, but the information provided does not contain any information about the underlying holdings in those portfolios, their performance or any associated benchmark. The constituent charities of the Teknometry CIG Charity Universe are anonymised by the participant managers to protect the identification of any charity. 

Analysis

In order to assess the impact of the different size bands we first had to look at the performance of TEK CIG Universe against two market indices – the Freedom Index UK and US equity indices. In recent times, UK charities generally have an average asset allocation of around 70% in Equites.

Asset Allocation

The following chart shows the average asset allocation in each of the major asset classes for the last four quarters, ending on 30th September 2019.

Note: "Other Assets" are holdings not classified as belonging to any of the other asset classes by the participants.

The results below align with expectations with the UK and US being the dominant markets for those equity investments there is a direct correlation between the performance of these market indices and the Teknometry CIG Charity Fund Universe. (Note that the Freedom Index US index is expressed in GBP terms to reflect the actual performance due to currency movements as applied to the UK investor)


We decided to calculate the equal weighted (average) return of each size band over the last couple of years and chose to plot it against the Teknometry CIG Average return.


The above chart shows that larger funds tend to outperform the universe in positive markets but underperform when returns are negative. Conversely, for the “small” band, the opposite was true – they tended to underperform when there were positive returns but outperformed when returns were negative. The “medium” band was broadly in line with universe.

In order to focus on the margin of the out or underperformance, we chose to plot the same data but instead, magnify the impact by showing the differences between the various size bands and the Teknometry CIG Charity Fund Universe, and display the results in terms of basis points as opposed to percentages.


As part of the calculation of the Teknometry CIG Charity Fund Universe we also calculate the median, quartiles and percentiles of the universe to show the spread of returns. The comparative reporting service we offer to charities allows us to show the individual performance of a portfolio against the universe and we show the performance as a quartile ranking, where a ranking of 1 indicates the performance was in the top quarter of all supplied portfolios whereas a ranking of 4 represents a performance lying in the bottom quarter.


In order to determine the proportion of performance for each size band we decided to show what the share of portfolios were, grouped in each quartile ranking.

The following pie charts show the percentage of charities in each of the three same size bands according to their rank. Rank 1 represents the top 25% performing charities in the universe, whereas a ranking of 4 represent the bottom 25% for the quarter ending on 30th September 2019.


This shows that in Q3 2019 73% of the largest charities outperformed the median return.

Summary
There seems to be a clear pattern emerging that shows the largest charity funds outperform their peers in positive markets but underperform when there is a downturn.

As not all participants supply asset level returns at this time, it makes it difficult for us to be able to state categorically how the performance of the underlying assets may be affecting the total return. 

However we can speculate, and some of the reasons may be due to some or all of the following:

  • Larger charity funds are actively managed by specialist asset managers
  • They may be prepared to take a higher risk in seeking returns
  • Larger charities tend to have a greater exposure to alternative assets
  • Very large charities have a significantly larger proportion of property assets
  • Smaller charities may invest in pooled funds, less risky investments such as bonds and cash accounts where returns are smaller but more stable