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Whose money is it anyway?

James Brooke-Turner from Yoke and Company looks at the winners and losers of the Financial Crisis, and how it impacted charity investments.

We all remember the Great Financial Crisis of 2007/08, and how the banking system had to be bailed out by governments to keep their economies flowing. We’re less clear what would have happened had the banks not been rescued, but it is safe to assume that the consequences would have been unthinkable in terms of human misery. We are less clear about the winners and losers. This article looks at that.

One of the banks that was bailed out by the Irish government was the Allied Irish Bank with €25.3bn of Irish tax payers’ money, but what did this mean? Here’s an example: on 31st January 2011 a bond issued by the Allied Irish Bank worth €750m was scheduled for repayment. It was repaid in full on the due date by the Irish Government so that the credibility of the financial system was maintained. The investors who held that bond lost no money at all, and many of those investors would not have been Irish nationals, but international investors. What is so shocking is that the €750m paid to the international bond holders was about the same value as the total cuts to the Irish welfare budget that year.

This story explains in a nutshell what has happened in Ireland (and also in Britain) over the last ten years. If you had money you benefited from government protection, but if you did not, you generally lost out because of austerity. Many grant making charities did have money invested in stock markets at that time and have also benefited hugely from the government bail outs and low interest rates, not just in the UK, but globally.

The chart below draws together data showing in changes in real median income and the investment returns to a typical charity portfolio invested 70% in UK equities and 30% in gilts.

What the chart shows clearly is that whilst these charity investment portfolios have almost doubled in value in the last ten years, the incomes of young adults have declined in real terms by up to 15% and are still 5% below where they were ten years ago, while pensioners’ incomes have increased marginally by 10%, and middle incomes have stood still.

In short, these people are no better off over the last ten years but charities with money have done very well. According to the Charity Commission, English charities currently have £143bn of long term investments and if they had all been invested in a 70% equity/30% gilt portfolio (as above) from 2009, they will have made over £40bn.

Why then is it so hard for Foundations to release the gains and share them with their beneficiaries? As usual, we could blame our investment managers for not creating more income, and although it’s not in a fund manager’s interest to encourage clients to withdraw money, my theory is that it is us, the clients, that put up the barriers, not least because of how we measure success.

Consider the chart below. It shows two funds, A and B. The dark blue area shows the value of the assets of the charity on its balance sheet. Many trustees would think that the charity that had the tallest blue area (i.e. the one with the most money - Charity A) was the one that had been most successful on the basis that the richer the charity is the more successful and important it must be. But wait - if that was really a measure of success, trustees should spend as little as possible simply to make their charity bigger and bigger. In fact, a better interpretation is to look at what has been spent together with what is left. If this were to be the basis for measuring success it’s Charity B that has been more successful because it has spent more, done more good, as well as having made more money that Charity A.

The difference between Charity A and Charity B often lies in the quality of the trustees. It’s not that one set of trustees are less good than another, its often that one set have access to better independent information about the balance between spending and saving. This is why we have established Yoke and Company - to provide independent, regulated advice to charity trustees to help them remained focussed on their key job – maximising charitable expenditure. After all, it’s what a charity spends that makes it charitable, not what it keeps for itself.

 James Brooke-Turner Yoke and Company