Charities Back Active Managers despite Peers’ Push to Passive

UK charity funds still believe in active management in the face of increasing use of passive strategies by other institutional investors.

Two-thirds of UK charities invest purely through active managers, according to a survey of the sector—and only 2% have moved their entire portfolios to passive.

The report by Newton Investment Management, covering 74 UK charities with £6 billion of assets, showed an overwhelming preference for active managers, which the firm said was likely to reflect a wide range of investment requirements among this group of investors.

Newton Charity Investment Survey 2014Average asset allocation among UK charities. Source: Newton Charity Investment Survey 2014“From the results it is clear that an active management strategy is the desired investment approach for charities currently,” said Jeremy Wells, investment relationship manager at Newton.

“This is likely to be due to the heterogeneous nature of the sector in terms of investment requirements, particularly with respect to the differing focus on ethically and socially responsible needs. The overriding concern for charities is delivering portfolio returns for their beneficiaries, and this is the driving force for all their investment decisions.”

The results come despite mounting evidence of investors allocating more to passive strategies as active outperformance becomes harder to achieve.

More than 10% of the total assets of the S&P 500 index are now believed to be held by passive products such as exchange-traded funds, and both Morningstar and the Boston Consulting Group have this year warned of significant threats to active managers from the passive investment sector.

Elsewhere in the survey—which Newton intends to publish annually—responses revealed a significant domestic bias in charities’ equity and bond portfolios.

From a sample of 52 charities which provided allocation data to Newton, the asset manager said the average portfolio consisted of just over a third in UK equities and a quarter in overseas equities. UK bonds made up 8.2%, while overseas bond allocations averaged just 3%—less than the average charity holds in cash.

UK charities also showed a preference for property and hedge funds in their alternative investment allocations, while the average portfolio had just 1.6% in private equity and 0.2% in infrastructure.

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