JPMorgan Asset Management Charity Survey 2006

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JPMorgan Asset Management Charity Survey 2006

  1. 1. JPMorgan Asset Management Charity Survey 2006 Better insight + Better process = Better results
  2. 2. Contents 1 Foreword 2 Summary of key findings 3 Breakdown of respondents 5 Asset allocation 8 Investment returns 12 Socially responsible investing 14 Alternative investments 14 Hedge funds 16 Stewardship of assets 18 Trustee Board composition 19 General 20 Conclusion
  3. 3. 01 JPMorgan Asset Management Charity Survey 2006 Foreword It gives me great pleasure to present the 2006 JPMorgan Asset Management Charity Investment Industry Survey. The survey, which is now in its sixth year, continues to be widely recognised as an essential guide to investment changes and trends among the UK’s leading charities. The survey continues to attract a high number of organisations, with over 100 charities from across the UK providing comments for this year’s report. This represents over £11 billion of charity assets, which is less than in 2005, but ahead of the total value of assets in 2004. As a result of the continued high level of responses, the survey continues to provide valuable insights into the developments in the charity industry, the products that are currently being used and the performance and service levels that charities demand. As in 2005, the findings of the survey cover the current approach of charities to managing assets, the level of charity investment in each major asset class, attitudes among charities towards risk and the level of returns they expect in the future. We also introduced two new topics in the survey in 2006, with questions on charities attitude to socially responsible investing and the composition of their Trustee Board. By including these new questions, we sought to gain even deeper insight into the current thinking of charities. We would like to thank all those who took part for their contribution to the survey’s continued success. Jeremy Wells Head of UK Charities
  4. 4. 02 JPMorgan Asset Management Charity Survey 2006 Summary of Charities remain optimistic about the future, but are more cautious. 40% of charities expect key findings returns over the next three to five years to be 8% or more. However, many organisations are maintaining a diversified portfolio (45% of those who changed asset allocation did so in order to increase portfolio diversification), with large allocations into equities and property as well as an increased allocation into absolute return strategies such as hedge funds. Heightened risk awareness has tempered confidence slightly. 80% of charities expect returns to meet future requirements and commitments of their charity, down from 90% in 2005. In addition, 48% of those who changed their asset allocation over the last year did so to control investment risk. Charities were net buyers of most asset classes, except UK bonds. Of those respondents who changed their asset allocation, charities were net buyers of most asset classes, with the notable exception of UK bonds, where organisations were net sellers of the asset class for the second year in a row. Charities also remain enthusiastic about alternative investments, with no charity reducing their exposure to hedge funds or private equity. Use of investment consultants continues to decline. Only 19% of charities stated that they used consultants for their manager reviews. This is down from the 2005 and 2004 surveys where 23% and 30% of charities respectively used investment consultants. Socially responsible investing is not high on charities’ agenda. Over half of charities (58%) stated that they do not have socially responsible/ethical constraints when investing, which is a similar response level to when the question was previously asked in 2003. Charities understand the benefits and value of hedge funds. 62% of respondents stated that hedge fund returns had met or exceeded expectations and 81% responded that hedge fund investments are good value for money. This is up from 72% in 2005. Please note, wherever mentioned, survey data for 2006 covers the period 30 September 2005 to 30 September 2006 and survey data for 2005 covers the 12 months to 30 September 2005.
  5. 5. 03 JPMorgan Asset Management Charity Survey 2006 Breakdown of In order to make it as easy as possible for respondents, charities had the option of submitting their respondents responses either in hard copy format or via the internet. We received 102 responses to the survey, which is slightly down from the record number we received in 2005 but enough to ensure that we gained useful and interesting insights from the survey. The value of charities’ assets under management varied even more widely than in 2005, with responses coming from across the asset range, from under £1 million to £5 billion. This ensured that we continued to gauge the views of charities across the sector. The total assets under management of all respondents was over £11.5 billion, less than in 2005, but up from the total value of respondents in 2004. Breakdown of respondents by assets under management (GBP million) 3% ■ Under 5 ■ 5 - 10 17% 24% ■ 11 - 20 ■ 21 - 49 ■ 50 - 99 ■ +100 16% ■ Not disclosed % response 17% 10% 13% As in 2005, over two thirds of charities (78%) saw their assets grow in 2006. The returns, however, were more evenly spread, with only a few charities seeing their assets grow by 21% or more. More charities (12%) experienced a loss than in 2005. Some charity portfolios were perhaps caught out by the sharp dip in equity markets in the middle of May to June 2006. Looking in detail at how much charity assets have grown in the last two years compared to previous years, 66% of respondents saw their capital grow by a handsome 21% or more between 2004 and 2006. This compares to 51% over 2003-2005 and 23% in 2002 to 2004. These results are not surprising given that equity market performance has been very strong over the past two years, with the MSCI World rising 29.1% over the two years to December 2006, and registering a gain of 24.5% between 2003 and 2005. All in all, most charities seemed to have had a good year of returns in 2006 – a feature that has contributed to charities continued optimism about the future.
  6. 6. 04 JPMorgan Asset Management Charity Survey 2006 Percentage change in investment returns in past two years 13 ■ 2001-2003 3 -21% or less 7 ■ 2002-2004 8 ■ 2003-2005 ■ 2004-2006 24 8 -11% to -20% 4 Investment return in the past two years 33 17 -1% to -10% 2 4 7 6 No change 9 2 9 18 1% to 10% 7 4 3 25 11% to 20% 24 12 10 23 21% or more 51 66 0% 10% 20% 30% 40% 50% 60% 70% Use of investment managers When asked how many investment managers they use to manage their assets, 18% of charities still manage their assets in-house, which is slightly up from 2005 when 17% of charities managed assets internally. When employing external investment managers, the majority of respondents still only use a few managers irrespective of whether their assets were being managed on a pooled or segregated basis. However, fewer charities in 2006 stated they used one or two managers compared to 2005. More specifically, 40% responded that they used only one manager and 20% said they used two in 2006, while it was 47% and 21% respectively in 2005. Only 6% stated that they employed more than five managers. Average AUM of charities that use external managers 2006 (£m) 2005 (£m) No managers used 10.6 14.7 1-3 managers used 69.6 158.6 4 or more managers used 700.9 590.4 In order to discover which charities are most likely to use external managers, we examined the assets under management for the charities that responded. As in 2005’s survey, we found that in general the larger the charity, the more likely they are to outsource their asset management and use multiple managers. The average value of assets for charities with no managers was £10.6 million, while those who used four or more managers had an average of almost £700.9 million, which is more than 10 times the value of assets of those using one to three managers and 70 times of those using no managers.
  7. 7. 05 JPMorgan Asset Management Charity Survey 2006 Asset allocation Incidence of charities in each asset class ■ 2006 100 ■ 2005 84 82 ■ 2004 80 76 75 75 73 71 70 61 Response % 60 56 50 42 42 44 40 35 25 19 20 20 11 11 13 16 10 11 3 0 te ds r ies ea s nd s ea s / ert y iva he uit ers es bo ers ds sh Ca sits op Pr uity fun Ot eq Ov uiti UK Ov bon Pr ge UK o eq He d eq de p Asset class As the chart above shows, UK equities are still the most popular asset class amongst charities and have been for the past three years as we would expect. UK bonds also remain popular, with 61% of respondents investing in them, as are cash deposits, with 70% of organisations investing in them. However, all three of these main asset classes have experienced a drop in their popularity, generally in favour of property and hedge funds. Allocations made to overseas bonds and equities have also fallen away slightly, following the trend seen in 2005. As stated earlier, hedge funds and property (although a lower allocation than two years ago) were the only asset classes to see some growth in terms of the number of charities that were investing in them. More specifically, nearly half of charities (42%) invest in property and 20% in hedge funds. We can conclude from these results that charities seem to be sensibly maintaining a diversified portfolio, spreading their risks across multiple asset classes, including traditional and alternative investments. This highlights the ongoing theme of the 2006 survey that, although charities are optimistic about the future, they are still cautious enough to want to reduce the volatility of their portfolios and spread their risk across different assets. When considering the asset allocation of charities that saw their assets under management rise, fall or stay the same, the survey found that the most successful charities had a greater allocation to property, UK equities and overseas equities – asset classes that performed well in 2006. Those that suffered a decrease in assets under management had a heavier allocation into cash. Hedge funds were also prevalent with charities that experienced losses, highlighting the importance for charities of picking a good hedge fund manager. For those charities that saw their assets under management remain unchanged, their allocation was quite evenly spread across asset classes, suggesting that poorly performing asset classes cancelled out gains from better performing ones. The table below shows the average AUM of those charities investing in property, private equity and hedge funds: Asset class Number of respondents Average AUM £m Property 33 281 Private Equity 9 653 Hedge funds 16 177
  8. 8. 06 JPMorgan Asset Management Charity Survey 2006 As the chart on the previous page shows, property and hedge funds seem to be the most accessible alternative investments for charities. Approximately a third of charities investing in hedge funds or property had assets under management below £50 million. Only one charity who invested in private equity fell into this category. Bringing in the earlier finding that more charities seem to invest in hedge funds and property than private equity, this perhaps reflects that there is a lack of suitable investment vehicles for smaller charities to invest in private equity. There are common investment funds providing access to hedge funds and property, but not private equity. Incidence of charities by management style for UK equity ■ % Response 2006 ■ % Response 2005 70 65 60 50 Response % 39 41 40 30 30 27 19 20 10 6 4 0 d d ent % t en % en t ge ce 2 na ) an em to em 4 em re ma ing E nh anag .5% ag % to ag mo ly rack 0 ) an 2 ) an or ive x t x m rk + um em k+ m m % ) ss e Ind hma r an n tiv ar nu ive +4 Pa (inde Ac chm r an ss rk num nc pe en pe gre hma r an (be (b Ag nc pe e (b When considering the returns that charities target from their investment into UK equities, the majority of respondents (69%) are targeting a return of 2% or less through enhanced index management or passive management. Only 41% are pursuing active management with a return target of between 2% and 4%, which is in sharp contrast to the 2005 survey, where 65% of respondents stated that they are pursuing active management in UK equities. This again ties in with the overriding theme of the survey that charities are still optimistic about the future, but are more cautious than in 2005. Supporting this theme is the fact that only 6% of charities are using an aggressive style of management and targeting excess returns of 4% or more. Changes to asset allocation in the last 12 months 2006 2005 Yes 29% 29% No 71% 71% Charities remain quite satisfied with their asset allocation, with the majority of charities (71%) not making major changes within the previous 12 months. There has been no change year-on-year to the number of charities making asset allocation changes.
  9. 9. 07 JPMorgan Asset Management Charity Survey 2006 Changes to asset allocation for those charities making asset allocation changes 72 Hedge funds 3 100 17 Private Equity 9 100 54 Property 20 34 Net change – 2006 17 Net change – 2005 Cash 14 Net change – 2004 50 -12 Bonds -20 -22 Equities 8 6 -40% -20% 0% 20% 40% 60% 80% 100% 120% For those charities that made asset allocation changes, the only asset class to see a significant decrease in allocation was bonds, which saw a 20% drop in allocation in 2006 compared to a drop of 12% in 2005. The asset classes that have seen the largest change in asset allocation are hedge funds and private equity, which saw a 100% net increase in charities that changed their asset allocation investing in them. Property also saw a significant increase in asset allocation, with a net change in allocation of +34%. Equities and cash were also beneficiaries of the asset allocation changes. We can draw several conclusions from these results. Firstly, the pursuit of absolute returns as opposed to relative returns seems to be clear from the large increase in allocation to hedge funds that charities have pursued. With charities a little more cautious than in 2005, making positive absolute returns seems to be more important to them than the pursuit of relative returns. Tied to this and some of the findings we have seen earlier in the survey is the fact that charities have increased their allocation across virtually all asset classes. They seem to be much more focused on ensuring that they have sufficient diversification in their portfolio and are concentrating on controlling risk. This is in contrast to 2005 where charities were more interested in pursuing returns. Reasons for changing asset allocation 50 48 ■ 2006 45 46 ■ 2005 40 38 29 29 Response % 30 28 26 20 11 10 9 10 10 3 0 g g se f f / in r hin llin isk y o ts se s he atc o tro t r rea n o ilit rea urn ge an l Ot nc tio n e inc e ret r m ets t on men o i fica es i lat mark ch eral nt se s s C t T i s Vo ty To nc A ov e Clo f as ilitie es ers las lio ui ha tm o inv div set c ortfo eq en es gy lia b s ep inv trate a s th When considering the reasons for changing asset allocation, the majority of charities changed their exposure in order to control investment risk and to increase diversification within their portfolio. This is in contrast to 2005, where the top reason for respondents to change allocation was to increase/enhance returns. These findings are further evidence that charities are more cautious than in 2005. Controlling investment risk and increasing diversification were not so important in 2005, but have moved to the top of charities’ agenda in 2006. However, given that 38% of organisations changed allocation to enhance returns, charities remain optimistic.
  10. 10. 08 JPMorgan Asset Management Charity Survey 2006 Best definition of ‘investment risk’ Other 7% Investment managers not meeting their return target over and above benchmark 11% Not generating enough Market volatility income return 48% 19% Capital growth not meeting inflation over the long term 15% As expected, by far the most popular definition of investment risk was ‘market volatility’. This is possibly because the survey was conducted quite soon after the spike in volatility in May and June 2006 during which charities’ concerns over market volatility re-emerged. This is consistent with the fact that charities made asset allocation changes in 2006 to increase diversification and therefore reduce portfolio volatility. Investment returns Methods used to measure overall performance in your entire portfolio 80 74 74 ■ 2006 70 67 ■ 2005 ■ 2004 60 55 ■ 2003 50 Response % 40 37 29 30 26 25 21 20 18 18 12 13 10 10 2 3 3 0 t t t st on r ins ins ins ain iti he ga ga n ga ag pet Ot s a et n k s ns a latio n s a ies ns com tur r ark tur nf tur ilit tur / Re ma chm Re sh/i Re liab Re oup e n ca gr tb er se pe When considering how investment returns are measured, the majority of charities (67%) prefer to measure returns against market set benchmarks. This figure has dropped slightly from 74% in 2005 and 2004 in favour of measuring returns against cash/inflation and peer group/competition. After several years of steady decline, the number of charities measuring returns against peer groups/competition seems to have stabilised in 2006. Actual absolute return of portfolio over the last 12 months 80 ■ 2006 70 67 ■ 2005 61 60 50 % Respondents 40 30 20 17 13 13 9 8 10 5 4 2 1 0 s % -7% re les -5% -6 -8 % mo or 4% 5% 6% 7% or 4% 8%
  11. 11. 09 JPMorgan Asset Management Charity Survey 2006 When asked to specify the level of absolute returns they achieved in 2006, 67% of charities replied that they received 8% or more. Most of the remaining respondents (28%) saw returns of 5% or less, which means that charities are either enjoying very decent returns or quite mediocre returns depending on their asset allocation. Those charities investing heavily into equities and other potentially high returning asset classes saw their portfolios rise significantly. Annual percentage rate of return expected over next 3-5 years (entire portfolio) 45 40 Where changes were ■ 2006 they were made as follows: 40 made, ■ 2005 ■ 2004 35 30 30 27 Response % 25 20 20 17 16 16 16 14 15 14 15 15 11 11 10 9 9 9 10 5 0 s % % % % re les -5 -6 -7 -8 mo or 4% 5% 6% 7% or 4% 8% In terms of expected returns over the medium to long term, the survey results show confidence in the future continues to rise. 40% of charities expect to earn 8% or more, which is up from 2005 and significantly higher than in 2004 where there was only 9% expecting a return above this level. This indicates that charities’ optimism about the future continues to improve, with respondents having a reasonably optimistic outlook for returns over the next three to five years. Studying the figures further, over half of charities expected a return of 7% or more in 2006. Bringing in the results from our analysis of the reasons for changing asset allocation on page 7, charities are more concerned with controlling investment risk than pursuing returns, we can conclude that although charities expected more in 2006, they are trying to be more realistic. In addition, it is possible that they have more confidence in their fund managers to add value and deliver returns. Charities expecting a return of 6% or more continue to be heavily invested in real assets, both equities and property. Active excess return % Respondents ■ <1% ■ 1% – 2% ■ 2% – 3% ■ 3% or more 17% 22% 26% 18% 2006 2005 38% 32% 29% 18% In terms of expected excess return, the average return expected was 2.0% (compared to 1.8% in 2005), with all responses falling between the range of 0% and 6%. This indicates that charities are continuing to expect their fund managers to perform for them and in some cases perform very well.
  12. 12. 10 JPMorgan Asset Management Charity Survey 2006 Expected return for UK Equities 60 ■ 2006 ■ 2005 52 50 48 40 Response % 30 20 16 15 14 12 11 10 9 8 6 6 3 0 % % % % % re <4 –5 –6 –7 –8 mo 4% 5% 6% 7% or 8% Expected return When asked about returns on specific asset classes, charities expected higher returns from UK equities than UK bonds. Expectations on average were for 7.1% per annum for UK equities. Given the returns seen over the past few years, it is not surprising to see that over half of respondents (52%) expected UK equities to deliver annualised returns of 8% or more over the next three to five years. Expected return for UK Bonds 35 32 ■ 2006 ■ 2005 30 27 26 26 25 23 23 21 Response % 20 16 15 10 6 5 0 % % % % % re <4 –5 –6 –7 –8 mo 4% 5% 6% 7% or 8% Expected return As for UK bonds, respondents were more bearish in their return expectations, with all respondents expecting 7% or less from the asset class, unlike in 2005, where 6% expected 8% or more. This more cautious return expectation probably reflects the disappointing overall returns from bonds over the last few years. Year-on-year, for those charities expecting 6% or more from UK equities, they have increased their allocation to UK equities in pursuit of these higher returns. Annual income required to meet objectives 13% ■ 0% 20% ■ >0% – 3% ■ 3% – 4% ■ 4% – 5% ■ 5 or more 33% 18% 16%
  13. 13. 11 JPMorgan Asset Management Charity Survey 2006 When asked to specify the income returns charities have seen over the last twelve months, the results revealed that the average income return was 3.5%, compared with 4.0% in 2005. The median result was 3.2%. Over a third of respondents required an income of 3% or more to meet objectives, with an average income return requirement per year coming in at 3.1%. This compares to an average figure of 4.1% in 2005. Meeting future commitments 2006 2005 Yes 80% 90% No 20% 10% 80% of respondents expected the returns from their investments to meet their future requirements and commitments of their charity. This figure is down from the 90% found in 2005, which indicated a fall in confidence in charities’ investment strategy. This is in contrast to charities’ increased confidence in future returns. The decline in bonds last year and the sharp dip in equity markets in May and June will probably have affected charities’ expectations that returns will meet commitments going forward. Solutions to remedy any return shortage 50 ■ 2006 46 ■ 2005 ■ 2004 40 36 35 30 Response % 30 27 20 15 15 15 9 9 10 0 1 0 er te th rom l igh es olu row n f ita t h egi ay y bs gy eg e ur ap k a rat it m ilit n a te ur om ret nd c oo n st hat olat t a stra fut t inc aw a L r u gt rv op n e Dr me Ad etur fic ren o ret ptin ate cri ur inc ce re r Sa for c ac to g d lea Of the charities that were expecting returns to not meet commitments, the most popular strategy to remedy the situation was drawing return from income and capital. This has seen a steady growth in popularity from 30% in 2004 to 46% in 2006. Conversely, absolute return strategies (hedge funds) have waned in popularity, with 35% of respondents in 2004 looking to adopt such a strategy, whilst no respondents cited this as a solution in 2006.
  14. 14. 12 JPMorgan Asset Management Charity Survey 2006 Socially responsible Socially responsible investing (SRI) is a topic that we investigated a few years ago and return to in investing this year’s survey to discover if there have been any changes to charities’ attitude towards SRI. Incidence of socially responsible and ethical constraints ■ Yes ■ No Expected return will meet charitable commitments 42% 46% 2006 2003 58% 54% Indicating that charities’ attitude towards SRI or ethical investing has not changed over the past three years, the majority of respondents (58%) do not have socially responsible/ethical remits when investing. Applying these principles to fund management The traditional approach of negative screening is 10 times more popular than the modern method of positive screening, with 91% of charities favouring this approach. The sectors charities avoid the most when investing were, as expected, tobacco (68% avoidance), arms (34% avoidance), alcohol (18% avoidance) and gambling (16% avoidance). Index for measuring returns against SRI benchmark The majority of charities that replied to this question said that they did not measure against an SRI benchmark, while only one charity mentioned using an SRI benchmark, but did not specify the index used. Incidence of use of an external research screening company 5% ■ Yes ■ No 95% Only one in 20 charities used external screening companies, which ties in with the finding that they prefer to use negative screening.
  15. 15. 13 JPMorgan Asset Management Charity Survey 2006 Plans to introduce new ethical or socially responsible investment policy 13% ■ No, not at the moment ■ Yes, within the next 12 months ■ Yes, but no fixed time frame 6% 81% Having left the topic out of our survey in the last two years, it seems that charities’ attitudes towards socially responsible investing have not really changed. The issue remains an area of focus for a minority of charities and 81% of respondents currently have no plans to introduce a new ethical or socially responsible investment policy. Amount willing to sacrifice in annual returns in order to invest in a SRI 5% ■ 0% 10% ■ 0.5% ■ 1% ■ 2% 5% 80% The average amount that respondents would be willing to sacrifice in order to invest in a SRI policy is 0.2%. Among those charities not pursuing an ethical policy, the perceived loss in return is a major factor in not pursuing this policy. However, amongst ethical charity investors, there is a body of opinion that suggests that an ethical policy should not require any return sacrifice and in fact ought to be return enhancing.
  16. 16. 14 JPMorgan Asset Management Charity Survey 2006 Alternative Attitude towards alternative investment vehicles investments 2006 2005 2004 Asset class Already use Considering Already use Considering Already use Considering Private Equity 17% 22% 15% 11% 19% 25% Hedge Funds 24% 12% 16% 13% 26% 32% Long only absolute return strategies 10% 12% 6% 9% 5% 19% Commodities 3% 13% 3% 5% 9% 6% Property 41% 24% 45% 12% 56% 28% When considering alternative investments, property (UK) was the most commonly used asset class, with 41% of respondents already actively investing in it which is broadly unchanged from 2005. Of particular note, diversification into property (overseas) seems to be of greater interest to charities, with 26% of organisations considering using it in the future. Elsewhere in alternative assets, the popularity of hedge funds and long only strategies continues to build, with both asset classes seeing considerable increases in charities using these strategies year-on-year. Hedge funds The year started investing in hedge funds 60 50 40 30 % 25 25 20 20 15 10 10 5 0 99 00 01 02 03 04 05 06 19 20 20 20 20 20 20 20 Turning specifically to hedge funds, of the 24% of respondents who already invest in hedge funds, the vast majority began doing so within the last five years, with only 5% of respondents beginning their investment before 2002. The hedge fund phenomenon seemed to take off from 2002 (a time when equity markets were approaching their nadir), with take up of the asset class fairly evenly spread over the next few years. Their popularity has continued over the last two years, with over a third investing in 2005 and 2006. Reason for investing in hedge funds ■ Recommendation from consultant ■ Recommendation from investment company ■ Recommendation from Trustee or Board 30% 48% 22%
  17. 17. 15 JPMorgan Asset Management Charity Survey 2006 When investing in hedge funds, 52% of respondents invested as a result of a recommendation from an investment consultant or company, which indicated the high influence of advisers when considering alternative asset classes. Almost half of charities acted as a result of an internal recommendation from a trustee or board, which is a sharp increase on 2005’s finding. These figures suggest trustees are becoming more confident about taking the decision independently to invest in hedge funds. Returns achieved from hedge funds 8% ■ Less than 5% 20% 17% ■ 5% – 7.5% ■ 7.5% – 10% ■ More than 10% 40% 33% 2006 2005 13% 42% 27% The majority of respondents experienced higher returns from hedge funds in 2006 compared to 2005, with only 8% stating that they had received less than 5% in 2006 compared to 40% of respondents in 2005. Three-quarters of respondents experienced returns between 5 and 10%, with the majority falling in the upper half of this range. A not insignificant proportion (17%) of respondents saw even higher growth, replying that their hedge fund portfolio had returned in excess of 10%. The average return achieved was 8.4%, compared with 7.5% in 2005. Satisfaction with returns from hedge funds 18% ■ Returns 29% 38% have exceeded 24% expectations ■ Returns have met expectations ■ Returns have not met expectations 2006 2005 44% 47% A smaller number of charities (18%) compared to last year indicated that returns from their hedge fund exposure had exceeded expectations. Just under half (44%) stated that they had met expectations, indicating that the majority are satisfied, but a significant 38% indicated that returns had not met expectations. This suggests that a growing number of charities are underwhelmed by the returns received from hedge funds. In the year to September 2006, the average hedge fund return was 5.2% to 5.5%, according to leading recognised industry benchmarks. Overwhelmingly respondents continued to regard their investments as good value for money, with 81% of respondents believing hedge funds are good value, up from 72% the previous year. This suggests that charities invested in hedge funds are fully aware of the costs associated with them and why they should be included in a portfolio. Education around hedge funds has been improving, helping charities understand the asset class and what it has to offer.
  18. 18. 16 JPMorgan Asset Management Charity Survey 2006 Stewardship of Last formal investment manager review assets 50 ■ 2006 ■ 2005 43 38 ■ 2004 40 35 32 33 30 Response % 26 21 21 19 20 12 11 9 10 0 t e e as ree fiv fiv el s th to an th nth to ee th go hin e mo ne o hr go re rs a t Wi elv n o rs ag nt a Mo yea ee a ee rs tw etw ye tw yea B Be Turning to charities’ stewardship of assets, two thirds of respondents (69%) had carried out a formal review of their investment managers within the last three years, with only 12% having not done so more than five years ago. The responses are similar to our survey in 2005 and 2004, which implies that most charities are carrying out their management review according to a regular timetable. Use of consultant for review 2006 2005 2004 Yes 19% 23% 30% No 81% 77% 70% The prevalence of consultants in the review process has continued to drop, with less than a fifth (19%) of charities using them in 2006 compared to 23% in 2005 and 30% in 2004. This suggests that as returns from their portfolio have been increasingly positive, charities remain optimistic about the future, and are becoming more relaxed about consulting advisers, preferring to review internally instead. In addition, given returns have been relatively satisfying, charities could be more reluctant to make changes and spend money making those changes. Reason for using a consultant Where they use consultants, charities seem to be using them for the right reasons. As in previous years, respondents overwhelmingly cited the requirement of investment advice and the need for assistance in making objective comparisons of investment strategies as grounds for using investment consultants. Influence of consultant on choice of managers Where consultants were used as part of the manager review process, most charities (88%) responded that they had a moderate or significant influence on their decisions. So, when consultants are used, charities generally try to take into account what they say and make decisions accordingly.
  19. 19. 17 JPMorgan Asset Management Charity Survey 2006 Next planned investment manager review 4% ■ In the next twelve months ■ Between one to two years ■ Between two to three years 11% ■ Between three to five years ■ More than five years 18% 45% 22% With regards to the next planned formal review, over half of respondents plan to have a formal review in the next two years. Only 15% expected their next review to be more than three years away. Future intentions to use investment consultant 100 ■ Yes ■ No 81 80 72 56 Response % 60 44 40 28 19 20 0 06 05 04 20 20 20 Reflecting the decline in the use of consultants, 81% of respondents are less likely to use a consultant than in previous years during their manager review. This is an increase on the results from 2005 and 2004, where 72% and 44% stated that they were not going to use consultants. Reasons for not using a consultant 57 60 50 40 34 Response % 34 30 20 7 10 2 0 g ot e h ard sin n du ug r ow ) Bo nt se f u es it or ot no n he el ee ficie erti t o ts do enef g f nd n t e atio ants Ot ee b st f p s n wi a to rs No orm ult Tru s su t ex Co tan e b s l th vie ce g e inf ons as e ha men su Re ligen ectin nag le t on stify c u i xp ma on c (p es j d e e inv an g ch Of the reasons given for not using the services of an investment consultant, over half (57%) replied that the board now has sufficient investment expertise to make their own decisions. The second most popular response highlighted that the cost of using consultants would not justify the benefits of using one.
  20. 20. 18 JPMorgan Asset Management Charity Survey 2006 Trustee Board The survey found that the average number of trustees per Trustee Board was 15 with the average composition length of tenure for trustees being 6.3 years. The majority of charities (62%) have an investment sub-committee, although the evidence from our survey indicates little correlation between having a sub-committee and returns achieved. Sufficient investment expertise on the Trustee Board ■ Yes ■ No 29% 71% The majority of respondents (71%) were confident that their Trustee Boards have sufficient expertise. The evidence from the survey suggests that this confidence is well founded. Sufficient demographic diversification on the Trustee Board ■ Yes ■ No 46% 54% There is a fairly even split among charities in terms of whether they think their Trustee Board is diversified enough across age, gender and ethnic mix. Just over half (54%) believe that their Board is appropriately diversified.
  21. 21. 19 JPMorgan Asset Management Charity Survey 2006 Adequate key charity representation on the Board ■ Yes ■ No 18% 82% Charities are more confident about whether the key representatives of the charity are adequately represented, with 82% of respondents stating that they are well represented. General Key concerns about successfully managing charity assets over the next 3-5 years 35 ■ 2006 31 ■ 2005 30 26 25 25 21 Response % 20 16 17 15 15 13 11 10 9 10 8 7 7 5 5 3 0 t e t sk g ty s en om rke nce /ri ern tin et er ou stm s Inc Ma rma ity onc lec ss op et ane ve turn til oc Se ect a ion Pr ark ell In re rfo la N rr at m sc pe Vo co lloc Mi a Finally, to ensure we had a full picture of charities’ views, we asked respondents to detail the key concerns they have about managing their assets over the next three to five years. In contrast to 2005, where 13% of charities were sufficiently confident to have no concerns, 2006 sees a decline in those organisations with no concerns to 7%. This highlights the ongoing theme we have seen in this survey that charities are cautiously optimistic in 2006 compared to being bullish in 2005. In addition, after a year of more moderate returns than in 2005, charities are again highlighting investment returns as their key concern in managing their assets over the next 3-5 years. Perhaps since returns in a broad sweep of asset classes in the six months before the survey was conducted were weak. However, on a more positive note, charities largely feel that they have a suitable asset allocation strategy for the next three to five years, with only 7% citing this as a concern in the latest survey. Also, charities are generally less concerned about market performance or income, again perhaps highlighting a level of tempered optimism.
  22. 22. 20 JPMorgan Asset Management Charity Survey 2006 Conclusion From the survey, we can draw some key themes from the charities’ responses, many of which continued the trends observed in 2005, but also some that offered different views from those seen in 2005. The key theme of the 2006 survey is that charities have remained relatively optimistic, but are acting with some caution. In 2005, the survey results revealed that charities were willing to take on risk and were much more bullish about the future than in 2004, perhaps because they were anchoring on the strong returns they had seen from their portfolios and income over the previous two and a half years. In 2006, charities indicated that they were still quite optimistic, but have tempered their confidence and are thinking more about controlling risk than the aggressive pursuit of returns. The sharp correction seen in equity markets during May 2006 has perhaps caused charities to be more realistic and aware that markets can change direction suddenly. Tied in with this theme is the finding that charities are increasingly concentrating on maintaining a diversified portfolio. In particular, they continue to increase their exposure to alternative investments. Property still remains a very popular choice amongst charities and features as one of the main asset classes in charity portfolios alongside UK equities and UK bonds. Of particular interest is that some organisations are starting to consider diversifying into overseas property. Charities also continue to increase their exposure to absolute return strategies, which is appropriate given their higher risk aversion. Hedge funds are particularly popular amongst charities, with many stating that returns from their allocation into the asset class has met or exceeded expectations and overwhelmingly that they represent good value for money. An ongoing theme from 2005 is the decline in the popularity of investment consultants. With charities remaining relatively positive about the future and feeling generally satisfied by the returns they have seen, many organisations are comfortable with their current asset allocation and investment managers, so do not feel they need the advice of consultants. They are also increasingly comfortable with making decisions independently, as illustrated by the confidence they show in their own Trustee Boards. Turning to charities attitudes towards socially responsible investing, a topic that we touched on in 2003 and re-introduced this year, charities’ stance on ethical policies does not seem to have changed. Over half of respondents indicated that they do not have socially responsible constraints when investing and 81% of charities stated they are not planning to introduce an ethical policy in the future. In summary, charities continued to be generally happy with their investments and returns they are earning. They are still looking to the future with confidence, but with more caution than seen in 2005.
  23. 23. JPMorgan Asset Management is one of the five largest active asset managers in the world. We manage assets of more than £1.3 billion for more than 300 UK charity clients. Globally, JPMorgan manages charitable assets of more than £7 billion – a responsibility that gives us clear insight into what charities want from their asset manager. We combine disciplined processes with team-based decision-making and rigorous risk control. Our focus on innovative thinking means we are constantly finding new ways to capture sources of investment return across financial markets. JPMorgan Asset Management is part of JPMorgan Chase & Co, the global financial services group. For further information contact Katie Delacombe in our Charities Team on 020 7742 5307 or by email at katie.j.delacombe@jpmorgan.com
  24. 24. JPMorgan Asset Management Finsbury Dials 20 Finsbury Street London EC2Y 9AQ www.jpmorgan.com/assetmanagement/uk/institutional The information in this brochure is based on our understanding of law, regulation and Inland Revenue practice as at 03/06. JPMorgan Asset Management is a trading name of JPMorgan Asset Management Marketing Limited, which is regulated by the Financial Services Authority. Registered in England No. 288553. Registered office: 125 London Wall, London EC2Y 5HA. GB H743 03/07

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