Navigating 2024

How Charity Investment Managers Performed and Why

We have previously written about the long-term risks and returns of major asset classes, concluding with a section titled "What return expectations are plausible?" Our analysis suggested that, while the relationship is not linear, a portfolio consisting of 70% equities and 30% gilts might achieve a net-of-costs real return (i.e. after manager fees and inflation) in the range of 3–3.5% per annum.

Following this, our sharp-eyed readers may have noticed that we introduced a new benchmark into our monthly manager return surveys under "growth strategies": a 70% global equity / 30% UK short-dated gilts strategy. Over the course of 2024, this strategy was the best-performing one in our table, delivering a return of 14.67%. Over the three years to December 2024, it was also the strongest performer, with an annualised return of 6.8%. However, despite the excellent one-year return, the three-year return is only approximately 0.5% per annum above inflation, reflecting the impact of high inflation in 2022 and 2023.

It is important to note that this index-based reference is not a real portfolio but was introduced as a comparator for informational purposes. However, it does highlight the significant challenges that active managers have faced in recent years, both in terms of relative performance against markets and, more importantly for clients, keeping pace with inflation. This paper will examine these issues in greater detail to support Trustees in assessing their current and potential future manager arrangements.

A Note on Objectives and Benchmarks

Before evaluating manager performance, it is essential to clarify what a manager is being asked to achieve and what constitutes ‘success’. For a typical long-term charity investor, this can be framed in three key parts:

Objectives – What is the long-term goal? This often takes the form of an "inflation plus" return target, such as "inflation plus 3% per annum," subject to specific time horizons, risk parameters, and ESG considerations. However, it is important to recognise that there is no single investment that directly reflects this objective - it is inherently "uninvestable." Any portfolio designed to meet this target is constructed based on a set of assumptions and investment beliefs.
Comparators – Since objectives are "uninvestable," it is common practice to assess performance against one or more comparators. These may include peer groups of funds or managers with similar objectives (as presented in our monthly reports) or specific sector surveys (such as in the property market). Like objectives, peer group comparators are also "uninvestable" - it is not possible to invest in the average manager in advance - but they offer valuable insight into the returns and risks available to managers pursuing similar strategies.
Benchmarks – Both we and most managers use benchmarks composed of investable assets - typically based on market indices - as a reference point for assessing a manager’s processes and skill. While there are various advantages and disadvantages to using benchmarks (which we will not explore in detail here), when applied appropriately, they can provide a useful measure of how a manager is investing and offer a transparent way to evaluate performance.

Reviewing 2024 Performance Applying this framework to the performance of "growth" managers in 2024 and over the past three years reveals several key insights:

One-year performance and spending power – For Trustees focusing on "affordable spending," 2024 was an excellent year. Every manager in our survey delivered returns significantly ahead of inflation, with even the lowest returns exceeding CPI by nearly 3%. As a result, objectives were broadly met on a one-year basis. However, over the three-year period, the high inflation of 2022 and 2023 has eroded spending power, making it more challenging to achieve sustainable long-term returns.
Variation among managers – The range of returns among comparable managers was particularly wide in 2024, with a performance spread exceeding 9% between the best and worst performers. While asset allocation at a high level (e.g. equities, bonds, cash, and alternatives) did not vary significantly, differences in regional allocations and stock selection appear to have been major drivers of performance. Over the three-year period, the dispersion in returns was less extreme, suggesting that relative manager performance tended to balance out between "good" and "poor" years.
Active management struggles – When measured against the index-based benchmark, 2024 was a particularly challenging year for active managers. None of the managers in our survey outperformed the benchmark, and most lagged behind by at least 5%. Over the three-year period, this underperformance has compounded, with the majority trailing the benchmark by more than 3% per annum - equating to nearly 10% cumulatively.

Key Drivers of Manager Performance While the specific reasons for performance disparities vary between firms, two consistent themes have emerged from performance attribution over recent years:

Underweight exposure to the US – The US has been the strongest-performing global equity market, yet many UK charity investment managers have consistently allocated less to the US than its weighting in the global index. As a result, regional asset allocation decisions have acted as a drag on performance.
Concentration of returns among a few large stocks – Within the US market, returns have been disproportionately driven by a relatively small number of very large companies. Even managers with a full allocation to US equities may have significantly underperformed if they did not hold these key "winners."

The rationale provided by managers for these positions typically revolves around two main arguments:

Valuation concerns – Many managers believed that US equity valuations were too high, posing a risk to clients’ capital.
Diversification principles – A more diversified approach was seen as prudent, as opposed to following an index heavily concentrated in a small number of large technology companies.

Additionally, for income-focused mandates, some managers cited the low dividend yield of the US market and the very low or zero dividends from certain large technology companies as a reason for maintaining a lower exposure to US equities.

Conclusion The strong market performance in 2024 has provided a welcome respite for charity investors, delivering substantial real returns and helping to recover ground lost to high inflation in previous years. However, the difficulties faced by active managers - particularly in keeping pace with index-based strategies - raise important questions for Trustees about manager selection, portfolio construction, and the role of active versus passive management.

Ultimately, while past performance does not guarantee future results, understanding the drivers behind performance disparities can help Trustees make more informed decisions about their investment approach and manager selection in the years ahead.

Reviewing an underperforming investment manager can be a complex and time-consuming process, requiring careful analysis of their strategy, performance, and service proposition. At PMCL, we specialise in helping charities navigate these decisions with confidence, ensuring they have the right investment partners to meet their long-term objectives. If you would like support in assessing your manager or exploring alternative approaches, please don’t hesitate to get in touch.

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Disclaimer:

The information presented is intended for organisations and individuals with professional investment experience. Portfolio Manager Consultancy Ltd is committed to serving professional clients, ensuring our advice and insights align with the sophisticated needs of this group. We encourage those who do not have professional investment experience to seek advice before making any investment decisions based on this update. For a full understanding of our terms and the scope of our advice, please consult the disclaimer provided.