Topical economic update

1. Topical economic update

2. 2013 in a nutshell • The economy: will it, won’t it....grow? • US politicians: will they, won’t they....shut down? • Ben Bernanke: will he, won’t he....taper?

3. Our concerns for 2014 – similar to those held at the start of 2013: • the impact of a reduction in central bank liquidity leading to higher interest rates • the pace of global economic growth • high government deficits • US political deadlock and the eurozone’s stability A stuck record? • Definition of a fund manager: short term pessimist, long term optimist • Anonymous

4. 2013 rewarded investors for taking risk: WM Total Charity Index returned 15.5% Investors have to take on a higher degree of risk to achieve similar results But not so bad … or is it? To generate a 4% income: 2008: 100% in government bonds 2014: 75% allocation to equities with an income bias To achieve the same expected return: 2007: 50% equities / 50% bonds 2014: 80% equities / 20% bonds

5. Strong equity performance in 2013 • Returns largely driven by multiple expansion Source: Kleinwort Benson, Bloomberg

6. May 2013 versus May 2014 22 May 2013: Ben Bernanke tapering announcement that the Fed reserve may start reducing asset purchases over the next two meetings. Result of +1% onto bond yields Risks of holding fixed income increase: move into other assets – RISK ON

7. Tales of the unexpected Tapering and praying Deflation becomes the key risk to the US economy and tapering is reversed Abegeddon Abenomics succeeds in generating inflation, and even growth. However higher bond yields cause Japanese banks’ balance sheets to implode causing the next financial Armageddon Roaring tiger, flying dragon The Chinese government removes the country’s biggest tail risk by preemptively insuring all bank balance sheets against real estate toxicity London no longer calling The London housing bubble bursts. Everyone wonders why they didn’t see it coming… ~ not priced into markets and may cause volatility in 2014

8. Asset class preferences Positive on equities … reasonable valuations and good momentum, but mindful of increasingly bullish investor sentiment Positive on corporate bonds … prefer high quality, cash generative corporate bonds Negative on government bonds … expensive by most measures BUT we invest in them to reduce volatility in multi-asset portfolios

9. Q1 2014 Index returns Q1 2014 (%) Lower risk assets out-performed FTSE Govt. All Stocks 2.1% ARC Cautious Charity Index 1.0% FTSE World ex UK 0.7% ARC Balanced Asset Charity Index 0.6% ARC Steady Growth Charity Index 0.4% FTSE All Share -0.6% Political intervention: FTSE hit in March with budget changes Source: Kleinwort Benson, ARC

10. Inflation – the silent robber • Loss of purchasing power Average: 4.1% Source: Barclays Equity Gilt Study (2014)

11. The challenge ahead No one asset class has consistently outperformed inflation Sources: Kleinwort Benson, Bloomberg Data from March 1988 to December 2013

12. Getting the big decisions right Asset class cumulative returns every five years best return worst return • ‘Insanity: doing the same thing over and over again and expecting different results.’ • Albert Einstein

13. What does this mean? • Ensure that you have identified the short, medium and long term pots of money by linking the investment policy to your strategic plans • Short-term noise is a distraction • Selecting the correct mix of asset classes is the most significant decision we make as investors BUT there is no one magic answer • ‘Why did God invent economists? • To make weathermen feel good about themselves.’ • David Rosenberg, former Chief Economist at Merrill Lynch

14. And finally … Consider how your charity would stand up to questioning over its ethical policy: • reputational risk • transparency • appropriateness • Charity law Comic Relief invests millions in controversial tobacco, chemical and arms firms The Mirror Wonga row: Archbishop of Canterbury ‘embarrassed’ over Church funds BBC News No laughing matter: Comic Relief invested in tobacco, alcohol and arms firms Independent Church has yet to shed its Wonga investment The Times

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