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In just three years, the BlackRock Charities Growth & Income Fund (CGI) has grown to approximately £200 million in funds under management, invested on behalf of over 40 charities. Since its launch just before the onset of Covid, the fund has delivered annualised returns of 5.2% (as at 30 June 2022).
Here, Robert Hayes, Investment Director for BlackRock’s UK Charities and Endowments team, and Angus Dell, Investment Strategist, Multi-Asset Strategies & Solutions, explain how the fund’s flexible strategy is designed to handle a fast-changing investment landscape while its sustainability focus meets clients’ long-term objectives.
Why did you launch the fund?
Charities face increasingly complex investment challenges. They need to meet their financial goals in an uncertain investment environment that’s characterised by lower yields and higher volatility. At the same time, they have to keep costs low, remain tax efficient and stay aligned with their ethical and sustainable values. This can create a significant governance burden if trustees try to juggle all these factors themselves.
We believe that CGI can help charities meet many of these challenges. It’s a pooled fund so brings together many individual investors’ capital – which can be particularly attractive to smaller charities. By investing in a pooled fund such as CGI, charities can benefit from economies of scale from their investments while keeping their costs and administrative burden down.
What are the fund’s overall investment aims?
Our aim is to help charities grow both their assets and their income. We look to achieve this through our flexible and diversified asset allocation. This is designed to deliver long-term capital growth and steady income, based on our sustainable investment policy. Our team has a long and proven track record. And because the fund is exclusively for UK-registered charities, our investors can take advantage of various tax benefits.
Risk: Diversification and asset allocation may not fully protect you from market risk.
Describe your investment approach
We run CGI as a multi-asset fund, which means that we invest in a range of asset classes such as equities, bonds, property and infrastructure, as well as holding cash. This approach helps us to deal with uncertainty in the markets because it’s unlikely that all the asset classes in which we invest will respond to events in the same way.
We take a ‘top-down macro’ approach to investing. This means that we look at big-picture economic factors like growth, interest rates, inflation and market cycles. We also consider themes such as technological innovation and the transition to a low-carbon economy and think about how these will interact to drive market prices. We then seek to build a diversified portfolio aligned to this outlook, combining stock-picking expertise from BlackRock’s specialist fundamental active teams, with other investments such as passive funds that track market indices and external funds in areas such as property and infrastructure.
How have you changed the fund’s strategy to deal with uncertainty?
We have significant flexibility to adjust our asset allocation when markets come under pressure. As an example, our strategic benchmark has an allocation of 60% to equities. When Covid lockdowns ended and investors were in optimistic mood, we adjusted the fund’s equity allocation so that it rose to just over 70% in mid-2021. More recently, however, our equity allocation has been as low as 55%, given the uncertainties of rising inflation and the war in Ukraine (as at May 2022).
Meanwhile, we have increased our investment in alternative assets to 25%, above the benchmark level of 20% (as at May 2022). This has not only provided the fund with diversification but also allowed us to drive positive change with our client’s capital.
The fund’s third anniversary coincides with a landmark High Court ruling on charities’ ability to invest more sustainably. Tell us about it…
In April 2022, the High Court issued a landmark judgment. This shifted the position from the historic ‘Bishop of Oxford’ ruling which focussed on Trustee’s role of maximising returns on their investments without considering ethical factors. So now, if all the relevant factors are appropriately balanced, charities may pursue a ‘Responsible Investment’ strategy. This means they can, for example, exclude investments that go against their ethics and they can invest in funds that focus on reducing the impact of climate change and furthering their environmental, social and governance (ESG) priorities.
Risk: This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.
The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
How does the fund help charity clients meet their ESG objectives?
We put ESG at the heart of our investment process. This includes screening companies and excluding certain types of business. But we go well beyond that. We seek to identify ESG themes that are becoming increasingly important – such as climate change, food security and biodiversity – and then look to find compelling opportunities related to those themes. This enables us to provide capital to companies that are innovating to solve some of the world’s biggest problems.
Can you give us some examples of the fund’s sustainable investments?
Two areas where we have significant investments are social housing and renewable energy.
Social housing includes accommodation for homeless people and adapted accommodation for people with disabilities. We channel capital to companies that provide this accommodation, allowing them to increase the housing stock available to those in need. This provides a strong social benefit by improving the tenants’ quality of life and helping them better integrate into the wider community.
As an investment team, we have been investing in the renewable-energy sector since 2013. We have typically focused on wind and solar power, and by investing in this area, renewable-energy assets have been built as a result of our charity clients’ capital that otherwise wouldn’t have been. More recently we have allocated to energy efficiency and battery-storage technology. A major problem with renewable energy generation is that there isn’t always sun or wind when you want it. Energy efficiency helps reduce energy demand whilst battery technology helps manage the intermittency of power production by storing energy so that it can be used when it's needed most.
Risk: BlackRock has not considered the suitability of any investment against your individual needs and risk tolerance.
Why is BlackRock’s charity-sector experience important?
We have been managing charity investments for over three decades and have offered pooled funds to charities for nearly 20 years – notably for Armed Forces and Catholic charities. Because we’ve been so heavily involved with charities, we understand the range of challenges they face – from rising operational costs to raising funds at a time when so many are feeling the pinch.
And we also understand the specific challenges that charities have to deal with when investing, achieving capital growth and regular income distributions from investments that are consistent with their ESG objectives. We’ve designed CGI’s income distributions to help charities budget with greater certainty – giving them greater confidence in planning their day-to-day activities. All of this means that our CGI strategy resonates with our charity clients.
How do you keep charity clients up to date?
We always aim to be regular and informative with our updates. And it’s important that this communication goes both ways. Two-way communication with clients has always been an essential element of how we manage the fund – through our regular unit-holders’ meetings, for example.
Throughout, we encourage clients to share their challenges with us. When they do, we listen and aim to be responsive. And we then try to ensure that the fund is positioned to meet their needs.
In particular, we focus on controlling costs since we know that in a time of lower returns every penny counts – although market returns are uncertain, costs and fees, fortunately, are not. So, they need to be managed closely to ensure the fund provides value for money.
A good example is the way in which we’ve managed our income-distribution policy. When clients have indicated that they are facing rising operational costs, we have reviewed the level of distribution, increasing our dividend payments when we believe we can maintain that level going forward – helping them to get through tougher times.
