Three in four charities (71%) expect to increase allocations to active strategies over the next three years, according to research from Rathbones.
The researchers also found 11% predict a ‘dramatic increase,’ while 29% said allocations to active funds will remain the same over the period. None plan to reduce allocations.
Around 100 senior charity executives, including board directors, finance directors, investment managers and investment directors were questioned, with a collective £5bn of stockmarket-related investments.
Reasons cited for the shift into active funds included the potential for stronger returns, increased transparency among active managers and the role active strategies can play in helping charities manage volatility.
Nearly seven out of 10 charities (69%) cited the potential of the ‘technological and data revolution’ as one of their three main reasons for increasing allocations.
Two out of three (63%) highlighted greater transparency and volatility management among their top three, while 55% said ongoing volatility could create opportunities for active managers to outperform passive strategies. Half (49%) pointed to a drop in active managers’ fees as a reason to switch.
Rathbones found that on average, charities have around 40% of their investment portfolios allocated to active strategies. Around a fifth (22%) have between 50% and 75% of their portfolios in these strategies.
Almost all of those quizzed (99%) have some of their investment portfolio allocated to UK equities with an average of 20% allocated to the asset class.
Around 62% have increased allocations to UK equities over the past two years, while 63% have done the same with non-UK equities.
The research found that allocations to private markets and alternatives have seen the most charities increasing allocations, with nine out of 10 (89%) boosting private equity, and 86% raising hedge funds and real estate allocations.
Three out of four (72%) have increased allocations to renewables, while 70% have raised UK fixed income and 78% have done so for non-UK fixed income.
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The findings also suggest risk appetite is increasing. More than half (53%) of respondents said their risk appetite has increased in the past two years, compared with 25% who said it has decreased. Over the next two years, 63% believe their risk appetite will increase compared with 27% who said it will fall.
James Ayre, head of investment for charities at Rathbones, said: “Investments are central to the finances of many charities, and organisations are increasingly focused on how portfolios can support long-term returns while continuing to reflect their ethical objectives.
“The current investment environment, together with developments in active management, including better data, technology and research tools, appears to be strengthening the case for active strategies. For many charities, this is also taking place alongside a broader reassessment of risk and diversification.”
