We wrote in August that given the prevailing economic uncertainties and market volatility, there was a sense of ‘peering through the fog’.

Notably for charity investors, there was a need to disaggregate the short and long-term and focus on appropriate ‘inflation plus’ investment return goals. Is the fog clearing? Is it time for a rethink on investment strategy and what else should charities be prioritising?  

Stock markets ended well for 2023 with a 17% rise in the MSCI World index of developed market shares for Sterling investors. However, the short-term challenges were numerous: the US Federal Reserve marked its eleventh successive rate increase to over 5% as the authorities attempted to quell inflation, bond prices were under pressure and both the US and Europe sidestepped a full-scale banking crisis following the failure of SVB and Credit Suisse. In China, the pace of the post-Covid re-opening disappointed from the second quarter and the weakness of the property sector acted as a deflationary draft. Geopolitical risk remains high with the continuing conflict in Ukraine and the escalation of tension and conflict in Gaza and Israel.   

Despite these global uncertainties, the US consumer remained remarkably resilient, inflationary pressures began to wane, and a much-feared recession was avoided. Notably for financial markets, the US bond market recovered its poise in light of the improving outlook for inflation – few would have predicted that the 10-year bond yield would end the year at exactly the same level as where it started. Against this backdrop, the US stock market performed strongly although it was the shape and drivers of the market return that provoked much debate. In 2024, with global interest rates now at or near ‘peak’, trustees of charities and endowments should be rethinking the role of credit in their portfolio.  

AI dominated the headlines of both the financial press and general media for much of the year. And seemingly in both quarters the subject tends to elicit something of a marmite reaction. Returns from the technology related ‘magnificent seven’ companies dominated the overall US stock market recovery representing some 75% of this market’s 20% gain to Sterling investors. Those commentators of a ‘glass half empty’ disposition point to the more subdued performance of the broader market and high valuations prevailing in the tech related sector. Those more predisposed to the ‘glass half full’ view, point to the transformative potential of the new technology.  Either way, given the pace of technological change, it is difficult to avoid the conclusion that trying to second guess the market in the short-term is difficult. Trustees looking at their equity portfolios in 2024 will need to ensure that AI’s potential will be captured over the long-term.    

The latest Conference of the Parties on climate change ‘COP28’ was hosted by the United Arab Emirates in November 2023, with the need to transition away from fossil fuels enshrined in a global agreement for the first time, but also a very clear message that our planet is heating faster and more certainly than governments’ efforts to deal with it. As we look forward to 2024, trustees will need to review what this means for the climate-related transition and physical risks in their portfolios.   

Demand for private equity, private credit and property funds fell off a cliff in 2023 as large pension schemes and other long-term institutional investors, sought to raise liquidity and reduce their allocations to these illiquid funds. Forced to sell their holdings for non-financial reasons, we are seeing discounts of up to 25% available on some good quality private market funds. This presents a buying opportunity in 2024 for charities and endowments with long-term investment horizons.   

Four trustee priorities for 2024

So where to in 2024? It is difficult to conclude that the fog of 2023 has cleared and blue skies have returned. Nonetheless, significant opportunities remain for charities to boost their long-term returns and we have seen that markets have an uncanny ability to look through the near-term challenges. Here are five priorities to help you take positive steps forward in 2024.   

Kick the tyres on your investment strategy and current investment exposure

 Given the significant market gyrations in 2023, the optimal long-term asset allocation may have changed. In particular, with high quality bonds yielding over 5%, credit is looking investible for endowments for the first time in a long time. Now is a good time to consider adding interest rate duration back into portfolios.  

Get to grips with the implications of AI for your investments

With a big leap forward in technology like this, it’s appropriate to take stock of your equity portfolio and assess how it is positioned. Are your investment managers making use of the new technology to drive better analysis? Are the companies you invest in adapting to the opportunities from AI or being left behind? Is your equity portfolio exposed to the right balance of active and passive management to capture the benefits of AI and manage the concentration risk in the top five global stocks? Listen here to our Investment Uncut podcast from last year which focuses on AI.

Take steps to understand the climate-related risks and opportunities for your portfolio

At its most base level this will involve analysing which elements of your portfolio are most exposed to climate-related transition and physical risks and how these risks are being managed. Moving beyond analysis, this might involve investing in the energy transition and using your influence with investment managers to ensure high standards of climate risk management and stewardship. This guide for trustees of charities provides practical steps to help manage the climate-related risks and opportunities.

Review the buying opportunity in private markets

If, like most charities and endowments you have a long investment horizon, discounts of 5% up to 25% on established, well-regarded private market funds make for a compelling opportunity. There is a range of options to access these on the secondary market and so talk to your investment adviser about whether this makes sense for your portfolio.