Trusts and charities

Fowler Drew goal-based modelling ensures the investment management supports and evidences the trustees’ responsibilities for ensuring objectives and trade-offs are clear and explicit.

Trustees we support

  • Charitable trusts and foundations
  • Permanent endowments (whether or not ‘total return’)
  • Trusts for vulnerable beneficiaries
  • Family trusts

Charities

Unless they are very large, most charities’ investment portfolios are managed by private-client managers and so reflect conventional approaches to each of: portfolio construction; determining an optimal risk approach and meeting objectives for disbursements. These approaches are not designed to support anything other than the vaguest of objectives and preferences.

At Fowler Drew, the same institutional techniques we adopted to make private wealth more explicitly supportive of desired and required outcomes lend themselves well to the management of charitable trusts and grant-making foundations.

Modelling encourages greater specification of the objectives, what denotes a successful outcome and how to manage trade-offs – what economists call ‘utility’:

  • It can help resolve any tension between sustainability of real capital and nominal income distribution
  • It will identify the dependence of the fund’s utility (or how it is maximised) on the duration of the capital
  • Even where distributions are limited to income, the income can be managed to maximise utility
  • Risk management at asset allocation level does not rely on diversification alone
  • We address the tension between capital and income objectives implicit in ‘nominal’ bonds or debt instruments in money, not real, terms

The Fowler Drew approach to charitable trusts also makes for a better value proposition:

  • Flatter fees to give Trustees the benefits of scale
  • Intelligent use of lower-cost quantitative techniques for risk management and asset allocation
  • Implementation using lowest-cost index trackers

 

Trusts for vulnerable beneficiaries
Modelling helps solve the problems of

  • identifying the sustainability of spending at given confidence levels, allowing for longevity risk, and
  • the appropriate approach to investment risk.

In the case of injury settlements, financial needs will have been approximated but the pattern and profile of spending needs detailed specification before the assets can be managed to deliver those outcomes and to do so at agreed horizons and within agreed constraints.

By quantifying probable outcomes, it is possible to support Trustees’ and Deputies’ responsibility for decisions about investment risk by relating them to specifics, rather than generalities. For instance:

  • there may be insufficient value assigned to any surplus assets, other than if arising through early death, to warrant any trade-off, if the price is to place at risk the identified spending needs for a lifetime
  • it may be possible to meet the required outcome at the required confidence whilst still creating an option on a bequest to heirs.

As for any spending plan, preferences can be directly revealed by the family or their representatives thinking and talking about the consequences of different outcomes, although what defines satisfaction or regret may be different because of the involvement of representatives. Modelling helps frame that conversation.

Family trusts
Life interest trusts are a specific form of trust whose inherent tensions (in this case between generations) can be best solved by explicit modelling subject to a set of defined rules that specify (as far as possible) the settlor’s intentions. Together with the rules, the modelling frames the conversation in a way that can resolve the tensions. Conventional private-client portfolio management does not do a good job of revealing, let alone resolving, the tensions.

The main conflict exists between the income beneficiaries and the residual capital beneficiaries. In a conventional portfolio approach, income is typically maximised by favoring high-yielding instruments without at the same time quantifying the extent to which the bias to income reduces the real value of the capital. Modelling the sustainability of real ‘draw’, subject to longevity assumptions, as in a Fowler Drew spending plan, can identify the target income level that resolves the tension.

Discretionary trusts also have close parallels with our concept of a spending goal. They may even be planned in conjunction with a spending goal if a trust is a resource contributing to, or potentially contributing to, a beneficiary’s spending. If the discretionary trust exists in a context of competition for resources, competition between different beneficiaries, or benefits having a different utility (or delivering more or less value) because of the timing of the distribution to different beneficiaries, modelling can help identify and resolve these tensions. It can also help ‘keep score’: maintaining broad equity of interests (where that is an intention) by applying the concept of time-dependent value received.