Our Institutional Process

Our Institutional Process

In modern, professional investment management, the most important decision is the amount of risk to take with a portfolio. The basis of this decision is often a psychological risk profile of the particular investor. But trustees face a problem: charities and trusts do not have a psychological risk profile, because they have no psychology (one can make a psychological assessment of the trustees, of course, but the trustees are not the trust). Trustees can therefore find themselves having to choose a level of risk – say, ‘cautious’, ‘balanced’ or ‘adventurous’ – on the basis of what ‘sounds right’. That approach lacks analytical rigour, but there often seems to be no alternative.

There is an alternative. Our asset allocation process for private clients (see the ‘Private Clients’ section of this website) works especially well for charities and trusts. Once we understand the goals for giving, inheritance or financial support, we codify them into a set of financial objectives and build a risk profile from two elements, the need to take risk and the capacity to take risk, without relying on psychological profiling. We assess both the need and the capacity for risk in a systematic way, using computer simulations to understand how the amount of risk taken affects the probability of meeting the financial objectives. This allows us to recommend an overall level of risk that has a reasonable probability of meeting the goals of an endowment, charity or trust.

There are additional benefits to this approach. For example, spending more today reduces the probability of growing the portfolio tomorrow, and vice versa. By seeing how our assessments of probability change with different spending plans, trustees can understand how the decisions they make have an impact on both current and future beneficiaries. And by connecting investment decisions to financial objectives by clear chains of logic, our process can assist trustees in demonstrating that they have applied proper diligence in fulfuling their fiduciary responsibilities.

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