About Uniting Financial Services

Risk considerations for non-profit portfoliosBy Edwin LoChief Investment Officer

Risk is a key topic on the mind of every investor, particularly as global share markets experienced a correction in the first half of 2022 and both inflation and interest rates are on the increase. Managing risk is of particular importance to not-for-profit (NFP) investors, who often need to produce sustainable absolute returns in order to meet their operational and giving requirements and as a result, can be sensitive to downward movements in markets.  NFPs play a range of important roles in our society, enabling us to practice our Faith, give voice to local communities and donate both time and money to philanthropic causes. According to Philanthropy Australia, there are currently over 600,000 NFPs operating in Australia1.At Uniting Financial Services, we are specialists in managing funds on behalf of NFPs and understand the importance of managing potential risks. Here we outline some of the key risks NFPs should be aware of and our approach to managing them.Markets riskOne of the better-known risks of investing in assets such as shares, bonds and property is market risk – which is the risk of loss due to factors that affect an entire market or asset class. This may result from factors such as changes in the global geopolitical environment, changes in government policy, or an environment where asset prices appear stretched.Within our managed fund range, we manage risk through portfolio construction and asset allocation, creating portfolios that are well diversified by manager, asset class, sector and company.At times, we also make short-term changes to the asset allocation of our portfolios. As an example, in 2021 when equity markets were outperforming, we held an overweight position in equities within our Ethical Conservative Balanced Fund, which contributed to portfolio outperformance above our targets. However, with inflationary pressures mounting this year, which can be costly for companies, we recently wound back this overweight position.Non-systematic riskAnother risk investors face is non-systematic risk, which is a risk that is unique to a specific industry or company. Some examples include an industry facing unexpected supply chain issues or a company suffering brand damage leading to earnings disruption.Another type of non-systematic risk is the risk of investing with a particular investment manager. Some examples of risks that can occur here include sustained underperformance, the loss of a key fund manager or even fraud.To mitigate these risks, UFS uses a multi-manager approach, thoroughly vetting managers on a range of measures and undertaking manager visits every six months. As part of the monitoring process, the suitability of the current investment managers in achieving the portfolio design and strategies is critically examined.Should a new manager be required, we undertake qualitative and quantitative analysis on a range of factors known as the Six Ps – principles, philosophy, process, people, performance and price.By investing with a range of best-in-class managers, our underlying portfolios are well-diversified, minimising the potential impact of shocks to one particular industry or company for investors.Environmental, social and governance (ESG) riskToday’s consumers are demanding greater transparency over company activities, from greenhouse gas emissions to deforestation and executive compensation.Long-term corporate success in a rapidly changing world depends on avoiding reputational risks and protecting corporate integrity. Failing to manage these factors carries increased financial and regulatory risk.At UFS, managing ESG risks has been at the heart of our operations since the 1980s. Our investments are managed according to our Ethical and ESG Investment Policy, which is directly linked to the United Nations Sustainable Development Goals.This means that our portfolios are not only managing potential risks but are also actively contributing to a more sustainable future by investing in companies that are actively making changes for the better, such as clean energy companies, green buildings, education providers and efficient users of water.2022 Outlook2022 will bring more challenges compared to 2021. Investors cannot expect 2021-level returns for equities, amid an environment of normalising earnings growth. Pressure on government bonds will continue, while interest rates will start to rise. Geo-political risk, with rising popularism and atrocities, adds further complexity to the system. Therefore, our risk and return assumptions, while generally still optimistic, needed adjustments to account for rising volatility in this two-speed world.Against this backdrop, UFS Investment Management will have to recalibrate risk throughout the year, with a focus on the balance sheet and fund resilience to rising interest rates and yields.We recommend all NFPs have a clear investment strategy that includes risk tolerance and regularly review their strategy to ensure it remains consistent with their organisation’s objectives.1. Philanthropy Australia sector overviewImportant information: While the information in this communication has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.  You can review the UFS Privacy Policy below.

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  Important for you to know Financial services are provided by The Uniting Church (NSW) Trust Association Limited ACN 000 022 480, ABN 89 725 654 978, AFSL 292186 (“UCTAL”) and by The Uniting Church in Australia Property Trust (NSW) ABN 77 005 284 605 (“UCAPT”) (together and separately “Uniting Financial Services”), for The Uniting Church in Australia, Synod of NSW and the ACT (“Synod”), under a s.911A Corporations Act 2001 (Cth.) authorisation and pursuant to APRA Banking Exemption No. 1 of 2021 and ASIC Regulatory Guide 87 and ASIC Corporations (Charitable Investment Fundraising) Instrument 2016/813 exemptions. Uniting Financial Services® is a registered trademark of UCTAL used with permission of UCAPT. None of The Uniting Church in Australia, UCAPT and UCTAL is prudentially supervised by APRA. Therefore, investments with or contributions to these Uniting Church organisations will not receive the benefit of the Financial Claims Scheme or the depositor protection provisions in the Banking Act 1959 (Cth.). All financial services and products are designed for investors who wish to promote the religious and charitable purposes of Uniting Financial Services and The Uniting Church in Australia and for whom profit considerations are not of primary importance in their decision to invest. The information on this page has been prepared without considering your objectives, financial situation or needs. You should, before acting on it, consider its appropriateness to your circumstances or refer to the relevant disclosure document. Loan applications are subject to credit approval. Interest rates are subject to change. Fees and charges may apply.