A SSOCIATIONS WITH T RUST C HARACTERISTICS

Analogous to the above analysis regarding the 4FP and loss aversion, the key terms with regard to the association of characteristics were analysed as well.

Table 9 shows the key terms and issues that emerged from the interviews.

The number of categories per characteristic varies. While the finding of association regarding equity holdings were explained and commented by arguments from two main categories only, arguments regarding other characteristics were sorted into more categories and were partly contradictory as in the case of “Expected Asset Growth.”

Characteristics: Key Terms and Issues (n=26)

Categories # of Mentions

Equities

equities as a synonyme for risk 16

equity investments require qualification 8 Expected Asset Growth

further donations not usable to cover losses 11

potential losses can be covered 6

further donations increase ability to generate returns 5 Decision Makers´ Age

wisdom / experience 13

generally more cautious 12

relaxed 7

different from private wealth: eternal life time of the trust 6 Natural vs. Legal Person

different type of people responsible 14

entrepreneurial thinking 11

balance of powers 9

Donor Influence / Position of the Interviewee

donor can inject more money 15

justifies decisions mainly in front of himself 12

"my money" mentality 10

Size

for percentage gains/losses not important 13 differences only on single investment level 11 large trusts have more financial competence 7 lower costs of investment for large trusts 6 Reserves

trusts do not easily change their investment philosophy 11

type of reserves is important 11

reserves should allow for more risk 9

Investment Restrictions by Statutes

statutes not concrete 13

statutes are binding 8

gilt-edged outdated / "safety" difficult to define 7

Table 9: Categorisation of key terms and issues, number of mentions with regard to trust characteristics

8.2.1 Rationales for the Associations found in the Quantitative Part

The quantitative analysis (as described in chapters 7.2.2 – 7.2.9) showed that there are associations between various trust characteristics and investment risk preferences.

Interviewees were not surprised to learn that trusts which invest a portion of their capital in equities exhibit risky behaviour in significantly more cases than other trusts. Equity investing itself was regarded as risky, partly even as a synonym for risky behaviour, by trust representatives. Interviewees argued that trusts that invest in equities were supposed to be more competent in financial matters and therefore rather able to take risk.

The discussion was more ambivalent for the finding that risky preferences are found significantly more often for trusts which expect their assets to grow by donations, inheritances or other external factors within the coming years. Various interviewees stated that they were not surprised by the finding, but it would be the wrong approach for these trusts as fresh money was no substitute for potential losses or missed out gains. Other subjects supported the finding but were not able to give arguments why this characteristic was relevant for risk preferences.

An interviewee explained that these trusts might want to be more attractive for their prospect new co-donors.

The finding that elder decision makers rather tend to take risky investment decisions than younger ones was not expected by the majority of interviewees as increasing age was connected with cautiousness rather than with risk.

Interviewees explained that the wisdom and experience would be a very important asset for trusts. Qualifications found with elder people would lead to the potential to invest riskier. Elder people were supposed to better be able to capture investment risk on the basis of their experience. They would be more relaxed than younger decision makers. Interviewees argued that age of decision makers was not relevant “in the conventional way” because they had to think for an eternal life time of the trust, whereas they may personally rather prefer to

switch to safer investments the older they get.

The finding that trusts tend to riskier behaviour if the donor is a natural person and still active in investment decision making did not come as a surprise to interviewees. The contacted trust representatives argued that natural persons becoming donors often had obtained their wealth by taking risk and exhibited a rather entrepreneurial thinking. The assignment of power in trusts founded by legal persons would in many cases be more balanced leading to more risk aversion.

Interviewees stated in the same line of argumentation as above that donors that are still active in decision making could take higher risks because they must justify it mainly in front of themselves, whereas other trusts had bodies that created some balance of powers leading to take decisions together as a group without much risk. Donors would also not fear not to be re-elected into a body of a trust. Interviewees also argued that a donor could cover losses himself by injecting more money if necessary. The difference between a trust which was founded by a natural person vs. trusts established by legal persons would be the

“my money”-mentality.

8.2.2 Rationales for Non-Association of Characteristics

The quantitative analysis (as described in chapters 7.2.2 – 7.2.9) showed that there are no associations between some trust characteristics and investment risk preferences in contrast to the conjectures made in the literature review.

In the quantitative part, the size of a trust was found to have no significant impact on risk preferences. Interviewees explained that the absolute size of a trust was irrelevant as the questions in the survey concerned the whole capital which gave comparability on a relative level. Small and large trusts had the same general aim, which is to finance their projects, and therefore the same general needs with regard to investment preferences. Differences may be observed on the level of single investments, where large trusts were better able to diversify their portfolio

risks. Interviewees also pointed at potential differences of investment competences between large trusts which could afford to employ investment professionals and the majority of laymen in small trusts, where in many cases only one person was involved in financial decision making. Expenses that are associated with investments would also be lower for the large trusts.

Following from the literature review, it was assumed that the existence of reserves could play a role with regard to risk preferences. The survey could not evidence that to a degree of significance. Interviewees were partly surprised by this finding as they expected trusts with some reserves being able to absorb more risk than others. On the other hand, trusts that had built high reserves may have done so because of particular risk aversion and were reluctant to change their investment behaviour. Subjects added to the discussion that the type of reserves would be of importance as not all reserves would be easily available for distribution.

In the literature review, it was conjectured that the statutes might have significant impact on risk preferences, especially if they contain the restriction of gilt-edged investment only. The survey did not find a significant association.

Interviewees argued that the statutes of trusts were in most cases not concrete enough to derive actual behaviour that would be mirrored in the preferences to be measured in this study. The question of gilt-edged investment was regarded as outdated as the current situation on capital markets showed that with regard to the sovereign debt crisis in Europe no investment can be considered as completely safe.

9 Integration of Results and Conclusions

The study yielded conclusions with regard to the applicability of the theoretical framework and also with respect to the practical questions concerning appropriate investment products for German charitable trusts.