Meeting the investment responsibilities of charity trustees

It is undeniable that the life of the charity trustee is far from ordinary. Beyond the pleasure and reward, the governance issues concerning charity administration, with an increasing burden of regulation and accountability puts pressure on trustees to ensure they are compliant with the rules. This is certainly the case with for trustees making investments on behalf of their charity.

The daunting prospect of investing money that has been donated by others for future beneficiaries needs clear guidelines. The starting point is to clearly set out the charity’s investment objectives. In doing so, trustees should be clear about exactly what the charity is trying to achieve by investing its funds. This will be different for each charity and will depend on its aims, operating model, timescales and resources.

Grant making charities which simply accept money and distribute it to other good causes may have limited resources and potential liabilities. They could take more risk with their investments to achieve a higher long term return. Operational charities which employ staff, engage in contracts for public benefit and work in challenging environments might consider it appropriate to take less risk and opt for higher short term income to mitigate the immediate costs of the organisation.

Objectives set out

Whatever the appropriate objectives are, the charity should set them out in writing, clearly stating how it intends to achieve them. The investment policy statement should be agreed by all trustees and reviewed annually to ensure they meet the ongoing needs of the charity. There is also the need under SORP for charities to state their investment policy in the annual trustee report. Guidance on how to construct an investment policy can be found in the Charity Commission’s guidance CC14, Charities and investment matters - a guide for trustees, and on the Charity Investors Group website.

In reality, trustees can make financial investments in any asset that is specifically intended to maintain and increase their charity's value and/or produce a financial return. This creates a formidable decision for trustees who are not familiar with the investment universe, given there are good opportunities from the UK to China, in listed companies, property, private equity and many other assets.

Specialist investment knowledge

While a charity’s trustees have overall responsibility for investment decisions and although trustees do not need to have specialist investment knowledge themselves, it is not unreasonable for charities to co-opt someone with specialist investment knowledge. Depending on the size of the charity or the complexity of the investment policy, some charities may find it helpful to establish internal investment committees or a sub-committee of trustees.

A limited number of charities feel they have sufficient investment knowledge to make their own investment decisions around asset allocation and underlying investments. Others will decide that they need to outsource the investment decision to an investment adviser. The law says that an investment adviser must be someone who is reasonably believed by the trustees to be qualified to give it by his or her ability in and practical experience of financial and other matters relating to the proposed investment the charity wishes to make.

If a charity goes down this route, as many do, care needs to be taken as to whether the adviser has appropriate qualifications and is regulated to give investment advice. The regulation comes from the Financial Conduct Authority, whose online register lists all regulated firms and individuals. The other issue to consider is that independent advice comes at a cost.

Proportionate cost involved

The cost should be proportionate to the investment made and it is conceivable that specialist advice may be more expensive. On average, the total cost of investment should be around 1%. Obviously, the cost can be reduced if trustees are making their own investment decisions and investing directly into certain Common Investment Funds or passive funds.

An alternative approach is to employ the services of an investment consultant, who is engaged to conduct a review of the investment policy and any investments held. This can save time and money in the long term. When reviewing their investments, trustees should be encouraged not to carry out a full investment tender if they believe they are relatively satisfied with their current arrangements. A full investment tender, if done properly, is a long process that involves considerable work for both the charity and the investment managers it engages to offer their services.

Guidance on general charity investment approaches and returns are relatively easily found in the charity sector press and online, with free databases from Charity Financials and others. While State Street is regrettably withdrawing its charity investment monitoring services, other peer group analysis can be gained from Asset Risk Consultants' free charity indices.

Articulating investment policy

Once the decision to invest using the services of a qualified investment adviser has been made, articulating the investment policy with the appointed adviser is important. This allows the adviser to make the appropriate investment on behalf of the charity or for the adviser to suggest amending the policy if it is not suitable given the charity’s risk and return profile. In doing so, the adviser can carry out their delegated responsibility and hope to meet the investment expectations of the trustees.

If a charity decides to invest into a Common Investment Fund (CIF), it is normal for there to be no formal agreement between the charity and investment manager. In this scenario, the charity’s trustees either appoint an independent investment adviser or co-opt an investment expert to make the recommendation of the appropriate CIF.

The investment manager will not manage the CIF to the individual charity unit holder’s investment policy, but generally invest in line with the majority of unit holders common investment needs. Some CIF managers will attend regular trustee meetings, but trustees should not expect the manager to offer independent investment advice.

Charities which tender and engage an investment manager on a discretionary basis should expect the manger to offer advice on the appropriate asset allocation and, depending on the manager’s investment process, the underlying securities.

Overriding dilemma faced

The overriding dilemma that charities face is the fact that they generally exist in perpetuity and have a long term investment horizon. Conversely, most trustees have a finite tenure with their chosen organisation that usually extends to a maximum of nine years or less. The resulting conflict is that trustees tend to psychologically reduce risk with their charity investment, in the hope that nothing goes wrong on their watch - which would be at odds with their charity’s’ investment policy unless the organisation is planning to run-out and close.

In conclusion, as undeniable that the life of the charity trustee is far from ordinary, it is also unquestionably rewarding. Good governance relies on a proper assessment of the needs and risks a charity faces. The risks are mitigated and positive returns are created by transparent policies or processes. Investments are daunting to the uninitiated but there is a plethora of advice, at a sensible cost to suit most cases.

Trustees should obey the regulation and law, but not be too constrained with the investment objectives for their charity to the detriment the beneficiaries. The heartening reality is that the vast majority of charities understand this, to the benefit of the society they work for.


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