Key areas for those with charity investment responsibilities

The synthesis of my charity research has been that understanding history is vital to interpreting the present and trying to plan for the future. Charity finance is no different and is the context to preparing a charity investment strategy.

Broadly speaking there are four sources of finance for charities: donations from the public, government funding, money from corporates and income generated by the charity itself from its assets. This last source is often described as the “equity” of the sector and as a total percentage it averages some 20% of the charity economy income.

The majority of this income derives from investment assets ranging from short term cash deposits to long term investments. Potentially there is now a fifth source emerging in the form of social finance, although this is still very much in its infancy.

Social investment

Social finance or social investment has become blurred by some into traditional investment. Guidance from the Charity Commission (CC14) has been helpful in defining the difference between traditional and "programme related" investment.

In addition, research by my colleague Mark Salway on “demystifying the hype“ and more recently the launch of a social investment toolkit and guide have made it clearer that social finance is really a form of borrowing rather than a new asset class for charities.

Nonetheless certain bonds and charitable investments are starting to emerge. It is also clear that some charities are starting to use their reserves as investments to stimulate "impact" by lending on to other charities. Effectively their mission allows them to take on this risk and further grow their work. This form of social investment I believe is exciting and different.

Asset classes

For charitable foundations with endowments and for those with sizeable long term investments the key to success remains the effective use of traditional asset classes such as equities, bonds and alternatives as these are likely to be the mainstay of growth. What do those in the charity responsible for investments need to know? These are the key areas of focus:

SETTING SUITABLE AND REALISTIC INVESTMENT OBJECTIVES AND ESTABLISHING A STRATEGY TO MEET THEM. It is important to ensure that the charity’s strategy is linked to its overall aims and objectives. Too often I have found that the investment policy has been written in isolation to what the charity is doing.

One issue might be ethical investment – ensuring the investment objectives are linked to the charities ethos. But it is also relevant to consider how the demands on the charity may evolve over time.

For example, an endowed charity in the medical field will probably find its costs rising more quickly than general inflation, so it may need to seek higher returns to ensure it maintains its effective giving capability. Endowment charities in particular must beware of adopting too cautious an approach to investment.

INVESTMENT RISK AND ITS RELEVANCE TO YOUR CHARITY. Are you an endowed grant making charity or are investments instead tied to a reserves policy? There is not a one size fits all approach to investment.

Rather, there must be a clear comprehension of what the investments are there to do and most importantly in what time frame. These factors will have a major bearing on what assets to hold and their respective risk profile. Also do not forget ethical and reputational risks.

THE GOVERNANCE STRUCTURE REQUIRED TO ENABLE TACTICAL DECISIONS TO BE TAKEN AROUND THIS STRATEGY. How are you going to monitor the management of the portfolio? Will you invest in pooled funds or have your own bespoke approach? If the latter, will you appoint a manager on a discretionary or an advisory basis?

Board competence

Do you have the competence on the board to make these decisions, or will you use advisers? Building a competent investment committee with relevant experience is vital.

HOW TO SELECT THE RIGHT MANAGERS TO IMPLEMENT THE INVESTMENT STRATEGY. Investment success can often be cyclical, with some approaches working in one part of the cycle and others in another. As a result if you seek to change managers too soon or too often you may find yourself firing an underperforming manager just as their strategy is about to come good and appointing a top performing manager just as they are about to falter.

It is important that you talk to your manager regularly to understand their approach and the market environment in which they would do well or poorly. Only then can you interpret your recent results. You may also find other factors influence the level of confidence you have in your manager.

For example, recent regulatory changes of investor status with the distinction between professional and retail investors have led to some managers altering the service level they offer to some of their charity clients.

HOW TO MONITOR PROGRESS AND MEASURE SUCCESS. Is the manager a problem or did the charity have totally unrealistic expectations and fail to understand its risk profile? In other words, don’t blame the manager if you set them benchmarks which are unachievable within the risk profile.

Communicating objectives

You need to be very clear and communicate to the manager what you want and how you would like to achieve it, and then have a monitoring system in place that you both understand to avoid ambiguity and technical filibustering.

ETHOS AND ADVICE. Success is often down to having in place a collaborative ethos and successful dialogue between the charity and the investment manager.

After reading this article you may feel you need help to initiate or oversee either the selection process for appointing an investment manager, or need help to run the ongoing relationship with a manager once appointed, and to remove the risks for the trustees. If you do decide to make contact with a professional adviser, just remember to check not only their qualifications but also their charity experience.

However, what can be particularly helpful for those in charities responsible for overseeing the investments and working with the manager is the willingness of so many investment managers to share their thoughts generally with charities, regardless of whether they are clients.

Investment understanding

Furthermore, particularly at a time of greater competitiveness, the leading investment managers in the sector are keen to engage with their clients as part of their overall commitment to improving the sector’s level of investment understanding.

This is enlightened self-interest. They understand that equipping trustees with better knowledge not only leads to better decisions, but that it also reduces the risk of the investment manager being sacked at the wrong time for the wrong reasons.


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