One of the biggest responsibilities facing charity trustees is how to invest donations and other financial support received in an appropriate manner. In this article, we explain why charities should look to invest funds, some of the issues that need due consideration, and how we can assist in this process.
Charity trustees need to consider investing the funds they receive, rather than leaving large amounts on cash deposit, to try and achieve a better return on the monies held, to further the aims of the charity. This return could be in the form of growth, which allows greater charitable work to be carried out in the future, or to provide an income to support the charity’s ongoing operations. Furthermore, trustees need to consider the eroding effects of inflation on funds held, as keeping significant sums on cash deposit is likely to see the real value of funds fall over time.
Charity trustees have a wide range of investment options open to them. In addition to straightforward cash deposits, charities can invest in shares of listed companies (Equities), interest-bearing loans (Gilts and Corporate Bonds), property or land, and Collective Investments (which may invest in one or more of these main asset classes). Not all of these asset classes will be appropriate to all charity situations and independent financial advice should be sought before charity trustees make any investment decision.
In all cases, trustees must consider the suitability of any investment for their charity. This will be influenced by the agreed level of risk and other factors, such as the size of the investment fund and the aims and objectives of the charity, together with the need to diversify the investment portfolio.
When beginning the process of deciding how best to deal with charity funds, the first consideration is to assess the overall financial position of the charity and determine any immediate financial needs. Appropriate levels of funds should be held as cash to cover these short-term requirements, and these should be kept separate from funds that can be considered for longer-term investment. A breakdown of expected income should also be prepared, to ascertain whether the income the charity expects to receive is sufficient to meet planned expenditure, or whether investment income or withdrawals will be needed.
For funds that are not needed in the short-term, trustees can move on to consider an investment strategy. Helpfully, there is government guidance set out to assist trustees in the investment process.
By law, trustees need to act within the charity investment powers, exercise care and skill where making decisions, and diversify investments wherever possible. Charity trustees must also consider the risk of any investment made and limit this risk to an acceptable level. The Charity Commission recommends that trustees should decide on an overall investment policy and agree on the balance of risk and reward that is right for the charity; naturally, the aims, objectives of the charity, and size of the funds available for investment will all have a bearing on these decisions.
In addition, trustees also need to ensure that investments align with any environmental, social, and governance factors that are pertinent to the charity’s ethos and values. An example of where this can produce an adverse public reaction was the decision by the Church of England investment managers to invest part of their funds in one of the key backers of payday lender Wonga. Whilst this position was quickly rectified once the link was discovered, it is a good reminder of the importance of looking very carefully at the investment portfolio and determining whether the investment policy conflicts with the ethical stance taken.
Given the high degree of responsibility placed on trustees to make appropriate investment decisions with charity funds, it is vital that trustees consider taking investment advice as set out in the Charity Commission guidance. Naturally, the board of trustees may have individuals with some investment experience, although even in this case, we would suggest that an external view from an independent professional could offer an objective opinion.
In addition to obtaining initial advice as to how charity funds are invested, keeping those investments under regular review is crucially important. In addition, where charity investments are already in place, trustees should be considering the following points:
Obtaining independent advice may well be of benefit in considering these and other points. We are a chartered, independent practice, that can give an impartial and unbiased view on existing investment portfolios, or to trustees looking to establish a new investment portfolio.
Concepts, our discretionary management service, is an ideal solution to assist charity trustees. We have devised socially responsible investment portfolios that meet stated ethical criteria, enabling trustees to invest in a managed portfolio of assets that fit with the aims and policies of the charity, whilst seeking to limit volatility.
Our discretionary managed portfolios are reviewed at least four times a year and changes made to the portfolio based on individual fund performance and prevailing economic conditions. These regular reviews will fulfill the requirement for charity trustees to review the investments in place and save time and cost compared to an advisory investment process. Lastly, our comprehensive reporting package provides clear information on portfolio performance, including performance measurement against recognised benchmarks, further assisting trustees in compliance with the requirements.
If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.
This content is for information purposes only. It does not constitute investment advice or financial advice.
