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6 key considerations for Charity Trustees when reviewing Charity Investments

Juniper Wealth Management Charity Investments

Whether you are new to being a Charity Trustee, an experienced Trustee or simply someone interested in becoming one in future getting to grips with some of the responsibilities you have can be difficult such as reviewing Charity Investments. You will be asked to make decisions and take responsibility for things that are often outside of your work and life experience to date such as Investment Policy Statements and other such regulations.

Sites like Charity Intelligence provide a number a good resources for Trustees looking to improve their understanding of the role of trustee and governance standards for Trustees.

In this article we outline 6 key considerations Charity Trustees need to consider when making Investment Decisions.

1. What money should you be investing?

So far as Charities are concerned not all cash is treated equally and there are broadly speaking four types of funds a charity may have.

Unrestricted general funds can be spent at the discretion of the trustees to further any charitable purpose of the charity. This means that these funds can be spent in their own right, or can be added to a restricted fund which does not have enough money to cover its expenditure.

Part of this will include your Reserves for which you will have a specific policy in place to dictate how much should be held.

Unrestricted designated funds but have been set aside by the trustees; ‘earmarked’ for a particular future project or commitment e.g. building extension work. The designation is for administrative purposes only and carries no legal authority. So in the same way that the trustees designate funds they are also able to remove that designation without needing permission from anyone else.

Restricted Income funds are to be spent within a reasonable period from their receipt to further the specific charitable purpose for which they were given. There is no definition of reasonable period but although it does not mean immediately, it also does not mean that they should be held for longer than is necessary.

Restricted endowment funds require charities under trust law to invest the assets of an endowment, or retain them for the charity’s use rather than to spend them. Some endowments may even be Permanent where the trustees have no rights to spend the capital. Careful consideration will need to be placed on investing this money.

2. How will you measure if your charity investments are successful?

When considering investments there are three things we can look to control. Risk, Return and Time.

There is a temptation to try and target returns and achieve a certain reward for our money but ones ability to control returns is very limited without the level of risk we take being dictated to us and the time horizon we have to accept those returns over being out of our control.

We can vary the amount and types of risk we look to accept depending on the tolerance we have or the goal we are looking to reach. The most common risks considered are inflation, capital loss, credit risk and market volatility (also described as the range of possible outcomes we may expect).

But by far and away the most important factor to consider as a Trustee is your time horizon for your charity investments. When are you likely to need the money and how mission critical is that date.

Once you know this information you can choose an appropriate benchmark against which to measure the performance of your investments and the time overwhich you want that performance to be achieved.

Investing an endowment for a scholarships fund will look very different to parking funds for a Hospice building project and you would expect them to have different benchmarks against which their performance is managed.

3. What are you liquidity needs?

Reserves policy + committed expenditure + known capital expenditure

When considering liquidity needs your Reserves Policy is vital. A well drafted reserves policy will inform you of what funds need to remain in cash and at what notice this money may be required.

Beyond the reserves though you will need to consider committed expenditure and known future capital expenditure. Will you be needing funds for projects the Charity wants to deliver in a set time-frame?

There are many way to measure the success of an investment but at Juniper Wealth we believe an investment is only a success if the funds you need are available when you need them. If the returns have been fantastic but you are unable to access the money when you need it one could argue that the investment has failed.

4. What ESG consideration DO affect your charity investment strategy?

Firstly ESG stands for Environmental, Social and Governance and for charity investments it is a very important step in the investment making decision.

There are areas of ESG investing that instantly come to mind such as tobacco, weapons and alcohol but more important than these is getting to grips with the issues directly affecting your charity?

What would happen if a poverty action or debt help charity was discovered to have shares in Brighthouse or companies with dubious credit lending practices?

What about an environmental charity investing in BP and Shell or an Animal Rights campaigning charity holding shares in big pharmaceutical companies?

This may seem obvious but many Charity Investment funds focus primarily on returns and ignore other governance issues. One fund I looked at recently has an ethical screening policy BUT still holds 10% of its funds in BP and Shell.

5. What ESG considerations Do NOT affect your charity investment strategy?

As Trustees we tend to be a virtuous lot and come with many of our own, personal, ESG convictions and sentiments BUT should your charity investments avoid an industry because of your individual dislike of it?

If we take Tobacco for instance. A health and wellness focused charity should certainly be considering this but should a Charity focused on campaigning individual liberty restrict their investment mandate in such a way?

It is an important discussion for Charity Trustees to have and to it may even be worth drafting an ESG summary for your charity

6. What does you Investment Policy Statement say about charity Investments?

Most importantly for all of these considerations a Charity and it’s Trustees should be referring to its Investment Policy Statement.

What is an Investment Policy Statement? By Law (Trustees Act 2000) every Charity should have one. The IPS sets out the requirements and restrictions of a Charity’s investments, it guides its advisers and investment managers on how to invest their funds and should include each of the above considerations.

The IPS sets out Investment Objectives and powers of the Charity, the kinds of risks an levels of risk, who can take investment decisions, how investments will be managed and bench-marked and the reporting requirements of the managers. A good IPS will also set out the benchmarks on which investment success will be measure.

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