What you need to know if you are responsible for a charity’s investments


Paul Palmer


Paul Palmer of Cass Business School says it is important that people who are responsible for a charity’s investment portfolio understand how it works.   

As I write this article shortly after Britain’s decision to leave the European Union, the first ‘thing’ I would say to charities is not to panic.

In this past week, the FTSE has shot down and gone back up. The synthesis of my charity research has been that understanding history is vital in order to interpret the present and plan for the future.

We have over one hundred years of investment market data and the clear message is that markets go up and down, that is their nature and trying to ‘guess’ market timing is an activity for risk takers. Trustees and staff supporting them who are responsible for looking after their charity investments should not be risk takers.

The underpinning legal and governance principle for charities is grounded in stewardship. For charitable foundations with endowments, and for those with sizeable long term investments, the key to success remains in keeping in the market and having a strategic asset allocation which incorporates the effective use of traditional asset classes such as equities, bonds and alternatives which are likely to be the mainstay of growth.

Charity Investors should be the ‘steady eddies’ (1). Charity trustees should not worry about short term market movements if they have a proper framework for long term financial sustainability in place.

The other Magnificent Seven guidelines include:

  1. Setting suitable and realistic investment objectives and establishing a strategy to meet them and not to forget the reserves! 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. Even worse, there is often no link to the reserves strategy and the cash flow. Joined up thinking, coordination and correlation is required and needs to be understood by those responsible.
  1. Another key policy is risk and its relevance to your charity – are you an endowed grant making charity or are your investments 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 on to and their respective risk profile.  Also do not forget ethical and reputational risks.
  1. 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? Do you have the right competence on the board to make these decisions, or will you use advisors? Building a competent investment committee with relevant experience is vital.
  1. 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 to 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 retails investors has led to some managers altering the service level they offer to some of their charity clients.

  1. Understand how to monitor progress and measure success – the easiest option is to see the manager as the problem but it maybe that the charity had totally unrealistic expectations and failed to understand their risk profile? In other words, don’t blame the manager if you set them benchmarks which are unachievable within the risk profile.

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

You may wish to measure your performance not just against your return objective, but also against a composite benchmark (which shows whether your manager is adding value) and against your peers. Three data points rather than one will give you a clearer understanding. And do not forget to measure return in the context of the risks your manager is taking to deliver it.

  1. Ethos and Advice – success is often down to having in place a collaborative ethos and successful dialogue between the charity and the investment manager. If after reading this article you feel you need help, then use the services of a wealth manager or an IFA to oversee the process and to remove the risks for the trustees. Just remember to also check their qualifications and their charity experience.

Professor Paul Palmer is director of Cass Centre for Charity Effectiveness (Cass CCE) and an Associate Dean at Cass Business School.

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