Choosing investment managers
June 2009 Supplement
Managing an investment portfolio is an art not a science and requires specialist skills and knowledge
Trustees should decide if they have the time and necessary skill to take this task on and they have a legal duty to seek professional advice - many charities delegate it to investment managers.
The Trustee Act 2000 gives trustees powers to delegate a range of functions, including the investment of assets subject to the trust. This statutory power can be restricted or excluded by the provisions of the charity’s governing document but few documents do this.
The Trustee Act also provides for the appointment of both nominees and custodians. These are defined in the Charity Commission’s guidance CC42. A nominee holds the title to the property of a charitable trust (or some part of that property) on behalf of its trustees as a whole and is the person whose name will be entered on the share register of any company whose shares are held by the trust. In the case of registered land, the nominee is the person whose name is entered in the proprietorship register.
A custodian is a person who, on behalf of the trustees as a whole, looks after assets of the trust, typically the documents or other evidence of the trust's title to its property.
With the need for timely settlement, ease of administration and systems becoming progressively paperless, it has become common practice for trustees use the nominee or custodian.
These are predominately on the recommendation of their investment manager, some of whom charge extra for this service while others include it as part of their fees.
The Charity Commission’s guidance: Investment of Charitable Funds has detailed information in part J on the legal background and practical procedures of using investment managers.
Appointing an investment manager
There are a number of investment managers with specific experience of managing the investment assets of voluntary organisations. Members of the Charity Investors’ Group would be a sensible place to research possible companies.
Charity Finance carries out an annual investment management survey each autumn. This gives information on over 30 companies including assets under management, comparison on fees, breakdown by size of charities and whether these funds are invested through pooled products (common investment funds) or on a segregated basis.
CaritasData’s Top 3,000 Charities directory published each spring lists the top investment managers detailing what each manages in cash, investments and property of the top 3,000 charities. Individual company websites offer a wealth of information and act as a wonderful reference library. Tapping into the experience and knowledge of other charities should give you a unique insight into companies offering specialist expertise to the sector.
Reviewing investment management arrangements are commonly know as ‘beauty parades’ and are not something to enter into lightly as they are very time consuming. Trustees are required to keep their professional advisers under review but the law does not stipulate how this should be carried out or how frequently. This could be simply asking the question ‘are we happy with the service and performance of company X’ and checking the cost against the market periodically.
For those organisations who do decide to enter into a formal review it is usual practice to begin with a long list of possibly a dozen firms who are invited to make a written submission, the list is then reduced to three to four firms who then make a personal presentation.
Criteria for selection
While the track record for investment performance is crucial, it is important to remember that past performance is not necessarily a guide to the future. Indeed although the main attribute you are buying is performance, trustees should also consider other factors.
Not only do trustees need to review independent evidence of performance, but they should also probe the nature and rigour of a firm’s investment process, as well as its pedigree, financial strength, experience of charities, level of service and commitment as well as reporting.
This process does offer trustees an opportunity to test their investment strategy against their objectives and gain (free) advice. It is important to supply as much information on the organisation including latest report and accounts, written investment policy and a synopsis of the long term strategy.
Some charities offer ‘pre meetings’ to allow the prospective investment managers an opportunity to ask questions and to gain the complete picture. This will allow you to gauge the true interest and meet potential candidates in an informal setting. However, it is important to remember that your organisation is under scrutiny and the way you conduct the process reflects on the organisation – they may be potential donors.
Documents for review would include the firm’s most recent annual report and accounts, insurance policies as well as the auditor’s AAF (formerly know as FRAG21) report on the firm’s management controls.
Trustees also need to feel comfortable about the individuals who are managing the investments and staff turnover (as people do move around).
Contract period and terms of engagement
The CHIPS Are Down report makes the pertinent comment that, ‘provision of a satisfactory level of service in all its form is the greatest guarantee that an investment manager will retain an account.
If contractual security is provided for too long it could lead to some weakening of this objective.’ It goes onto to suggest that it is sensible to agree contracts that extent for a minimum period of three to five years which are subject to regular review and contain a provision for termination if the investment manager fails to satisfy the agreed objective or goals.
The other important point the report raises is that the ‘overall purpose of an investment contract should be the clarity of the relationship, rather than the avoidance of liability. This does mean trustees giving their fund managers clarity about the period their performance will be judged and what constitutes “abnormal circumstances”.
Charges
There are a number of different potential costs which can sometimes be tricky to identify and compare and it should be noted that VAT is levied on most investment management fees but not on commission.
The categories of cost include:
Investment management charges
- Investment manager fees for the management of the portfolio.
- Unit trust or investment trust fees paid to third party managers.
- Fees paid to your investment manager where part of your portfolio is invested in their unit or investment trusts.
- Trail’ fees charged against the assets of a unit trust where third party unit trust managers.
- Performance fees for above average performance by your fund manager.
Transaction charges
- Commission paid to the investment manager on each stock markettransaction.
- Commission paid to the agency broker through whom the investment manager executes these stock market transactions.
- Front end load charged on third party funds where there is an upfront commission paid to the adviser.
- Stamp duty and regulation levies on these transactions where applicable.
- ‘Soft commission’ paid out of client funds by investment managers to agency brokers through whom they conduct their clients’ transactions to receive benefit from that broker suchas research.
Custody and administration charges
- Fees charged by the custodian (who may also be the investment manager) for holding and administeringthe portfolio
- Handling charges for withdrawing or lodging securities
- Collection charges levied for collecting income payments on the securities
- Charges for special services
- Third party charges payable to the custodian’s own sub-custodians overseas, which may well get passed on by the main custodian
Cash management charges
- Deductions on the interest rate earned on cash deposits
Summary of guidance
CC42: Appointing Nominees and Custodians, Charity Commission Investment of Charitable Funds: Detailed Guidance, Charity Commission When the CHIPS are down – a template for improving Charity Investment Practice (ACEVO) FRAG21/94 (Revised): Reports on Internal Controls of Investment Custodians Made Available to Third Parties (Audit Faculty of the ICAEW)
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from Cass Business School. She has been one of the judges for the non-profit category of the Chartered Institute of Marketing's Excellence in Marketing Awards for the second year running.
She has also acted as clerk to the trustees of a small almshouses charity and as a member nominated trustee to a pension scheme of a multinational publishing company.
Click here for other articles written by Clarissa Dann
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