How to develop your investment strategy
When the Investment Powers Working Group conducted a review on behalf of the charity sector into the possible implications...
...for charities and their trustees of the principles developed by the Myners Review back in 2001, a useful set of guidelines emerged. These became known as the Charity Investment Principles (CHIPs) which are still available from ACEVO (2003) [1].
While the issues for pension scheme trustees are very different – and the funds far larger – the clarification of a charity trustee’s general ‘duty of care’ when it came to investment management in the CHIPs is an excellent framework.
Although the Trustee Act 2000 obliges trustees of any unincorporated charity to prepare an investment policy before they exercise any power or delegate any responsibility to an investment manager, it does not specify the form or content of the policy. The Charity Commission’s CC14: Investment of Charitable Funds: Basic Principles ‘strongly recommends that charity trustees decide on an investment policy for their charity, record it clearly in writing, and keep it under regular review’. It goes on to make the point that if investment management has been delegated to an investment manager this is a legal requirement and without an investment policy, ‘trustees are likely to find it difficult to demonstrate that they are making good use of the charity’s funds’.
Key documentation and further reading
Key documentation
- Governing instrument. This may set powers of investment and any specific restrictions or requirements. These can include specifications for capital or income, discretion or non-discretion, the use or otherwise of nominees for custody and whether the investments must meet the terms of the Trustee Act 2000. The Charity Commission does have powers to alter restrictions in certain circumstances.
- Trustee Act 2000. Although this does not technically apply to charitable companies, the principles of the act set useful guidance for all trustees.
- Charity Commission guidance CC14 and detailed accompanying guidance notes. The policy documents and the detailed guidance notes in this are essential reading.
- Reserves policy statement. Unrestricted monies available for investment may form part of a charity’s reserves and should be considered when setting a reserves policy.
- SORP 2005 This, together with the Summary Information Return (SIR) requires greater disclosure from charities in their annual statements about their aims, objectives and outcomes. This includes information affecting reserves policy, investment strategy, income targets, performance against benchmarks and ethical policy – but only if there is one.The detail in which investments are covered within the report and accounts will depend upon the importance of these assets in the overall context and will be a brief synopsis highlighting the key information.
Further reading
Your written investment policy
(a) General background. This could cover the year of establishment, summary of its charitable objectives and beneficiaries.
This sets the document in context of what the charity is trying to achieve.
(b) Financial background. You need to explain what your investments mean to your charity, and overall risks and timeframe. Most importantly this includes when you might want to realise them. You could detail the value of assets held (including property) and your sources of income (e.g. grants, contracts, donation).
It is sensible to mention significant anticipated additions or withdrawals of capital (e.g. for capital projects).
(c) Investment powers. Any specific restrictions or requirements detailed in the charity’s governing instruments should be displayed clearly (such as the Trustee Act 2000).
(d) Strategic investment policy. This is the core of your document and should be prefaced by a statement setting out its intended ‘benefit’ to the charity.
Remember that the decisions you make here will have the greatest impact on your investment outcome.This can fall under the following headings:
2) Return requirement: Fundamentally you have a choice between certainty and a low return (e.g. cash), or a higher return with more volatile assets. You need to identify what type of investment return you are seeking: capital growth, income, or a balance between the two. If you have set a long-term target either in nominal terms or relative to inflation, this should be included here.
3) Risk tolerance: Perceptions of risk are different; while some trustees think in terms of high, medium or low risk; this should be backed up by a detailed discussion with your investment advisers about what your specific risks are. This is, of course, highly subjective and risks do change over time and in different circumstances but it is important to express guidance that covers the whole portfolio. The need for diversification of the portfolio should also be covered here.
4) Liquidity requirements: This should state any anticipated drawdowns, whether reqular income requirements or one of capital expenditures. If there is a requirement to keep a percentage of the assets in ‘liquid’ assets that can be sold quickly then this should be outlined here.
5) Other restrictions: Attitudes to ethical investment and conflict of issues need to be stated.
6) Review: The trustees will review this policy at least annually or more frequently if circumstances require.
f) Investment manager. You should include a statement that the investment manager is a suitably authorised person within the meaning of the Financial Services and Markets Act 2000 and contractually bound to follow the instructions in the policy statement (or any amendment). This section should also provide details of remuneration and the frequency with which the investment manager is reviewed.
(g) Reporting requirements. This should detail the content and frequency of investment reporting (e.g. quarterly written reports and two meetings a year) and state the charity’s financial year-end. See page 29 for details of the core content this should contain.
(h) Annual review. Your written investment policy should be reviewed regularly and you should include a statement along the lines of ‘the foregoing policy and arrangements will be reviewed at least annually by the trustees. Any changes must be given in writing’.
(i) ‘Boilerplate’. Your policy should include details of parties authorised by the trustees to issue instructions to your investment managers – money laundering regulations have tightened considerably. Your investment manager will require a certificated copy of a passport and a bank statement (or utility bill) that is not more than three months old. It is good practice for both the charity and the investment manager to sign and date the investment policy as confirmation that the terms of reference have been agreed.
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
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