Trustee & Charity Investments
Investments generate income of around £3.8 billion for charities, according to the June 2019 Charity Income Spotlight report – a return on investment of approximately 2.9% - and that doesn't include any underlying growth in the value of the investments within the charities portfolios.
Trustee & Charity Investments
The Trustee Act 2000 introduced a statutory duty of care upon trustees when exercising their powers of investment.
The first step to developing an investment strategy is to understand your legal obligations. Charity law stipulates that trustees must know and act within their charity's powers to invest and they must exercise care and skills when making investment decisions and select suitable investments for their charity.
Importantly, governing documents, such as the articles of association, must be checked to see what investments are allowed and whether any restrictions are in place. Only then should decisions be made about how the investment(s) will fit in with the charity’s overall financial plan and objectives.
The Charity Commission, in its guidance CC14 – Charities and Investment Matters: A guide for charities, recommends that, regardless of the size of the organisation or its investments, a written policy be drawn up that sets out a framework for investment decisions, helping trustees to manage the charity’s resources effectively and demonstrate good governance.
Therefore, as a trustee you will need to seek professional advice on a wide range of issues including taxation, the level of risk being taken and ongoing legal obligations, whether that be on behalf of a charity, family settlement or pension scheme. Changes in taxation and the economic climate may mean existing trust investments are no longer appropriate.
The Act states that trustees should invest as if they are absolutely entitled to the assets, ensure the ongoing suitability of the investments, consider tax, ensure sufficient diversity, consider the size and risk profile of the trust and regularly review the trust investments. If you’re not doing this you could be breaking the law.
Cost is also an important consideration and if a segregated portfolio is required, it can be more expensive than a pooled option and many managers often have a minimum initial investment of several million pounds that will be beyond the budget of many smaller/medium sized charities.
A segregated portfolio is one that is tailored precisely to the trust’s circumstance, goals and risk tolerances, while a pooled option is a way of putting sums of money from many people into a large fund spread across many investments and managed by professionals.
Finally, an increasing number of UK charities want to invest in a more socially responsible way and address environmental and governance (ESG) issues through their portfolios. Therefore, it's right that trustees should make sure they are getting what they want from their existing asset manager and consider new advisers from time to time.