Investing to match
the charity's business plan

Our viewpoint

The recent stock market highs have put many charities in a good place with potential to increase the spend on their charitable mission. This brings with it new challenges: where to allocate the extra funds and how quickly?

Typically this means a step up in charitable spending in the relatively short term – not least because the trustees need to justify holding additional reserves. Fund raising efforts will be less well-received if the charity is seen to be holding onto excessive funds!

Investment objectives may also change. The investment strategy is no longer just about maximising return and generating a good income to pay regular expenditure. Capital preservation will be more important as the charity increases its charitable activities in the short to medium term. No charity wants to designate a significant reserve to a new project only to see stock market falls wipe away a third of its value.

Some charities are going further and carrying out a fundamental review of their reserving policy. The investment strategy should be an integral part of that review. An integrated risk and investment review should start with the characteristics of the various charitable funds (as illustrated below).

This integrated analysis will help trustees to translate the reserving policy into investment objectives for each reserve to develop a more tailored strategy.

Many trustees are also concerned about the high stock market levels and keen to diversify away from traditional equity and bond markets.

Cash is the obvious safe-haven but investment returns are negligible so not consistent with trustees’ duty to maximise returns. There is a variety of alternative asset classes available in pooled fund structures to enable charities to access these efficiently. For example, multi-asset credit funds, secure income funds and unlisted infrastructure funds are among those currently attracting new investment as charities search for income and diversification from the more traditional asset classes.
So my message to charities is this: on the back of recent strong investment returns, trustees should review their investment strategies to check they continue to be fit for purpose.

Key questions to ask:

  • If you can now afford to spend more, what is the effect on your investment strategy?
  • If your strategy needs to change, is this an opportunity to “bank” profits from equities and bonds?
  • Are there other asset classes available which would be better suited to a more aggressive spending policy?

Having surplus assets is a nice problem. Make sure you have a spending and investment strategy to make the most of it.

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