Hedged in: charity trustees

With continued volatility in financial markets, and ongoing cuts in public and consumer spending, charities are feeling the pinch. The pressure is on to make every penny count and now, more than ever, it’s essential for charity trustees to make the right investment choices.

Yet, I know from my own experience of working with charity trustees and finance directors, that those investment choices are sometimes compromised as a result of getting lost in the maze of regulatory requirements and the vast array of different investment strategies they are often presented with.

Unique challenges

The biggest challenge faced by charity trustees making investment decisions is that it’s not a case of one size fits all. Every charity is unique. No two charities have the same mission, vision or financial goals. As well as a requirement to comply with the legal framework established by the Trustee Act and the Charity Commission, trustees have a duty to consider the suitability of each investment in relation to their own charity’s very specific policy, objectives and resources.

Among other things, investment decisions must take into account ?the charity’s:

• immediate financial needs;

• future spending commitments;

• anticipated demand for support;

• long-term objectives;

• attitudes to risk; and

• any ethical restrictions or requirements and the possibility of unplanned changes or events, such as changes ?in interest rates.

There are many boxes to tick and yet there is no easy way to compare and contrast the available options. To successfully discharge their responsibilities, trustees must either commit to complex, time-consuming research or appoint a third-party investment manager. It’s not surprising that many choose the latter.

However, while the delegation of day-to-day investment decisions to an experienced fund manager may seem the perfect solution, it surprises me how few trustees realise that their choice of adviser can in itself place limitations on their charity’s investment choices. Furthermore, all too often the process used by trustees for selection of their third-party adviser often has some fundamental flaws. In fact, in some cases, these oversights are costing charities millions of pounds.

So what should charity trustees be doing to ensure that they choose the investment manager who can help them make the best decisions for their charity?

Finding the right investment manager

The Charity Commission requires that trustees satisfy themselves that an investment manager can perform effectively in line with the charity’s investment objectives and policy.

Consequently, trustees must consider how the services offered meet those needs and also compare services in terms of cost, investment approach and level ?of service.

But finding the most suitable investment manager – the one who can offer your charity the most appropriate and beneficial investment options – can be a challenge even for trustees who have investment experience.

In an effort to comply with these duties reasonably and fairly, most charity trustees undertake a formal tendering process which involves meeting with and choosing from a number of shortlisted firms. On the face of it, it’s a sensible and commendable approach: the trustees have the opportunity to learn more about a potential investment manager and how he or she will implement the charity’s investment policy.

However, it’s common practice for shortlisted parties to be selected only from those firms that have responded ?to the tender. Moreover, those firms that do respond have generally been approached directly by the trustees, ?either because the trustees have already heard of them or have seen an advert in a third sector publication.

When you consider the vast choice of different fund managers/investment firms operating in the UK – each working according to their own house style, following a particular investment process and having distinctive views on strategy – it becomes apparent that trustees who conduct their selection process in this way are automatically restricting their charity’s investment potential, potentially to detrimental effect.

And it’s not just the shortlisting process that can impose limitations. Of equal concern is that some fund managers offer to write a charity’s investment policy statement as part of their service, whereas this is the very document that trustees should be using to clarify the fund manager’s remit and responsibilities. One might even question whether this rather back-to-front approach may place trustees in danger of breaching their legal obligations.

The value of independent advice

The value of independent financial advice may seem obvious but, surprisingly, many charities don’t ?even think to consult an independent financial adviser before selecting their fund manager(s).

An independent adviser is free to research the whole marketplace to find solutions and providers that best match their clients’ specific needs.

Moreover, an experienced independent adviser with specialist charities expertise will first thoroughly review their client’s investment policy to ensure it is in line with the charity’s goals and attitude to risk, contains clear guides without any ambiguity, and is a comprehensive document to use as a brief to any prospective fund manager.

Experienced IFAs should be able to provide a process to follow that will guide you through your investment choices. They can help facilitate conversations for trustees to explore their feelings towards a portfolio’s exposure to investment risk, or ‘variance’, as well as compliance with any social, environmental or ethical criteria.

As a result, trustees should be better positioned to recognise and manage appropriate levels of risk and different types of investment. Importantly, by following a clear investment review process and documenting discussions along the way, trustees will have a clear audit trail to demonstrate why certain choices and decisions were taken, giving them the peace of mind that they have done everything possible to find investment managers that will secure the best future outcome for their charity.

Assess your fund manager’s performance

Once an investment manager (or managers) is appointed, charity trustees have a continued duty of care both to review their investment policy and the suitability and performance of the appointed firm(s) on a regular basis.

If necessary, trustees are required ?to end an investment firm’s appointments. But what are the most appropriate indicators to use when considering performance?

The traditional approach for many is to compare the performance of their fund manager against a benchmark or indices. A common example is the Association of Private Client Investment Managers (APCIMS) indices.

However, as the name suggests, this benchmark may not necessarily be the most appropriate for a charity. In my opinion, it’s good practice for trustees to consider alternative industry benchmarks or even the suitability of creating a bespoke benchmark of their own.

Whatever benchmark trustees use, the golden rule is that it needs to be simple, easy to understand, relevant to the charity’s investment objectives and transparent. Again, this is where the knowledge and experience of an independent adviser can prove invaluable.

Leave nothing to chance

So, if you or your clients are charity trustees, be clear on your investment policy and be sure to give consideration to all the available options. The playing field for fund managers is large but it is by no means level.

If your board of trustees doesn’t have the time or expertise to feel confident about making the right choices, seek independent advice.