Five steps to consider for charity investment management

Friday 7 February 2020 – London, UK

In just 7 years there has been a £47 billion increase in charity assets under management.

Essentially, these assets (excluding property assets) represents the surplus funds available to charities, which they do not need for immediate use, and have placed into investment to seek a better return to bolster the charity’s income in future years.

By the end of 2017, over £108 billion assets in total were under management.

With public expectations and attitudes shifting towards greater focus on transparency, and sustainability, it is becoming more important for charities to ensure they have robust processes, procedures and internal controls to ensure that the way they safeguard charity assets and invest surplus funds is in line with the charity’s objectives.

Here is our quickfire 5 step guide for charities considering investing their surplus funds.

1. Know the legal requirements

It is imperative for Charity trustees to know what financial investment they can make. Specific powers of investment may depend on its constitutional form (for example, whether a charity is unincorporated or a company). In addition, a charity’s governing document may place some conditions or limitations on the use of any power of investment.

2. Ensure there is a defined operational process

It is essential that before embarking head-on into a project of placing the charity’s assets into investments, trustees would benefit by having a clearly defined internal process of how they will oversee the assets which they place into investments, including how they will be selected and oversee the investment managers they engage with.

3. Undertake active learning

It is important for trustees to undertake their own research to understand their role and responsibility and not simply reply on the multitude of marketing material which charity investment managers throw towards them. Getting independent training and advice is critical to ensure that trustees avoid group thinking when making key decisions around investing their assets, including selecting appropriate investment managers.

4. Understand the risks

Risk is part of the investment process and there are several risks that trustees should consider, such as capital risk, liquidity risk, market risk, tax risk. The last one is often overlooked, where charity trustees naturally think there will be no tax consequences. However, if making foreign investments, where there are no equivalent tax reliefs for UK charities in the countries concerned, the investment return may be reduced by foreign taxes.

5. Develop an investment objective

Having clear investment objectives which outlines what assets the charity places in investments, how and under what criteria those assets will be managed, as well as the role the investment manager will have in important prerequisites before embarking upon placing assets into investments.

In summary, remember the simple acronym LOLROs when undertaking charity investments.

Legal, Operational, Learning, Risks and Objectives