A well thought-out investment policy is essential to achieving your charity’s goals and demonstrating that Trustees have fulfilled their duty of care.
A written investment policy provides a framework for your charity’s investment decisions, helping Trustees to manage the charity’s resources effectively and demonstrating good governance. It’s like a road map for the Trustees and your investment manager to follow, setting out the charity’s investment objectives and how you would like your portfolio to be managed.
Trustees have a duty of care when appointing and reviewing investment managers. The Trustees are always responsible for setting investment policy, deciding whether to delegate decision-making and reviewing performance measurement.
A written investment policy is a requirement of the Trustee Act 2000, but also represents best practice for all types of organisation. Although you cannot delegate writing the policy to an investment manager, it’s helpful to prepare the policy in consultation with them.
Here are five key areas that need to be addressed when creating your investment policy.
Objectives and investment powers
The aim is to give enough background information to the investment manager so that they can easily identify your mission, beneficiaries, structure, type of charity and your financial objectives.
This should include any liquidity requirements and whether the Trustees are seeking income only or a ‘total return’ approach, meaning that some of the capital return of the charity can be spent each year. This needs to be carefully considered and documented.
Any restrictions on the investment powers of the charity (for example, imposed by its constitution or donors) should also be documented explicitly, to remove ambiguity.
Time horizon and risk
Your policy needs to set out the time horizon over which your portfolio will be invested, how much risk the Trustees are prepared to take and how these risks will be mitigated.
Risk is strongly linked to time horizon. For example, cash is generally seen as low risk, but currently produces almost no return and is constantly being eroded by inflation. So over longer time periods, cash becomes high risk.
Risk will also mean different things to different people, so it’s essential Trustees and their investment manager have a strong understanding of what each means by risk.
Portfolio constraints and restrictions
Your policy should specify permitted asset classes, restrictions on investment types or ethical considerations, base currency and tax considerations.
Many charities now have an ethical investment policy. This might be based on negative screens, such as excluding investments in tobacco or arms manufacturers, or positive screens, which aim to allow investment only in companies following the very highest environmental, social or governance standards.
A charity can invest on an ethical basis to avoid investments which conflict with its aims, if it might lose supporters or beneficiaries if it doesn’t invest ethically, or if there is no significant financial detriment.
Strategic asset allocation, benchmarking and targets
Asset allocation is the single biggest factor in determining both risk and reward.
Therefore it’s vital to agree a strategic asset allocation that will allow the charity to reach its long-term financial objectives. This can also be used as the basis of a performance benchmark against which the Trustees can compare the performance of the investment manager.
Many charities also set an investment range within which the investment manager can make changes without referring back to the Trustees.
Performance and reporting
Trustees must assess the performance of their investments and decide what reporting they require, for example quarterly valuations and annual investment reports. The trick is to make sure that reports are clear, performance history and costs are transparent, and Trustees understand them.
You should also agree on the frequency of regular review meetings. You should review your investment policy at least annually and have a more comprehensive review every five years or so.
Quick checklist for establishing your investment policy
- Appoint a sub-committee to advise the full board of Trustees
- Make sure investment objectives are workable and achievable
- Document the rationale behind decisions for future generations of Trustees
- Keep it short and relevant
- Get your investment manager to agree, sign and date your policy
- Review at least annually
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.