Is it time to review your Charity’s Investment Policy?

A well thought-out investment policy is essential to achieving your charity’s goals and demonstrating that trustees have fulfilled their duty of care

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Published: 09 Jun 2023 Updated: 09 Jun 2023

Why does a charity need an investment policy?

A written investment policy, also known as a WIP or a Statement of Investment Principles, 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 the 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.

An investment policy is a legal requirement of the Trustee Act 2000 for charities registered in England and Wales, and considered good practice in Scotland and Northern Ireland. Although you cannot delegate writing the policy to an investment manager, it’s helpful to prepare the policy in consultation with them.

What areas need to be addressed when creating a charity investment policy?

Objectives and investment powers

You should provide enough background information to the investment manager so that they can easily identify your charity’s 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 is constantly being eroded by inflation. So over longer time periods, holding cash may become high risk.

Risk is strongly linked to time horizon. For example, cash is generally seen as low risk, but the returns are largely linked to prevailing interest rates and are under threat of erosion by inflation. So over longer time periods, cash can become high risk.

Portfolio constraints and restrictions

Your charity’s investment 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 promote investment in companies that follow the very highest environmental, social or governance standards or along themes that are particularly important to your charity.

Strategic asset allocation, benchmarking and targets

Asset allocation is the single biggest factor in determining both risk and reward. It’s therefore 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. Reports should be clear, with performance history and costs being  transparent, and trustees need to be able to understand them.

You should also agree on the frequency of regular review meetings.

How often should a charity review its investment policy?

Your charity’s investment policy is a living document and should be reviewed at least annually or when any significant changes occur within the charity to ensure it remains fit for purpose. While your investment objectives might be long term goals reviewing your policy periodically ensures that how you achieve those objectives remains aligned to your charity.

Checklist for establishing a charity investment policy

• Consider appointing 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
• Consider having a separate responsible investment policy if your restrictions or ESG preferences are particularly complex
• Get your investment manager to agree, sign and date your policy
• Review at least annually or when your charity’s circumstances change

Speak to Evelyn Partners about getting your charity investment policy right

At Evelyn Partners, our charities team are highly experienced in helping charities to establish an investment policy that works for their individual requirements. For more information on how we can help you, contact us.

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.