Investing Charitable Funds in Good Times and Bad

At a time when finances are dominating Board meetings, we talked to Trustee Leadership Programme alumni John Chambers about Charity Investments.

John has had an extensive career in finance: he has been Director of the AEGIS Managing Agency since 2001, and last year became Chair of the Lloyd’s Charities Investment Advisory Committee. 

As Trustees seeking to invest charitable funds for the first time, what are the key considerations and decisions that need to be made at board level?

The key considerations for Trustees are:

• How long they’re looking to invest funds for
• The ethical approach they are looking to take
• The level of return that they are hoping to achieve, and 
• The degree of risk they can tolerate. 

With regard to timeframe, investing with a very long-term horizon allows a riskier approach to investment, looking more at stocks and shares which have historically seen higher returns than other forms of investment but are more volatile. A charity with a fund that it expects to spend over the next few years should take a lower risk approach, investing in cash accounts and short-term bonds.  

When Trustees have agreed on the above, it is important that this is recorded in an Investment Policy for the charity that is approved by the board. 

Trustees will likely not have the time or expertise to make specific investment decisions about buying and selling individual funds. Generally, the management of the investment portfolio will be outsourced to a professional investment manager. The board must then select a suitable manager, set the Investment Policy, and monitor the ongoing performance of the manager in line with the Investment Policy and market benchmarks. 

If the investment portfolio is of a significant size it is important that there is a Trustee with a reasonable working knowledge of investments who can hold the investment manager to account.

What is the biggest impact of COVID-19 on investments, and how should charity boards be responding?

The COVID-19 pandemic has clearly had an impact on the investment markets - stock markets globally saw sharp falls, similar to those in 2000 and 2008/9. Those charities with Investment Policies in place will have already considered this possibility and thus should not be considering impulsive responses. 

The impact of the pandemic will be different to that of past financial crises and Trustees should be considering, in conjunction with their investment advisors, the long-term implications to society and the global economy and look to adjust their investment strategy to reflect these changes.

Should charities that don’t already have investments be considering investment in the current context?

The right or wrong time to enter the investment markets is only ever clear in hindsight, and if you are making long-term investments, then market timing is of much less importance. However, if stock markets have declined significantly then it is a better time to invest, even if sentiment suggests otherwise.

If you are looking to invest a lump sum, then it is often best to invest funds into the market over six to twelve months to average out any timing effect.

How should decision making processes for investing charitable funds differ from general investment processes?

Charities have significant advantages over other investors. Firstly, they have tax advantages such as there being no income and capital gains tax payable on interest and other investment gains, and investment in UK property being free of stamp duty. Charities, therefore, should not let tax considerations influence investment decisions. 

The other advantage is that charities can often take a very long-term view when investing. Studies have shown that investing with a very long-term horizon leads to better performance compared with investors with a short-term outlook.

Do you have any advice for balancing risk, ethical investments, returns and the charity’s objectives when making investment decisions?

It is widely believed that investing with a strong Environmental, Social and Governance (ESG) viewpoint limits returns compared with an unconstrained approach. However, evidence shows that this is no longer clear cut, and that companies with strong ESG credentials are rewarded in share performance. 

There are many ways you can invest ethically. Charities might exclude certain companies from their portfolio, such as those involved in arms production. They might actively select companies with strong ESG characteristics, or target social enterprises in order to support good causes whilst still making a return on their investments.

If your board of Trustees is looking to create an Investment Policy, read the Charities Aid Foundation guidance here.

Thanks to John for answering our questions, and to our Programme partners, Close Brothers Asset Management and the Clothworkers’ Foundation, for allowing Cause4 to support Trustees at this time. If you have any questions or issues, email us at trusteeleadership@cause4.co.uk