One of the most important roles as a trustee is to manage your charity’s resources responsibly. That means exercising sound judgement and not taking unnecessary risks, particularly when it comes to investing. You need to make balanced and adequately informed decisions, which involves thinking about the long term as well as more immediate concerns.

Many charities choose to outsource the task of investing their assets to a professional investment manager. Yet our experience is that the relationship between a charity and investment manager works best when trustees have a good understanding of what’s involved.

A working knowledge of financial markets can help ensure that you are acting within charity law and any other regulations that may apply. It will also inform other duties that remain your responsibility – from writing an investment policy statement to selecting an investment manager and monitoring their performance.

As part of its commitment to helping trustees, the Charity Commission has published Charities and investment matters: a guide for trustees, also known as CC14. Although CC14 provides a useful framework, we feel it lacks substance in some areas, while other parts are unnecessarily detailed. This article provides high-level commentary on the more important aspects of CC14 for trustees to focus on as they consider their investments.

Define your investment universe

In general terms, charities can invest in a wide range of assets, and there should be no tax to pay on any income or capital gains that might arise. Eligible investments include cash deposits and shares as well as bonds issued by both governments and companies. Collective investment schemes (pooled funds), commodities, derivatives and buildings or land are also approved charitable investments.

More specifically, trustees must know and act within their own charity’s powers to invest. The organisation’s governing document may restrict the types of investment it can make, although this is fairly unusual.

It is worth noting that any profits from trading are not always subject to tax relief. Typically, these types of investments are more speculative in nature and are often held for relatively short periods of time. However, a well-diversified portfolio of financial investments comprising a mix of low risk and higher risk securities is unlikely to fall foul of this distinction.

Exercise care and skill

Trustees must exercise care and skill when making decisions relating to their investments, and take advice from someone experienced in investment matters unless they have good reason for not doing so. Although they do not need to have specialist investment knowledge themselves, some charities find it helpful to have a trustee on the board with investment experience.

However, trustees who offer themselves up as experts are responsible for the quality of advice they provide. For example, a trustee who is an investment manager would be expected to draw on their professional skills. Like any outside professional adviser, they may be liable to the charity if it loses money due to poor or negligent advice. As a result, most charities will delegate their needs on this front to a professional investment manager.

Trustees should record in writing any key decisions relating to their investment approach. This would include agreeing their investment policy and any decision to delegate day-to-day investment management to a professional fund manager. A written record enables them to demonstrate they have considered relevant issues, taken advice if appropriate and reached a reasonable decision.

Some charities find it helpful to establish their own investment committee to make decisions. However, they must document the precise remit of the committee.

Understand the risks

Trustees must consider the suitability of any investments as well as the need to diversify. That means investing in a range of different asset classes and instruments. A well-balanced portfolio can reduce the risk that the loss from any single investment or asset class could materially harm the charity.

There are five main areas of risk to consider. First, capital risk or volatility, which is the risk that an investment could fall in value. Second, the risk that an investment does not keep up with the pace of inflation. Third, liquidity risk, which is how quickly an investment can be sold. Fourth, the risk that an asset denominated in a foreign currency falls in value against the pound.

Lastly, regulatory and governance issues can present a material risk. Some investments, such as certain types of pooled fund, may be unregulated or based in countries that are subject to looser regulations than in the UK. Any management failures or lack of regulatory control could be a cause for concern.

All these risks affect charities in different ways according to their investment objectives, time horizon, attitude to risk and capacity for loss. Achieving adequate diversification may be difficult for smaller portfolios. Charities with larger portfolios may consider appointing more than one investment manager to further diversify investment risk.

Set your objectives

Any charity with investible assets has to have a written policy that sets out its investment objectives and how it intends to achieve them. This document should reflect the organisation’s individual investment needs and situation. It should also be consistent with any other policies, particularly those relating to risk and reserves.

The investment policy statement must be owned by the trustees rather than any investment manager. However, many trustees find it useful to prepare the statement in consultation with the investment manager, which can help to ensure it is both realistic and workable. Working together, they should review these objectives regularly.

Before writing the statement, trustees should be clear about what exactly the charity is trying to achieve by investing its funds. The trustees should take into consideration a broad range of issues such as their organisation’s aims, operating model, timescales and resources. For example, clarifying how much cash may be required for use in the near future would affect the investment approach.

A charity’s longer-term financial commitments must also be considered. This may include likely levels of future grants or spending on projects. Trustees should be satisfied that sufficient cash will be available to meet these needs when they arise. In the meantime, they should be looking to maximise their returns to fund these commitments by investing with an appropriate level of risk.

Other issues include whether the charity has restricted funds. Perhaps a donor has imposed restrictions on how funds may be used or invested. It is also important to plan for any unexpected events that might impact on the charity. For example, how the organisation would cope financially if a scandal deprived it of essential donations.

Some charities find it useful to divide their funds into different pots. They could include money that’s available for the next 12 months; funds for medium-term investments up to perhaps five years; and assets that you can tie up for longer. Although planning ahead can be difficult, trustees should consider the issues relevant to their charity and develop a financial plan that looks reasonable.

Select an investment manager

If trustees decide to use an external investment manager, they need to make sure the firm has the necessary expertise to meet their objectives and requirements. In addition, there must be a written agreement between the charity and the investment manager detailing the relationship and clarifying the remit.

Most charities go through a formal process before appointing an investment manager. Typically, this process involves sending a detailed tender document to a long list of potential managers, inviting them to submit a written proposal. The trustees then review the responses and invite three or four firms to present their proposals in person.

In the first instance, the tender document should introduce the charity and set out what you are looking to achieve by investing. It should then list a series of questions for prospective managers including experience of working with charities, investment philosophy and process as well as performance track record and likely fees.

The aim of the tender process is to find an investment manager that best fits your overall needs. Some charities find it useful to devise a scoring system to appraise managers. It is also worth keeping a note of how responsive potential firms have been throughout the tender process as this could indicate how they will act if you appoint them. For example, have they given the impression of being interested, proactive and keen to be involved? Did they ask questions to clarify points about the tender and the charity’s requirements? It is easy to be impressed by a slick presentation on ‘pitch day’ but what you want is a manager who is prepared to really engage with your charity.

You need to be careful when outsourcing. Some investment managers offer pooled funds designed specifically for charities that do not provide investment advice alongside the provision of their funds. It is difficult to see how trustees investing with these providers are satisfying the legal requirement to take advice unless they have sought it elsewhere, such as from a consultant or an independent financial adviser.

Monitor and review

If you appoint an investment manager, you must review your portfolio and performance regularly. This review should cover how the investments are performing and the service provided by the investment manager in relation to the brief. The frequency of reviews will depend on what makes sense for a charity’s individual circumstances, although a quarterly or six-monthly cycle is typical.

If you are content that the investment manager is meeting the brief then any formal manager review can be relatively light, with no need for a formal tender. Regardless of performance though, it is worth reviewing competitor offerings every so often, such as every five years. This process can help you decide whether your current investment manager is still suitable.

Trustees should also conduct a formal review of their investment management arrangements if there is ongoing evidence of significantly poor performance or service over an extended period. Substantial outperformance could also be a cause for concern because it could suggest the manager is taking too much investment risk.

If the charity’s circumstances change materially then a full manager review may also be necessary. For example, if it receives a substantial donation that radically changes the financial situation or if the investment objectives change.

Trustees should outline their charity’s investment policy in the annual report and accounts, and include a statement about the performance of investments over the past year. They must also explain if the board has adopted an investment approach that is sensitive to any ethical concerns.

Make a difference

All trustees should take reasonable steps to find out about their legal responsibilities, for example by reading relevant guidance or taking appropriate advice. The responsibility to make the right decisions about investing can seem daunting because it’s a continuously evolving landscape.

For example, the Charities (Protection and Social Investment) Act 2016 introduced a new statutory power for charities to make social investments, including programme-related investments and mixed motive investments. The aim is to use a charity’s assets directly to further its social aims in a way that may also produce some financial return for the charity.

For example, a charity that works to help and advise the unemployed may give grants to charities and other organisations that help unemployed people get back into work. However, it could decide in certain cases to issue loans instead of grants. It would expect the loans to be repaid, potentially with some interest, enabling the charity to spread the work it does among more beneficiaries. Different considerations and legal duties apply to such social investments. Acting as a charity trustee and making choices that improve people’s lives is incredibly fulfilling. Time spent on a charity board can also provide an opportunity to learn and develop new skills. By increasing your financial knowledge, you not only help to secure a charity’s financial future but also potentially provide an additional source of income to further its aims and ambitions.

Andrew Pitt is head of charities at Rathbones

Charity Finance wishes to thank Rathbones for its support with this article