Paul Palmer looks at the key topics charities need to consider to invest successfully.
The nonprofit sector may be diverse in scale, purpose and organisational structure but all organisations share a common desire to make the most of their resources.
This includes ensuring that the financial assets are invested to meet the needs of the charity, whether as a reserve to cover potential liabilities or as a source of return generation.
Charities with investment portfolios, upwards of £5m but less than £50m, can often find it difficult to gain access to impartial advice in a cost effective manner. Forward thinking organisations in the sector ensure they are considering a variety of approaches to investment to achieve long term sustainability.
As the sector continues to evolve, the importance of sound financial decisions has never been in sharper focus, particularly in the context of charity finance and creating long term sustainability through sound investment.
To broadly define an often fragmented environment, nonprofit organisations can usually point to four main sources of finance: donations, government funding, income from corporates and finally income generated by assets. It is interesting to note that this final source represents some 20 per cent of the sector income. Too often the sector holds these funds in cash or assets that are not making a real return above inflation.
If your organisation is fortunate to have reserves that can be invested (or an endowment) understanding the investment options out there and the complexities of the market are vital to achieving strong growth and returns. These complexities include:
- Setting investment objectives and strategy
- Investment risk and its relevance to your organisation
- Governance structures required to enable tactical decisions to be taken to support the strategy
- How to select the right managers to implement the strategy
- How to track and monitor progress
Of course, one can expect to make the best decisions when educated and well informed, a view echoed by many investment managers across the sector. A strong dialogue between trustees and financial directors is also another prerequisite in ensuring success.
Professor Paul Palmer is course director for Charity Investment - Theory and Practice at the Centre for Charity Effectiveness, Cass Business School, City, University of London
Civil Society Media would like to thank Cass Business School for its support with this article.
