Paul Palmer of Cass Business School says it is important that people who are responsible for a charity's investment portfolio understand how it works.   

When I spoke at the CFG London meeting in December, I used the history of charity finance, and the way it has evolved over the last 25 years, to illustrate the importance of lifelong learning and the need to ensure continuing professional development (CPD).

Broadly speaking there are four sources of finance for charities: donations from the public, government funding, money from corporates and income generated by the charity itself from its assets. This last source is often described as the “equity” of the sector and as a total percentage it averages some 20 per cent of the charity economy income. The majority of this income derives from investment assets ranging from short-term cash deposits to long-term investments.

A rather humorous observation was that the owners (charities) are open-toed-sandal people while the managers (financial institutions) wear black shoes. The implication being that they are different people and don’t understand each other.

I think this is rather dangerous and from a charity management perspective completely wrong. If you are a charity which is fortunate enough to have reserves that can be invested or an endowment, then understanding the complexity of investment and being able to assess and make the right decisions are vital.
If you are responsible for a charity’s investments then it is crucial that you understand five key areas:

1. How to go about setting investment objectives and establishing a strategy to meet them – it is important to ensure that the charity’s overall aims and objectives are linked to the charity’s strategy. Too often I have found that the investment policy has been written in isolation to what the charity is doing.
2. Investment risk and its relevance to your charity – are you an endowed grant making charity or are investments instead tied to a reserves policy? There is not a one size fits all approach to investment. Rather, there must be a clear comprehension of what the investments are there to do and most importantly in what time frame. These factors will have a major bearing on what assets to hold and their respective risk profile. 
3. The governance structure required to enable tactical decisions to be taken around this strategy – how are you going to monitor the management of the portfolio? Will it be discretionary or advisory? Do you have the competence on the board to make these decisions, or are you using advisors?
4. How to select the right managers to implement the investment strategy - why is it that you fire the underperforming manager just as their strategy is successfully delivering and appoint the top manager just as they stop performing!?
5. How to monitor progress and measure success – is the manager a problem or did the charity (going back to points 1 and 2) have totally unrealistic expectations and fail to understand their risk profile? In other words, don’t blame the manager if you set them benchmarks which are unachievable within the risk profile. You need to be very clear and communicate what you want and how you to achieve it to the manager and then have a monitoring system in place that you both understand which avoids ambiguity and technical filibustering.

It is clear that there needs to be a successful dialogue between the charity and the investment manager. It is therefore a rather limiting perspective to adopt the aforementioned view of the investment manager as a “capitalist storm trooper” who is the enemy. 

Three years ago when I was searching for partners to help me develop a dedicated CPD course on charity investment, I received overwhelming encouragement from most investment managers who were keen to ensure that both their own clients and also the sector in general were well informed and educated. Having a dialogue with charity managers and trustees who understood investment terminology and were empowered to ask the right questions was felt by the best investment managers to be better for them as they could show and add value to charity clients and differentiate themselves in the market. In other words, the best investment managers want to engage with their clients as that is by far the best way to keep their clients and not be subject to a frequent problem in the sector of one dominant trustee who then removes a manager to avoid them disclosing their own limitations.

Professor Paul Palmer is associate dean for ethics, sustainability and engagement at Cass Business School and director of Cass Centre for Charity Effectiveness (Cass CCE).

Civil Society Media wishes to thank Cass Centre for Charity Effectiveness for their support with this article.

Cass CCE’s Charity Investment Course starts on 12 April 2016.