Effective stewardship of charity assets – are you getting the right advice?

Most charities remain under constant pressure to grow and protect income alongside the value of capital assets. Ensuring that the real value of income and capital are protected enables your charity to do more and helps to safeguard your future. With other sources of funding under increased threat, income from investment portfolios is playing a more prominent role in many operational charities for whom a regular cash-flow is vital.

But it is our old enemy inflationthat we must keep a constant eye on, both to ensure that invested capital maintains its real value, and that the level of income maintains its real power to benefit society. In the UK, inflation as measured by the Retail Prices Index (RPI) stood at 2.4% by the end of April, which represents a significant fall from previous highs of around 3.5% in late 2018. Although more benign, it would be folly to disregard the compounding erosive effective that the present level of inflation can have on the real value of assets and incomes over rolling 10-year periods.

It is interesting to note that in the 10 years to the end of March 2019, every £1,000 held in the average UK instant access savings account would have grown to just £1,013, whereas RPI inflation has led to charities needing £1,349 to do the same amount of good as £1,000 would have achieved in 2009. The magnitude of this “inflation gap” remains under-appreciated. This should certainly focus minds!

‘Safer’ assets such as cash deposits, UK and other western government bondsare offering negative real returns; in effect, if you buy a 10-year UK government bond, or gilt3, you are paying the government for the privilege of you lending them money! So, where are the opportunities to access a high and growing income while maintaining a diversified portfolio? And why should you be considering taking independent advice?

Law and Regulation – tighter scrutiny is the direction of travel

Traditionally, using independent financial advisers or discretionary fund managers has been seen as the preserve of the privileged few; large, well established charity endowments who can afford the fees, and who often have prominent profiles to protect. However, charity law and regulatory guidelines issued by the Charity Commission are shining an increasingly bright spotlight on the responsibilities of Trustees relating to effective stewardship of charity assets.  Gone are the days of relying on one board member who used to work in the city “because they know all about money matters”… the fact is, if you do not possess the necessary expertise regarding investment markets on your Board, even as a more modest sized charity, can you really afford not to seek qualified independent advice? There are some key reasons why you should consider appointing an adviser.

Charity Commission Paper CC14, ‘Charities and Investment Matters – A Guide for Trustees’, clearly states that Trustees must:

  • Know, and act within, their charity’s powers to invest
  • Exercise care and skill when making investment decisions
  • Select investments that are right for their charity. This means taking account of:
    • How suitable any investment is for the charity
    • The need to diversify investments
  • Take advice from someone experienced in investment matters unless they have good reason or not doing so
  • Follow certain legal requirements if they are going to use someone to manage investments on their behalf
  • Review investments from time to time
  • Explain their investment policy (if they have one) in the trustees’ annual report

In addition, the law states that:

  • An investment adviser must be someone who is reasonably believed by the trustees to be qualified to give advise by his or her ability in and practical experience of financial and other matters relating to the proposed investment
  • Most usual options for trustees are:
    • An investment manager
    • An investment adviser (independent or tied)
    • A fellow trustee, if one of the trustees has suitable experience and ability

Crucially, these aspects need to be considered in the context of how your charity is constituted. Most charities in the UK remain unincorporated, set up either under Trust Deed or other governing document that does not constitute a legal entity (for example, a Scheme or Set of Rules). Why is this important? Trustees of unincorporated charities are exposed to the risk of personal liability.  This is a serious and under-appreciated risk, because any proven failure in stewardship obligations that leads to a material financial impact on the charity will lead to personal financial loss.

This is another key reason why Trustees should consider taking independent advice in order to mitigate risk or, as increasing numbers of charities are now doing, maybe it is time to consider becoming a corporate entity so that personal liability on Trustees is removed and replaced by limited liability against the corporate (legal) entity?

There are many facets to this complex area, but a high quality authorised investment adviser with proven experience in dealing with charities and other trust-based investments can help you through the maze and provide valuable guidance from helping to formulate and Investment Policy Statement to performing ‘health checks’ on existing portfolios, selecting suitable new investments, and ensuring that regular monitoring and reporting is carried out in accordance with the law.

Outlook for 2019

Based on RPI inflation averaging around 3.0% during 2019, we believe that long-term charity investors seeking income should continue to favour a significant bias towards equity funds offering a diverse spread of exposure to quality UK and international businesses. Minority weightings in bonds and property continue to play their role in managing capital volatility, but it is equities that continue to offer the greatest potential to deliver high and growing income streams and UK equities look to be offering more compelling value right now. Far from abandoning our home market in favour of more overseas exposure, we would encourage charities and other long-term investors to consider taking advantage of the recent market turbulence and increase UK equities exposure while income yields remain high and lowly valuations relative to the majority of other world markets offer attractive buying opportunities.

The value of investments and the income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invested.

1INFLATION: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.
GOVERNMENT BONDS: Fixed income securities issued by governments, that normally pay a fixed rate of interest over a given time period, at the end of which the initial investment is repaid. Bonds –
GILTS: Fixed income securities issued by the UK government.

Dafferns Wealth Limited is an Appointed Representative of Insight Financial Associates Limited which is authorised and regulated by the Financial Conduct Authority, FCA number 458421.