Is it time to review your charity’s investment policy?

As part of the support that we offer our charity clients, we often get asked for input into policy statements. If a charity has investments, it is important that these arrangements are recorded in an Investment Policy Statement. A well-thought-out investment policy is essential to achieving your charity’s goals and demonstrating that trustees have fulfilled their duty of care.

Why does a charity need an investment policy?

A written investment policy provides a framework for your charity’s investment decisions, helping trustees to manage the charity’s resources effectively and demonstrating good governance. It’s like a road map for the trustees and your investment manager to follow, setting out the charity’s investment objectives and how you would like the portfolio to be managed.

Five areas to be addressed when creating a charity investment policy:

1. Objectives and investment powers

You should provide enough background information to the investment manager so that they can easily identify your charity’s mission, beneficiaries, structure, type of charity and your financial objectives.

This should include any liquidity requirements and whether the trustees are seeking income only or a “total return” approach, meaning that some of the capital return of the charity can be spent each year.

Any restrictions on the investment powers of the charity (for example, imposed by its constitution or donors) should also be documented explicitly.

2. Time horizon and risk

Your policy needs to set out the time horizon over which your portfolio will be invested, how much risk the trustees are prepared to take and how these risks will be mitigated.

Risk will mean different things to different people, so it’s essential trustees and their investment manager have a strong understanding of what each means by risk.

3. Portfolio constraints and restrictions

Your charity’s investment policy should specify permitted asset classes, restrictions on investment, base currency and tax considerations.

Many charities also have an ethical investment policy. This might be based on negative screens, such as excluding investments in tobacco, or positive screens, which aim to promote investment in companies that follow the very highest environmental, social or governance standards or along themes that are particularly important to your charity.

4. Strategic asset allocation

Asset allocation is the single biggest factor in determining both risk and reward. It’s therefore vital to agree a strategic asset allocation that will allow the charity to
reach its long-term financial objectives.

5. Performance and reporting

Trustees must assess the performance of their investments and decide what reporting they require. Reports should be clear, with performance history and costs being transparent, and trustees need to be able to understand them.

How often should a charity review its investment policy?

Your charity’s investment policy is a living document and should be reviewed at least annually or when any significant changes occur within the charity to ensure it remains fit for purpose.

Investment does involve risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

Details correct at time of writing.