Independent Fund Director Services

Just as investors in an investment fund place their trust in the stewardship of the investment fund provider and managers, charity donors place trust in the charity’s trustees and officers to put their contributions to work towards the charity’s primary purpose.

Clearly, not all of the money received in donations can go immediately towards the charity’s primary purpose so it has to be held in some form of investment or deposit. Also charities often have different sources of funding. Besides donations received through their fund-raising activity, there may be long-term endowments, grants and other forms of corporate or state funding.

All of these different sources of funding are likely to have different conditions and expectations attached to them which will affect how they can be invested. Suddenly, what began as a relatively simple conduit for channelling funds from donors to beneficiaries starts to become complex and multi-layered.

Before the trustees can even begin to consider appropriate investment strategies, structures and implementers, good governance is essential to ensure that Charity Funds can demonstrate that they have adequate systems and controls to meet the expectations of their benefactors and effectively make investment decisions with regard to their funds.

Independent Fund Director Services can help you to develop appropriate governance and decision-making structures.

Having identified and if necessary segregated the different sources of a charity’s funds, the trustees have a responsibility to develop an appropriate investment strategy, structure and means of implementation for the fund and each of the sub-funds.

In very basic terms, investment strategy will reflect the fund’s (or sub-fund’s) objectives and time-frames. For example, is it for immediate (within the next 12 months) operational use or is it for a defined purpose at a known cost at a known future date (such as a new school or hospital building in three years time)?

Investment strategy should also reflect any conditions or sensitivity attached to the source of the funds. For example, government grants are likely to have specific conditions attached and there could be considerable sensitivity over public donations - both circumstances that might require a very low risk investment strategy to ensure capital security.

Conversely, there may be less restriction or lower sensitivity attached to a corporate donation or longer term endowment which could allow a higher risk strategy in order to generate greater long term returns.

Investment structure is how the strategy is delivered.
Is it by direct investment or through pooled funds?
Are the funds to be actively managed or passively managed?
Are there any ethical or socially responsible investment requirements?

Implementation is the identification, selection and appointment of suitable investment managers. This can be a complex and time-consuming process.

Most charity funds appoint professional investment advisers to assist them with this process. However, the task of selecting, monitoring and reviewing professional investment advisers is highly specialised and even the most competent and talented advisers are only as good as the quality of the brief that they are given.

Independent Fund Director Services can help your Charity Fund's Trustees to a better understanding of the key issues surrounding investment strategy, structure and implementation to ensure that you get the most out of your professional investment advisers.

This is a hugely complex subject for most charities.

What exactly is ethical or socially responsible investment? Is it necessary? How do we decide our own policy on ethical investment? Will it cost more? Will it reduce our returns? Is it more risky?

There aren’t any easy answers. For a comprehensive overview of the subject, take a look at the Ethical Investment Research Information Society (EIRIS) website.

In its simplest form, ethical or socially responsible investment consists of identifying a set of issues that you do not wish to support and identifying a set of principles that you do wish to support and developing an investment policy that is consistent with these aims.

You may say: "We wish to be as ethical as possible in our investment policy." However, as soon as you start to impose any investment restrictions, you reduce the universe of potential investments and this may reduce the potential return.

Then, there is the question of relevance which is extremely important for charities. For example, if you are an animal welfare charity, you are likely to wish to avoid investing in companies that test cosmetics on animals. But what about companies that manufacture armaments? You, as trustees, may share a personal belief that weapons manufacture is unethical but this view is not directly relevant to animal welfare and may not be shared by all of the supporters of your charity.

Perhaps, the greatest difficulty with ethical investment is the question of ethics itself. Going back to our animal welfare example, testing cosmetics on animals is one thing, but what about testing medicines on animals? Is there a moral difference?

Clearly, as a charity, you will have a strong interest, if not a moral obligation, to ensure that your investment policies are compatible with the primary goals of your organisation and the concerns of your donors, but you have to formulate your policies carefully and ensure that you have a mechanism for their ongoing monitoring and review.

Finally, there is cost. Ethical investment is more expensive because it adds an additional layer of costly research for the manager. Theoretically, it also reduces returns as it reduces opportunities. However, in practice this isn’t necessarily the case.

There is an argument, backed up by some evidence, that unethical businesses are badly run businesses and therefore more likely to face financial sanctions and poor publicity as a result of their bad behaviour. Badly run businesses and businesses on the receiving end of fines and bad PR are likely to be bad investments. So there is a case that ethical investment can actually improve returns and reduce risk.

But the case can be argued both ways. There is no correct answer. The important thing is that you, as trustees, understand the questions. Independent Fund Director Services can help ensure that you are asking the right questions.