Does your Charity have an Investment Policy?

As trustees your principal duty is to further your charity’s purposes, and any investment decisions you make must support this.

Investment is a vital consideration for any charity with surplus or reserve funds and it is essential that that you have a policy in place which governs how assets are to be managed. This is a requirement under the Charites Statement of Recommended Practice (SORP) and trustees should monitor this regularly to ensure the funds are being used to best support the charity’s goals.

Whilst not every charity has funds available for traditional investment, if your charity keeps money in a savings or deposit account which is set aside for a future purpose and not for day-to-day expenditure, this counts as investment and your Investment Policy should cover this. The same responsibilities apply to investing in cash as to any other investments.

As a trustee you are expected to act with reasonable care and skill and where you do not have the skills or experience, take advice to ensure the best outcome for the charity. The Charity Commission investment guidance details the responsibilities of a trustee including your duty to ensure that investments are suitable for meeting the charitable objectives.

There are two primary reasons a charity may invest:

1. Financial Investment: To receive a financial return on the money which can be used to help achieve the charitable objectives over the longer term.
2. Social Investment: The investment itself is directly working towards the charitable objectives whilst also aiming to achieve a financial return.

How to write an Investment Policy

The purpose of an investment policy is to provide a framework for the management of the invested assets. There are no strict rules on what your investment policy should contain however there are several things you should consider including for a well-rounded policy. Your governing document may also place restrictions or conditions on how you can invest, and this should be considered when creating your investment policy.

The most important first step is to set out your objectives for the investments, consider why you are investing them and what the expected use of the capital or income will be in the future. This should be clearly defined within the policy so you can evaluate regularly if the investments are achieving the intended purpose. An investment objective could be “to achieve a return after costs of 2% per year above inflation to maintain the real value of the funds”.

Next, consider the amount you have available for investment. Consider your charity’s financial position and cash flow needs, you should balance the need for short term cash against the long-term objectives. This may be clear to you already, perhaps you have a permanent endowment fund which is clearly defined, or designated funds for a specific future purpose and this should be detailed within your investment policy.

What type of return do you expect to achieve via the investments, this will be led by your objectives for the funds, but it is important to specify what type of your return you are aiming for:

• Income – a regular income to support the charity’s ongoing costs.
• Growth – growth of the investments to support a future need.
• Social – achieving the charitable objectives directly through investment.

How much risk are you prepared to take. All investments (including cash) come with their own risks attached but the overall level of risk will depend on the type of investments you have selected. You may be willing to take different levels of risk with different portions of money to meet multiple objectives.

What is your time frame for investment, are these funds needed in the next 12 -24 months or can you commit them for much longer. This is also an important factor when considering the level of risk you are prepared to take. Generally, the longer you have, the more risk may be appropriate.

What kind of ethical restrictions are you going to put on the investments. This may seem obvious, but there are thousands of investments out there and there are no clear criteria for what constitutes an ethical or unethical investment. You should think about the things that matter to your charity in the pursuit of your objectives and avoid investments which may actively go against these objectives.

Finally, it is important that the investment policy is clear, concise and avoids ambiguity so that it can be easily understood and followed as this needs to be reported in your financial statements.

There is a wide range of different investments on the market with varying levels of risk and complexity attached. To simplify this, some of the main asset types are:

• Cash – the lowest risk investment
• Fixed interest – loans to governments or companies which typically pay a fixed rate of interest
• Property – Physical buildings either commercial or residential
• Alternative assets – Such as infrastructure, hedge funds, private equity
• Equity – Shares in companies across the world, tradable on a recognised stock exchange, generally considered to be at the higher end of the risk scale