Navigating the financial markets for charities

Has your charity considered investing its money? If not, it is worth reviewing – as long as you follow the correct guidance, investment creates opportunities to maximise your funds and potentially to generate a sustainable income that will help to support your cause in years to come.

However, navigating the financial markets for charities presents several challenges to derive the most appropriate investment solutions.

How can my charity get into investing?

Identifying and agreeing the best route to market is often the first step. Many established charities have the strength and depth within their Board of Trustees to conduct regular due diligence on the investment firms with relevant offerings and are very capable of compiling their own investment policy statement and tailoring their bespoke requirements.

At times, a charity may prefer to rely on professional advisers to conduct the relevant due diligence and match that charity’s requirements to appropriate investment philosophies.

What happens next?

Once a decision has been taken, there are a range of challenges and considerations that the charity will need to contend with before making investment plays, particularly in the current climate.

Some of the key challenges facing the charitable sector in meeting cash flow, distributions and growth requirements include:

Investment portfolios for charities

The investment portfolio suitable for an individual charity will be contingent on its own specific circumstances and will relate to its operating and funding model, its distribution policy and even on its legal establishing documents. The correct portfolio will support its charitable aims and maximise the period for which it can operate. It can also reflect trustees’ Environmental, Social and Governance preferences (but be aware of the legal framework noted below).

Charity Trustees – investment considerations

Trustees do not have complete freedom of action in deciding investment policy. The Bishop of Oxford case (Harries v the Church Commissioners for England, 1992) and its more recent clarification in Butler-Sloss v the Charity Commission for England and Wales (2022) sets limits on their freedom of action.

Trustees’ investment powers should be used to “further the charity’s purposes” however ceteris paribus, this would mean maximising investment returns rather than curtailing them through egregious restrictions on, for example, ethical grounds which don’t relate directly to the individual charity.

However, trustees do have discretion to exclude investments that they reasonably believe conflict with the charity’s aims. Equally, the Charity Commission and OSCR, the Scottish Charity Regulator have views on how charities can treat investments and still retain charitable status (essentially, don’t hoard investments – they must be seen to be advancing the charity’s ambitions).

What about market volatility?

Investment markets are inherently volatile, particularly over shorter time horizons. Capital values and, to an extent, income payments, can vary significantly in the short term which has implications for charities with specific, known commitments or with repeated requirements to dip into capital. Broadly speaking, the more risk a charity can take with its investments, the higher the long term returns it should achieve; however, the offset is short term volatility and the danger of being forced to cash in investments at times when asset values are depressed.

All markets entail risk, the current ones being no exception. Uncertainty is the general rule, with periods of complacency characterised by a false certainty and confidence, followed by brutal periods of market falls as expectations are reset. However, an appropriate investment policy and portfolio can navigate through most scenarios, with short term needs being met through prudent cash modelling and management, allowing time for the investment portfolio to fulfil its potential despite the danger of short-term falls.

Structuring a charity’s investment portfolio

Portfolios can be massaged to generate more or less income, but generally (and particularly given the favourable and equal tax treatment of capital gains and income) the optimal investment strategy doesn’t tie itself slavishly to either capital or income gains but aims to generate the best total return of a combination of the two. Focusing predominantly on either category of return brings with it additional and often unforeseen risks, which may not be immediately obvious until they manifest.

Investing in the markets is, for charities with the luxury of a long investment time horizon, the only historically proven way of protecting spending power over the long term against the ravages of inflation. However, the field is complex, and trustees should either have experienced investment professionals serving with them or take professional advice.

If you would like to discuss the potential for your charity to invest, or to review its investment strategy, contact Graham or Phil today.