risk

Getting ready for the tide to go out…

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Charity investors are offered two ways of investing: a discretionary manager who buys and sells shares directly for their client; or through an investment fund, usually called something like ‘Charity Income and Growth Fund’ and which have risk appetites varying from cautious all the way through to adventurous.  

The former (discretionary) approach requires the manager to carry out a suitability test so they understand each charity’s financial status, its need for income and its capacity to withstand capital losses. This includes looking across all the charity’s assets and liabilities. With a single investment fund it is not possible to do this. The manager cannot tailor the fund profile to the needs of each individual investor – it is a single product designed to have a specific risk profile.

A charity will commonly seek to invest in a ‘medium risk’ fund. However, the fund manager is only regulated to make sure the fund itself is ‘medium risk’ which means that the client, if they have other assets, may well have a completely different risk profile. If, for example, they hold property the overall risk the charity is taking might better be described as ‘adventurous’ rather than ‘medium risk’.

What should Trustees do? Trustees must remember that investing in a fund that is ‘low risk’ only describes that single fund. It certainly does not describe the charity’s total investment risk if it holds any other assets outside the fund. That’s why it is so important for trustees to understand the risks they are taking in the round and not simply to assume that labels on individual investment products apply to their entire charity.

Regulations don’t allow firms that offer products to consider the risks of the other assets and liabilities of the charity, only the risk of the funds they offer. That’s why independent advice is so important for any trustee body that is not confident in making these decisions about their total risk.

After ten years of very good stock market returns, we hope that all trustees will find that they are properly covered when the tide does finally go out.

Why charities need to engage

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At Yoke, we like to cycle to meetings. It keeps us fit and cuts our carbon footprint. While some say cycling in London or any city is dangerous, we manage the risks and take appropriate time between meetings, keeping within the law. The biggest risk on the road tends to be other cyclists or pedestrians, who do not appear to be aware of the rules of the road. 

We notice that it common for pedestrians at crossings wait for a bike to pass, when it is the person on foot’s right of way. This is because many cyclists think they are in charge and ignore the highway code by crossing red lights and zebra crossings, so pedestrians are naturally confused and avoidable accidents can occur.

An excellent recently published report entitled Time and Money highlights that charities who rely on investments to support their long-term mission can take advantage of their ability to make and spend more money and encourage good corporate behaviour. However, short-term thinking can get in the way.

Trustees can unwittingly be blown off-course and when investing for the long-term. It is important that Trustees should be committed and ambitious, not complacent, continually attending to the proper management of their assets but never losing sight of the main charitable goal.

Why do we link the poor pedestrian to a report about investment management for charities?  In many cases an investment manager attends the charity meeting and for usually 30 minutes, they entertain client with stories from the market. Rarely does the charity engage. Like the pedestrian at the crossing who is used to the cyclist ruling the road, charities tend not to challenge. 

Charities must engage, not be entertained, when it comes to investment. They must understand the risks and investment objectives. While the manager can advise, it is the charity that is in control and they must have the confidence to remind themselves of what they want from these assets, assess whether or not they are getting what they want, and if not, decide what action to take.   

Investment managers should also encourage their clients to be engaged by basing their presentation of how well they are fulfilling the mandate they have been given against the benchmark the charity has set. Fabulous tales of the far east and what’s going on in the Silicon Valley is simply entertainment and adds very little to the Trustees’ understanding of whether they are achieving their long term goals.

Like the pedestrian, trustees need to enforce their right and be in control of where they are going to avoid unnecessary accidents.  

How charities can avoid the Ryanair fiasco

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The recent debacle of Ryanair, having to cancel hundreds of thousands of bookings on their flights due to a cock-up over pilot holidays has some resonance with the charity sector.

 

Both offer a service to the public. They are both regulated, offering their services on a cost-effective basis. People with lower incomes rely on their service and both suffer from negative media attention when things go wrong. When things go wrong, people are adversely affected.

 

Of course, it would be impossible to suggest that Ryanair was a charity or shared many of the behaviours of a not-for-profit organisation. It is an airline that is driven by profit, with aggressive tactics creating one of the fastest growing airlines in the world.

 

But when things go wrong, for whatever reason, it can get out of hand quickly. This causes personal pain and long-lasting reputational damage. It is easy to compare the charismatic nature of Michael O’Leary, Ryanair’s Chief Executive, with the founder of a successful charity that goes array. It is called founder syndrome. A few senior people in the organisation who are driven by their own vision and in certain instances, have weak boards or controls to maintain a stable organisation.

 

Something as simple as a badly planned staff holiday rota has caused personal pain for many passengers, reputational damage to the airline and the media a field day. It is a salutary lesson for any organisation, listed, private or charitable that it is vital to have good governance, controls and processes in place to prevent simple errors escalating into a serious breach of trust.

 

Charites are not immune from the Ryanair affair and errors happen. The secret is to manage your risks accordingly and when things go wrong, have a concrete plan to mediate the issue as openly and honestly as possible.