A charity recently contacted Yoke to evaluate their fund managers. It was concerned that after a number of years, there had not been a review of the charity’s investments. The finance committee felt they didn’t have sufficient knowledge of the investment universe and wanted to get some independent advice.
The charity had an investment policy statement that stated a need for income and growth in capital. It also had an ethical policy with a number of exclusions. The organisation had previously selected a number of charity common investment funds which were largely meeting the objectives of the policy and there were of no particular concerns about the managers.
It would have been easy to look at the current situation, gather information on the funds and other competing investment managers, and maybe write to managers for views on the investment policy statement, asking for their past performance, charges and so on. We could have organised for the charity to interview selected managers and made the necessary changes to the organisation’s investment arrangements. With the investment review complete, the charity would have moved on, happy that they had dealt with this particular governance issue.
No one would argue that a periodic investment review is both good practice and a legal obligation for a charity. Most investment people would argue that the cost and time of conducting this exercise would likely generate higher future returns by switching to a better performing manager. A few thousand pounds spent on the review today will generate extra tens of thousands in future it is hoped. This is the pattern of many charity investment reviews.
Why this particular project was so interesting and untypical of most charity investment reviews was that the investments were not the problem. It is easy to look down the wrong end of the telescope when trying to find an answer.
Our approach and what we found
At Yoke we put the investments aside, as is completely necessary at the start of any review, and we spent time getting a full understanding of the financial strategy of the charity. We carried out a review of how the charity earned what it spent, the nature of its reserves and as a result, how effectively they were using their capital. It became clear the charity was spending down its reserves over the coming years and had a critical need to do this.
It could be argued that faced with an annual deficit, the charity needed to take more risk with its assets to meet the pressure of increased spending. This would have placed increased short-term pressure on the finance committee and ultimately the trustees, who had already identified their limited investment knowledge.
With clarity from the finance committee, we were able to suggest that they split their funds between current reserves for secure liquid funds (needed to be spent in the short-term), and higher returning investments (for the long-term). Besides this, with a simple desktop analysis, the committee could see the existing investments sat comfortably within the peer-group of other charity investment managers but investing with more than one manager for a smaller pot of money seemed unnecessary. Having revised the investment and spending policies, the review was concluded in significantly less time, at a lower cost and which will help put the charity on a financially secure footing.
It is vital that investments are reviewed in the broad context of the charity’s complete financial picture. So often, an investment portfolio is viewed in isolation, and primarily for return. The overall financial security of the charity has to be understood in the context of the available income, why the reserves are there and how they are being spent.
Just like looking through the wrong end of a telescope, the small things look bigger and the big issues look less important. Unless the review is begun from the correct end, the outcome can cost the organisation considerably more than the price of the review itself