For a small charity, venturing into financial investment needn't be daunting if good planning is in place to support the process and the investment strategy is simple.
Start with the plan
Planning is the most important part of the investment strategy. Before trustees make any decisions about their investments they must decide on the charity's overall financial plan and objectives and consider how much to invest, what to invest in and how the investments fit in with these plans.
Understanding what money is available for investment and what is restricted is also important. The less experienced the trustees are, the simpler the plan should be.
Another consideration is the time scale of the investment. To determine this, questions need to be asked about the aims of the investment: is capital needed in the short term or is a longer term investment ok? These facts will shape the investment process and determine the appetite for risk.
Check the legalities
Legally, trustees must know and act within their charity's powers to invest; they have to exercise care and skills when making investment decisions and select suitable investments for their charity. One important point is for them to check governing documents, such as the articles of association, to see what investments are allowed and whether any restrictions are in place.
Charities will need to take advice from someone experienced in investment matters, review their investments from time to time and include information about their investment policy in the trustees' annual report
Simplicity is the key to success
The investment strategy should be as simple as possible – it will cost less and be easier to understand.
Investing in a unit trust investment fund can be good option, which will allow a charity to pool its money with thousands of people and invest in world stock markets. Unit trusts are invested in a broad spread of shares so the risk is reduced.
Another option is the Oeic (open ended investment company) – a type of company or fund in the UK that is structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size. The company's shares are listed on the London Stock Exchange and the price of the shares is based largely on the underlying assets of the fund.
Charities can invest in unit trusts and Oeics with as little as £25 a month or a £500 lump sum – so it can be easy to get a foothold in the stock market. Such investments are low-maintenance too: the charity won't have to do anything and the fund manager should provide half-yearly reports so the board can check progress and the reports can be included into the annual return too.
Identify a fund manager
The Charity Finance's annual Fund Management Survey is a good place for small charities to identify fund managers to approach. It will include all the major fund managers and companies with charity expertise.
There are also useful investment comparison sites such as Hargreaves Landsdown or Best Invest, where charities can check which fund managers might suit their criteria. It all goes back to the planning, if the charity has decided it doesn't want to pay over a certain fee or is looking at income or capital growth, these details will narrow the playing field.
What to look for in a fund manager
Charities should look for an adviser who will give advice as part of the fee they charge for the investment purchased. If charity approaches an independent financial adviser first for advice they will take a fee and the fund manager will do the same.
Getting started
Following research, phone around different fund management houses to get an understanding of the charges and costs involved and what the service includes. Does it include online access to the account, for example, free of charge and simple reports that could be inserted into the annual return?
What are the best investment options for small charities?
• A single Oeic – these can be growth or income orientated or cautious and aggressive – and the investment options should be tied into the plan. The longer the time horizon for the investment, the riskier the investments that could be considered.
• A collection of Oeics that meet the charities investment criteria. With this option it is very important to check whether there are any investment restrictions in the governing documents such as avoiding tobacco stocks.
• A portfolio of direct investment is best avoided for small charities as this will cost more and be more harder to administrate.
The best advice for any small charity embarking on financial investment is to go for it, but ensure that great planning supports the entire process. It must be kept simple and the charity should ensure that it gets some really good advice too.
David Rowe is managing director with responsibility for UBS's Charity businesses and a speaker at Cass Business School's – Introduction to Charity Investment and Theory Practice Course which is running until October 2014.
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