Mark Humphreys is an investment consultant at financial consultancy Watson Wyatt.
Investment policy is based on a complex decision about how to structure the asset mix and appoint appropriate investment managers.
Because governance capacity is stretched in this area, it is no surprise that trustees have become very dependent on advisers - which, in the charity sector, often means the fund managers employed to manage assets. It is debatable whether trustees are best served by this arrangement because it is not clear if the interests of fund managers and those employing them are aligned.
In a recent survey we asked trustees what they believed their role in investment policy was. The results were surprising - 60 per cent of trustees did not feel they had any role in maximising investment returns at all.
It's clear that effective investment oversight remains an 'also-ran' in the third sector, with the result that much is delegated to fund managers with vested interests.
Most investment managers are paid a fee related to asset size, so it could be argued that their primary aim is simply to retain clients. This can lead to 'closet tracking' behaviour whereby active managers take little risk relative to their benchmarks - the aim being to minimise the risk of performing very poorly and being replaced.
Certainly, no investment manager, whether active or index-tracking, is likely to recommend investments that involve a transfer of assets away from themselves. This results in a conflict with the aims of charity trustees, which should include maximising overall returns.
However, investment is making its way up the agenda. Trustees are seeking independent advice and are looking to develop their own knowledge in various areas in order to challenge and hold to account agents that are paid to add value. These issues include asset allocation, finding the most skilful, best-in-class fund managers, and fees.
By improving their investment governance, trustees can be confident they are in a position to maximise total return through a diversified mix of assets and by controlling 'agency leakage', which should result in achieving their goal - more money for charitable purposes.
The Charities Bill has turned the spotlight on UK charity trustees in terms of their investment activities, because it includes a requirement for charities to strengthen their accountability and transparency.
As part of this process, charity trustees will be required to "govern their organisations effectively". The challenges that lie ahead include the need to focus on investment and the suppliers of independent advice and services in this area.
- Charities should ask if they are best served by relying on fund managers for investment advice
- Trustees increasingly seek investment advice and try to build their own knowledge to hold agents to account.