Investment options for smaller fish

If your organisation doesn't have the financial clout of some bigger or more well-known charities, it doesn't mean you can't invest wisely. Patrick McCurry investigates the pitfalls and the potential solutions for smaller investors.

For smaller charities, getting a good return on investments has always been a challenge. This is because the big charities have the investment sums available to justify individually managed portfolios and sophisticated advice. For smaller charities, it can be harder to know what products are on the market and how best to structure their investments.

Some of the managers of larger funds define the term 'smaller charity' as any charity with less than £1m to invest; this figure is sometimes the threshold for getting a bespoke service.

However, Ron Green, senior manager of charity financial services at the Charities Aid Foundation, believes this scenario is beginning to change.

"Many of the bespoke portfolio services are limited to charities with several million to invest," he says. "However, some entrants to the market are now prepared to look after charitable funds starting at a much lower level."

When considering an investment house catering for smaller charities, it is important to look at the levels of service offered, including how performance is reported. "Some of these houses specialise in private clients, which means they aren't always geared up to the needs of a charity investor," says one charity director, who asked not to be named.

With that in mind, the first thing a charity needs to do is work out how much it has to invest. Trustees must ensure they hold on to enough funds for the charity to meet its day-to-day needs and cover any seasonal cash flow problems. They also need to work out what timeframes they are considering, because different investments are suited to different periods.

One of the challenges smaller charities face is getting specialist advice. If a charity has a trustee with relevant expertise, he or she can be invaluable in providing guidance. But for charities without this advantage, it can be more challenging. "A charity with only £10,000, for example, could not justify spending £1,000 on specialist advice, because that's 10 per cent of its investment," says Green.

For basic principles, a good place to start is the Charity Commission's guidance CC14, Investment of Charitable Funds, available from the commission's website. Having taken advice, the level at which a charity should consider bespoke fund management services is open to debate. Alastair Richards, finance director at respite care charity Vitalise, believes the realistic threshold is about £1m (see box). But Georgina Hand, a manager at investment house Rathbones, says that generally a charity with less than £100,000 to invest should consider pooled investments rather than a bespoke service. The advantage here is that a small charity can get a diversified investment at a cheaper price than it can a bespoke portfolio.

"Pooled funds have easy administration and are a good way to diversify investments," says Hand. "But they won't be tailored to the individual needs of the charity and make it harder if the charity has specific ethical issues for its investment."

Finally, whether a charity opts for pooled funds or decides to go it alone, it's important that it chooses a fund manager that understands its requirements and is prepared to work hard for it.

David Bailey, head of the charities team at Aberdeen Asset Management, admits that there is a tendency for investment houses to neglect smaller charities in favour of larger clients.

"We make sure a charity with a few hundred thousand pounds gets as good a service as our larger clients," he says. "It's important that the investment houses smaller charities choose are willing to offer a good service."


Respite care provider Vitalise has seen its investable funds increase from £350,000 to £700,000 after a merger. "We're currently looking at the best way to invest this sum, but it seems that if you have more than £250,000 and less than £1m, it's quite a challenge," says finance director Alastair Richards.

He says that it makes sense for charities with less than £250,000 to invest directly in pooled funds, such as common investment funds, while larger charities should hire the services of fund managers. But he says that for charities in between there is a gap in the market.

The first task, he says, will be working out the asset allocation for the investments and then deciding on the particular products to invest in. "There are so many investment products on the market now, it's hard to know which is most appropriate," says Richards.

Vitalise is considering paying for specialist investment advice, but recognises this would be costly. Richards says he may initially try to tap the specialist knowledge on the trustee board. "We have a couple of trustees with investment knowledge and one with experience in pensions investment," he says.

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