Board Talk: How should trustees deal with investment decisions?

Charles Ssempijja and Fred Worth debate trustees' role in the use of financial assets

CS: For me, there are two fundamental principles: first, trustees have a legal responsibility to safeguard a charity's assets, including cash and investments. Second, investment decisions should not have a negative impact on the charity's objectives. The frenzy about Comic Relief's investments that followed the BBC's Panorama programme is testament to how immeasurably damaging some investment choices can be to the individual charity and to the sector. What bearing do ethical considerations have on Mencap's investments?

FW: For some charities it is appropriate to take into account their ethical values. For example, cancer charities will not invest in tobacco companies because it would be ethically inappropriate. It is not so obvious what sort of ethical policy would be relevant to a charity working with and for people with learning disabilities.

However, if a sector's corporate social responsibility policies worked against the interests of people with learning disabilities, that would represent a sound reason to exclude investment in that industry.

CS: Charities should certainly list all the industries or products that they must not invest in as a matter of principle, and put their approach to investments together in an investment policy.

Back on the first point, that responsibility to safeguard assets means by extension that trustees are required to ensure that they achieve the maximum return for the lowest risk possible. In practice, this can be a difficult balance to strike. On the one hand, charities' resources are squeezed and any additional income can go a long way. But the level of financial risk that comes with a high return might simply be unacceptable.

So how do you start going about putting an investment strategy together?

FW: It is important that a charity's trustees consider financial investments that will deliver a real return over a certain period of time, but also that they are aligned with the charity's risk profile and the access that it must have to those investment funds.

Creating the optimal portfolio for a charity involves making decisions on the various asset classes in which to invest and needs to take into account the investment environment at the time of the investment.

Subsequent reviews of the investment performance should be a regular action by the trustees and their professional advisers, proportionate to the size and complexity of the portfolio. Expected returns should be assessed against actual performance and the agreed benchmark indices and, if necessary, changes made to the portfolio. Although a portfolio of investments cannot mitigate the risk of being invested in the stock market, a well diversified portfolio can reduce the unique risk and thereby the total risk of the portfolio.

CS: Spreading risk is definitely desirable, although it may be unrealistic for most smaller charities. But you absolutely need to put a lot of a research into defining what you consider acceptable forms of investment - especially since there is so much choice in the market. I certainly think that, for most charities, it would be too expensive to employ an investment specialist and manage the investments in-house.

It would also be sensible for trustees to consult with other people or organisations around the sector - these might be paid consultants, or other professionals from similar charities who would generally be happy to share their experiences for free.

FW: Actually, I would go so far as to say that a charity's trustees should always ensure that they act on the advice of professional people who are authorised to give advice in relation to the type of investments and portfolio management under consideration.

In this regard, it is important that the charity's trustees have a clear understanding of the adviser's fees and the transaction costs that will be payable. After all, excessive costs could have a significant adverse impact on net returns.

Charles Ssempijja is founder and director of NFP Accountants and treasurer at the Asylum Support Appeals Project and the World Development Movement

Fred Worth is a co-opted trustee at Mencap, the charity for people with learning disabilities

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