Charity investments look as though they are on the up again after several years of bad performance from the stock market. In the past three months, charities with equity portfolios have seen the highest returns since the end of 1998 (see finance news, p9).
This is undeniably good news for organisations with investments - many of which have seen their reserve funds shrink rapidly during the stock market downturn. Research from the Charity Commission shows that just over half of larger charities have the recommended level of reserves, but the figure for smaller charities is much higher. As larger charities are far more likely to have money invested in the stock market, these figures demonstrate the risks of investing reserves in equities.
Keeping up reserve levels and deciding where money should be invested is tricky at the best of times, particularly now when the market is in such turbulent times.
It has been considered good practice over the past decade for larger charities to invest reserves in equities. When the stock market was performing well, charities reaped the benefits. But those who have chosen to keep them in cash will be feeling justified at the moment.
There is also the issue of keeping money accessible - reserves are, after all, meant to be used to bail out a charity in difficult times, not to be sat on as a nest egg. NSPCC has decided recently to sell equities and invest in cash in order to be able to spend reserves when they are needed (Third Sector, 9 July).
Organisations with a good spread of investments in equities, cash and other areas such as property and bonds, are best placed to ride any storms and take advantage of booms. The lesson that can be drawn from the recent stock market problems is that charities should be wary of putting all their eggs in one basket.