The general perception by smaller charity trustees, who may have limited investment expertise, is that anything more adventurous is not possible if you want a regular income and capital preservation. Investing in an interest-bearing account or Treasury bonds might be safe, but it does not protect capital values in the longer term.
So what are the finance directors or trustees of small to medium-sized charities to do if they are reliant on external professional advice, which is not always impartial?
I would recommend some investment in closed-ended investment companies, in- cluding investment trusts. Unlike a unit trust or open-ended investment company (OEIC), these are companies in their own right, run by an independent board of directors. They invest, primarily, in the shares of other companies.
An investment company can borrow money that an OEIC or unit trust cannot, in order to make further investments and get higher returns. The board of directors, responsible to the shareholders, will set the investment policy and appoint the fund manager, who is responsible for implementing the investment policy, day-to-day fund management, administration and marketing.
Overall, the advantage of non-specialist closed-ended investment companies is that they are extremely cost-effective. They have strict guidelines on how much they can spend on marketing their shares. Closed-ended investment companies usually do not pay introductory or annual trial commissions to advisers on top of annual management fees. These can be as high as 5 per cent and 2 per cent respectively for unit trusts and OEICs.
Specialist closed-ended investment companies do have higher fund-management fees, but advisers are not usually paid commission. In contrast, the introductory and annual charges levied by OEICs or unit trusts can reduce total returns over a five or 10-year period.
Moreover, closed-ended investment companies provide a range of choice in asset classes, sectors and geography. From the UK and smaller companies to global, European, North American, Japanese, Asian and emerging markets, as well as specialist companies dealing with property, private equity and hedge funds, there is a huge variety.
This allows charities to construct portfolios that have asset allocations as wide as those associated with larger charities managing significantly larger sums.
- Next week: investment trusts.
- Biman Mittra is director of finance at Coram. This is the first of two articles on investment companies.