Kate Rogers: A starter kit for beginners in the investment world

It may seem daunting, but charities should not put off thinking about their options, writes our columnist

Kate Rogers
Kate Rogers

I've just become a school governor, and the number of new acronyms I have to contend with is mind-boggling. This is not unusual: many professions and industries are like this, not least the investment world. We pepper our communications with jargon when everything could be described in plain English if we really wanted it to be. Perhaps we do it to put up barriers to entry or to identify ourselves as members of the same tribe. The result for charities that want to invest can be baffling.

So where does a charity that is investing for the first time begin? First, let me describe two key concepts: return and risk. A return is the gain or loss you make on an investment. This might come in the form of actual income or a rise in the value of the asset. Risk is usually defined as the volatility of an investment, or how much, and how frequently, its price goes up or down; the greater the volatility, in theory, the greater the risk.

The starting point when considering investment options should always be your own charity's financial strategy: why are you holding investment assets and what do you hope to achieve with those assets? This should be expressed as a written investment policy. You might find the online guide on the Charity Investors' Group website helpful, and thinking through the following three questions is a useful place to begin.

For what and for how long will the money be there?

Your assets might be your reserves and therefore might be needed at short notice, so they should be invested in low-risk assets, which will also have a low return. On the other hand, assets held long-term to generate an income should grow with inflation to preserve their value. It should be remembered that your assets are there to support you in the delivery of your charitable objects, not for speculative gain or over-cautious cash hoarding. Balancing fear and greed is the challenge.

What are the best assets to invest in?

This will depend on your answer to the first question. Invest lower-risk assets such as cash and bonds in short-term funds; higher-risk, income-generating assets linked to inflation, such as equities and property, are better in longer-term funds. You might have expertise in this area on your finance or investment committee. If not, investment managers, advisers or consultants can help you find the right asset mix for each charity. There is no single answer; it depends on your circumstances and preferences.

How do we manage the investments?

This will depend on a number of factors, including the expertise in your charity and the size of the investment pot. For most charities the answer will be to invest in one or more funds that match your investment objectives. For the few with a significant balance to invest, there is the possibility of investing directly in the assets, although many still choose to pool their assets with others in funds.

It seems daunting, but charities should not put off thinking about their options. Improving the return on the charity asset base will not only enhance organisational stability but also improve the ability of your charity to fulfil its mission.

Kate Rogers is client director at Cazenove Charities

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