How to tailor your charity investments for a resilient revenue stream

Third Sector Promotion Charles Stanley

Income investing requires a balance of investing for today and for tomorrow. Ben Gilmore, investment manager at Charles Stanley Wealth Managers, shares what investment options are available to charities, how they can tailor their investment strategy and what to look for in an investment manager

Many charities are looking to invest their reserves to help future-proof their income, ensure their sustainability and help them deliver on their mission. 

Investing for today and tomorrow

Portfolio construction now is very different to what it was 20 years ago. Before, a typical portfolio would be 60:40, with 60 per cent being invested in risk assets, such as equities and property, and 40 per cent in fixed income, such as UK government bonds – which, at the time, paid a much higher level of income.

Today the approach is different and much more nuanced. Fixed income is lower, the proportion of international equities has increased, and there’s an increase in alternatives such as absolute return funds and private equity funds. As a result of low interest rates, bonds do not pay much income at all and are less attractive to invest in. 

Charities are less inclined to invest in the more traditional sectors such as tobacco, oil and gas, and arms, and more inclined to invest in environmental, social and governance (ESG) investment. As a result, investment managers need to think carefully about constructing portfolios that, first, meet the income objective, and second, meet any wider requirements.   

Tailoring the investment strategy to your charity

There are three main areas to focus on when it comes to tailoring the investment strategy to your charity:

  • Determine the goals and objectives of the investment 

  • Integrate factors that are important to your charity in how the monies are invested

  • The ongoing management and implementation of the strategy

Start simply by asking why you want to invest and what the objective is. What are your specific requirements as a charity? Look to agree the balance between risk and return that’s right for your charity. It’s important to have a Statement of Investment Policy, which mutually helps your charity and your investment manager to be on the same page.  

What factors are important to you in how your money is invested? When looking at these considerations it’s important to think about aspects such as ESG investments, regularity of income payment and planned withdrawals and incoming funds. 

Fundamentally, engagement between all stakeholders is so important. For example, between the investment manager and the trustees, so think about the types of communication and the regularity. It’s important that everyone is aligned. 

What to look for in an investment manager

The role of an investment manager is to help your charity achieve its financial objectives and to protect and grow a charity’s assets over the long term. So what should you look for in an investment manager and how do you find one?

First, identify what’s important to you in the investment manager relationship. Is it that you have bespoke requirements, such as specific ethical considerations? Do you need trustees and stakeholders aligned in their thinking and requirements, or do you need a trusted adviser to be suggesting practical and relevant solutions? Think about your communication requirements and reporting needs. 

Look for firms with an excellent reputation, a track record of charity investments and a robust risk management process. You need to be confident in the abilities of the firm to withstand what will occasionally be volatile market conditions. Understand how the firm operates in terms of your direct access to your investment manager and how they will report to your trustees. 

Investment management is a service that you pay for, yet the result cannot be guaranteed. It’s important to remember that investment managers cannot control the outcome due to the unpredictability of markets in the near term. What matters most is how they control the process, which is to not take undue risks and to follow a disciplined process. Remember to take a long-term view as investing is an ongoing journey.

Finding a safe pair of hands is half the battle. The key objective is for trustees to have peace of mind that the investments are being managed proactively, in line with their wishes.

In conclusion

Look for that balance between dividend yield in the short term and dividend growth in the long term. Consider investing globally; however, take into account the prevailing risks. Having a total return mindset is important, rather than reaching for yield. Beware of the pitfalls of unsustainable income as well as over-exposure to any one sector, company or asset class.

Find out more about Charles Stanley Wealth Management and how it can help your charity plan for the future. 

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