Six questions for a charity to ask when investing for the first time.

Choosing your investment is one of the last things you should do. Instead, you will find it much easier to begin by identifying and agreeing the criteria that will shape your organisation’s investment decisions. To help you with this, we have identified six questions for you to answer before taking any further steps towards investing for your charity. 

1. What does investing mean for our organisation? 

Investing can mean different things to different people, and understanding may vary among your trustees and other decision-makers. Charity investments can include instant access cash, term or notice cash deposits, property (do not forget the buildings you may own), funds, stocks and shares and many other things.

While most cash deposits will not fall in value, and all organisations need cash reserves, they rarely retain their spending power over time. Adding the risk of possible capital loss means your potential rewards could be higher, but you will need to accept that values can fall and you may not get back the amount you originally invested.

Knowing if your senior decision-makers will accept greater risks with some, or all, of the organisation’s assets will help you focus your search.

2. Do we have investment experience in our organisation?

Charity trustees are expected to seek professional investment advice unless they have the suitable skills and knowledge required. This is a judgement call based upon the people you can draw on, your faith in their expertise and the size of the potential investment involved. 

If you have smaller amounts or simpler requirements then you may not need the added costs of an adviser. Using an investment fund places the management and administration of the investment in the hands of the fund managers, leaving you to assess whether it is achieving the desired returns. However, you may consider that paying for advice is worthwhile, given its greater potential to align your investments with your organisation’s aims.  

3. Can we commit to invest over a longer period if we might get better returns?

As a rule, the greater the risk you are prepared to take for a potential reward, the longer the timeframe you should allow for it to be realised, for example, if you invest in a fledging industry that is thrown off-course by global events, you may have to wait longer for its potential to fulfilled.  There are no guarantees, and you may opt to cut your losses.

If you are looking at risk assets, you should consider a minimum timeframe of five years. This need not mean that you cannot cash in your investment earlier if necessary. But as risk assets fluctuate in value − the longer the time period, the more opportunity they will have to recoup any short-term falls. 

4. What are we looking to achieve?

Investments can be made for a range of reasons. You may be seeking to generate income, strengthen your long-term reserves or save for a specific future event. Whatever you are looking to achieve, it will impact on your choice of investment. So, it is important that you note and refer to your objectives when making your decisions. 

5. What about ongoing monitoring and management?

Whether it is a notice deposit account, a fund or a portfolio managed by an adviser or investment manager, your trustees are responsible for the investment.  It is important, therefore, to set aside time in your trustee meetings to review what you hold and use up-to-date performance information to analyse your investment’s ongoing suitability.

Interest rate comparisons are relatively straightforward, and funds should provide regular updates comparing their performance to their objectives. An adviser charging an ongoing fee will supply valuations and may meet with trustees periodically. 

Whatever method you use, make sure that you record and review the decisions your trustees make. This should also include maintenance of the status quo if everything is working well.

6. What would our employees, donors and the communities we serve think?

As you discuss these issues, it is vital that you consider how much possible investments align with your organisation’s purpose. For example, colleagues and others you work with may challenge your approach if your organisation’s aim is to promote healthy living, but you invest in companies that produce tobacco products. 

In response, you may make a conscious choice to avoid certain investments like this, despite the potential reward. However, it can be difficult to ensure you completely exclude specific activities. For example, would you also avoid investment in a supermarket selling cigarettes or a company that recycles packaging for a tobacco producer? 

For this reason, many organisations place a limit on the amount of revenue earned from a particular activity rather than an excluding it outright.

If you are able to work with an adviser, they can be very specific on what is included in your investment portfolio. For smaller amounts, however, this may not be possible or make economic sense, so you may have to take an informed view on what is an “acceptable” rather than “ideal” position for your organisation.