Problem page: How to invest charity funds

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24th September 2018 by TFN Guest 0 Comments

I’m a trustee of a charity and we are looking to boost our income by making investments. However as a board we don’t know where to start and what we are allowed to invest in?

Investments can be a good source of funding for charities but you are right to ask the question as charity trustees have specific duties and responsibilities when it comes to investing charity funds.

The first step is to check the charity’s constitution as it may contain investment powers and/or restrictions. If there is nothing in the constitution which relates to investments made by the charity, then the Charities and Trustee Investment (Scotland) Act 2005 contains statutory powers which allow for investment. Under the act, charity trustees are entitled to make “any kind of investment of the trust estate”. However, as the Office of the Scottish Charity Regulator sets out, these powers are “subject to restrictions and exclusions and do not extend to certain categories of trustees”.

Charity trustees must act “with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another person”.

Nicola Whyte

Nicola Whyte

Lianne Lodge

Lianne Lodge

Firstly, look at the immediate financial needs of the charity, future spending commitments and if the charity’s funds are restricted – can you afford to lock funds away in investments for a few years?

You’ll also need to think about the level of risk you are willing to accept versus the need for income. Government bonds, for example, have a guaranteed return, whereas stocks and shares will fluctuate but could generate a better return.

The purpose of the charity is also relevant as investments should reflects the charity’s values and ethos. It may mean that financial returns are less but it will prevent you from losing supporters or damaging your reputation. Remember to put any personal ethical concerns to one side. While an individual trustee may not want to invest in tobacco, a charity for the benefit of fish may decide that it would generate the best return and is not against the charity’s objectives. A charity for the prevention of cancer, on the other hand, would not make such an investment.

Finally, you should spread the risk of the investments over different assets. Unless the trustees have investment expertise, it’s important to get proper advice. In reality many charities will delegate the day to day running of an investment portfolio to a qualified investment manager.  A good investment manager will work with the trustees to discuss the level of risk you are willing to take, investment objectives, targets, strategy and any ethical limitations on the types of investments the charity wishes to hold.

An investment policy is helpful and should be included in the annual trustees’ report so stakeholders can understand and have confidence in the investment decisions.

Finally, remember to review. Making the initial investment decision is only the first step and, even if delegated to a professional, ultimately the investments remain the responsibility of the trustees.

This month’s solution was provided by Gillespie Macandrew LLP’s head of charities Lianne Lodge and Nicola Whyte, who provide legal advice and support to a range of Scottish charities.