We all know that it is only by spending that charities can fulfil their charitable purpose and that retaining it deprives current beneficiaries of support. This is a product of the ‘never sell the family silver’ mindset. There is always a time and a place for that, but charities have made so much money over the last ten years (often doubling their portfolios) that now is a good time to loosen the purse strings and fund their purposes after so many years of austerity.
This is easy enough to say, but how are trustees to decide on what to spend and what to keep, especially when so much has come in the form of capital gains and not income? Often we suggest to clients that they split their funds between short-term funds (with safety in mind) and long term funds (with higher returning investments). Where we help trustees most is in thinking through how much they might allocate their capital to each fund, and it is this that often helps trustees release surplus money to fund and deliver a long cherished strategic initiative. This can be followed by a review of the investment and spending policies which will help put the charity on a financially secure footing for the future.
It is vital that investments are reviewed in the broad context of the charity’s complete financial picture. So often, an investment portfolio is viewed in isolation, and primarily for return. The overall financial security of the charity has to be understood in the context of the available income, why the reserves are there and how they are being spent.
Sometimes trustees can look down the wrong end of the telescope when searching for a solution making the small things look bigger and the big issues look less important. Unless the review is begun from the correct end, the outcome can cost the organisation considerably more than the price of the review itself.
We are often contacted by charities to evaluate their fund managers with a view to improving performance and generating more money to spend. What makes these projects so interesting (and untypical of most charity investment reviews) was that the investments were not the problem; it was how trustees think about their reserves. For further information, please contact James Brooke-Turner.