John James, Investment Manager, Thorntons Investments
You are a Trustee of a small charitable trust which receives a relatively substantial legacy. What do you do? The natural impulse might be to spend the money on good causes but, what if you could retain the lump sum and use the income to fund future projects? This suggests a foray into the world of investments, an area that may be well out of the comfort zone of voluntary trustees, but well worth further investigation.
However, before making any decisions regarding investment, as a Trustee you should consider how best the funds can be applied to your own charitable aims and how this tallies with your current income and expenditure profile. Having weighed up the needs of current and future beneficiaries, it might be worth sketching out requirements in terms of capital outlay and income expectations to validate any project. Once you have a viable business plan which entails a sum of money from which an income is required, what happens next?
The OSCR website outlines the main duties of a Charity Trustee, governed by the Charities & Trustee Investment (Scotland) Act 2005, in particular Part 3, Investment Powers of Trustees. The Act states that, before exercising the power of investment, the Trustee will consider suitability and the need for diversification appropriate to the circumstances of the Trust, and should obtain and consider proper advice. If there is a suitably qualified Trustee on the board this may not be required, although it is generally considered prudent to receive 3rd party advice.
It is at this stage that the Trustees would consider appointing an investment manager, preferably one with experience of managing Charity portfolios. A good manager will be able to highlight the relationship between risk and expected return, how different asset classes would be expected to react in different market conditions and provide guidance in portfolio construction. Ultimately, this can be used to draft an Investment Policy Statement, a document which outlines the trust’s aims and objectives as well as the constraints under which the manager must operate. This would include a relevant benchmark against which the performance of your portfolio can be measured.
Risk is part of the investment process and tends to diminish over time. Trustees should consider holding cash to meet short term commitments, whereas as longer term commitments, where inflation can erode spending power, can be met using higher risk assets.
Whilst there is no specific guidance from OSCR regarding Risk in a portfolio, which tends to refer to the volatility of an asset in terms of price and income, Trustees should consider if the portfolio will have a specific wind-up date or whether to distribute the income only. And on the topic of income, it is important decide whether to commit to fixed donations or to distribute free income.
Although Trustees are not directly responsible for the decisions made by the appointed investment manager, they are obliged to ensure that the portfolio remains suitable for their investment aims and objectives, which means regular meetings with the manager, monitoring performance against the agreed benchmark.
Properly managed, long term investment of a lump sum could effectively turn a legacy into the gift that keeps on giving by maximising your charitable donation. This way you could bring about more projects for social good over time than would be possible by simply donating the entire pot of cash directly to deserving causes.