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Five Top Tips on Diversifying your Charity Investment Portfolio

Updated: Feb 9, 2023

A need to diversify investments is a requirement for charity trustees to act within the law, as stated in the Charity Commission's Guide for trustees on investment matters (CC14). Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio in an attempt at limiting exposure to any single asset or risk.

Investment managers diversify investments in their managed portfolios and funds. However, we believe that charity trustees and finance directors need to be aware of certain factors as they discuss investment strategies and appoint and monitor investment managers:

1. Every Charity has different investment requirements

Charities differ in their investment requirements and particular investment risks. Trustees of a permanent endowment, for example, may choose to invest solely in equities and would need to diversify their portfolio by sector, region or style of investment. For charities with shorter investment horizons, market volatility presents a bigger risk that can be managed by building a multi-asset portfolio.

2. Investment approaches change

Many charity funds have been managed as "balanced" portfolios of equities and bonds. This approach is now seriously challenged by extremely low bank rates, implying low - or potentially negative - medium term returns for bonds.

3. Investment managers need to have different capabilities

Where it is important for a charity to reduce volatility, we recommend considering a wider range of alternative assets and actively managed strategies in addition or in place of bonds. This may have implications for selecting investment managers as they can differ in their capabilities in different asset classes.

4. Manage performance based on your charities objectives

Charities need to "own" their investment objectives and benchmarks to effectively monitor and assess their managers' performance, rather than follow peer group indexes. In the case of alternative assets, we frequently find that absolute return targets (such as

Cash + 2%) are more appropriate than market composites.

5. Diversification is about more than appointing managers

Finally, diversification of investment management arrangements is not about a number of managers appointed, but rather in ensuring that the underlying strategies are truly diversified. We often recommend looking for a core and satellite managers to explicitly address a charity's investment risks.

About PMCL Consulting

PMCL Consulting has a dedicated focus on non-for-profit and public sectors, acknowledging their specific investment needs and understanding the complex dynamics of charity trustee boards and investment committees. Our team brings together extensive experience in the charities sector with a solid investment background and analytical framework. If you are interested on finding out more about how we can help you then drop us an email or call us.

T: +44 (0)207 866 2534

Written by Tatyana Mursalimov

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