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Foundations of a Robust Charity Investment Strategy: Setting your objectives

This is the second article in the series on Strategic Investment Framework for Charities that we worked on in collaboration with Robert Hayes, a senior consultant to PMCL Consulting.

In the first article we discussed what constitues a good investment strategy. In this second article we focus on the main objectives. The most basic points to establish relate to thefinancial position and aspirations of the institution.

In simple terms it is always crucial to keep in mind ‘What is the money for?', 'What are we hoping to achieve?' and 'What do we want to avoid?’.

In this article we focus on the first two questions.

What is the money for?

This may seem a very simplistic question but often goes to the heart of the matter. The COVID crisis, for example, led a number of Charities to appreciate that what had previously been considered as ‘endowment assets to provide regular long term income support’ were in fact ‘reserves to be called on in the event of a crisis’. These two scenarios require very different investment strategies since it is clear that a ‘rainy day’ reserve needs to be robust and available to be called on in all market conditions.

To help explore this the questions that need to be considered include:

  • Is the money a permanent endowment which we need to preserve for the very long term or in perpetuity?

  • Is it accumulated reserves and - if so - in what scenarios might it be called on?

  • Has a proportion of the reserves now become so established that it now acts as an endowment? What actually is the legal position of the assets, is there a need to clarify or take advice on how they might be invested or disbursed?

  • Are there any existing or committed calls on the assets? Whilst an explicit ‘spend out’ plan is relatively rare, even a pure grant giving endowment may well have regular beneficiaries or ongoing programmes which are not totally discretionary in nature. Operating costs and expenses should also be considered. 

  • Are there any loan principles or interest payments to be met? With interest rates going up, some organisations decided to reconsider their financial structures and decided to allocate some of the reserves to repay their loans. Also, a number of institutions have explicit ‘long term loan repayment’ allocations.

  • In what scenarios might we want to change our plans and make additional calls on the assets? This could be as mundane as unexpected roof repairs or might be in response to events such as natural disasters. Or it might also reflect areas such as changes in technology or Government legislation that throw up new opportunities or threats.

  • What day to day trends might impact our requirements – in particular inflation? Up until the last couple of years inflation has not been high on many investors' agendas for quite some time. However, as well as ‘general inflation’ (typically taken to be CPI) it can also be useful to think about specific areas of inflation that may impact your spending plans – for example medical research costs, pensions costs or building materials.  

We find that for even the longest term institutions it can be very helpful to look at cash flow planning and establish a ‘waterfall’ or ‘ladder’ of commitments that can then be reflected in the assets. 

What are we hoping to achieve?

Whilst many endowments and charities will typically express their investment objective as ‘inflation plus X’ it is often worth stepping back a stage to explore this in more detail.

Another way of setting out the question could be:

"What are the aspirations of the charity and what are the financial resources required to meet those aspirations and how much of that requirement needs to come from the investment portfolio?"

Thinking about the challenge in this wider framework also allows you to include other sources of actual or potential income. Obviously, this is particularly important for ‘operating charities’ where you have commercial activities, but it also allows for all other sources of income and expenditure such as legacies or donations.


The next element is to think carefully about timeframes.  For a reserves portfolio a useful approach is often to think about ‘how many months expenditure do we want to cover before selling assets?’. For a permanent endowment that is drawing total return from the investment portfolio there is still the scenario or question of ‘how many months or years are we happy drawing down if the capital value (in nominal or real terms) of the portfolio has fallen?’.

Both of these examples might lead trustees to consider a ‘dual portfolio’ where the assets are split into ‘matching’ and ‘return’ pools or ‘allocated reserves’ and ‘long term growth’ pools, or similar terms. 

This would mean, for example, that whilst an overall objective of ‘inflation plus x’ may be appropriate there are secondary objectives that apply to the two pools of assets.

Our Role in Supporting Your Investment Journey

Research has consistently shown that the investment strategy and mix of assets in broadly diversified portfolios is by far the greatest determinant of both total returns and return variability over the long term. At the same time, we find that many organisations spend suprisingly little time on devising their investment strategy and just opt for a broadly matching 'risk profile'.

Any investment strategy is based on some combination of implicit assumptions and we work with our clients to, where possible, dig into them and make them explicit.

The fundamental principle here is that the objectives for your assets should reflect your actual or potential commitments or aspirations – the better you can express those commitments in terms of desired cash flows the better you can set the objectives in financial market terms.  By embracing this framework, we aim to ensure that your investments truly reflect your aspirations rather than your activities being just an outcome of what investment results happen to provide.

Should your charity require professional support in any aspect of this process, we are here to assist. Our team is ready to discuss your specific needs and explore how we can contribute to your charity’s financial success. You can view client testimonials on our website for examples of the impact we've made with other clients.


Stay tuned for upcoming insights

Our subsequent articles will delve deeper into key topics:

  • Thinking about risks: What are we trying to avoid

  • Developing the Plan: Transforming objectives and constraints into actionable policies

  • Getting into the Nitty-Gritty: Practical implementation and ongoing policy management.


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