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7 December 2017, 11:40

The wash-up from Investment Conference 2017

In January, CFG held its Investment Conference 2017. Instead of a ‘conference’ style format, delegates were seated at round tables hosted by CFG’s corporate partners. The aim of this new ...

In January, CFG held its Investment Conference 2017. Instead of a ‘conference’ style format, delegates were seated at round tables hosted by CFG’s corporate partners. The aim of this new approach is to generate lively discussions around three topical issues and to give delegates and hosts the chance to meet more people. Delegates gave fantastic feedback on the new format overall, several commented that it was ‘really useful to be able to talk one-on-one with investment experts, and discuss issues with peers’. The new format also enables CFG to report back, so that the discussions and thinking can be shared with people who couldn’t make it to the conference. Whilst of course there’s no substitute for being there on the day, the following is a report of some of the discussions, which we hope you find interesting. With many thanks to three of our hosts: Investec, Sarasin & Partners and Quilter Cheviot for facilitating discussions and writing up session notes.

Investment 2017 was framed around three plenary sessions by invited speakers:

1. The Shifting Nature of Funding Andrew O’Brien, Head of Policy, CFG
2. Managing the Challenges of Governance James Brooke Turner, Director of Finance, Nuffield Foundation
3. The UK’s Decision To Leave The EU Trevor Williams, Chief Economist, Lloyds Bank Corporate Markets

Session 1

CFG’s Andrew O’Brien spoke to Conference about the changing landscape of funding, and its impact on decision-making around investments and reserves.

General funding environment

In the discussion that followed, delegates expressed concerns around austerity and the difficulty and lead-in time in securing grant funding, which hit small charities the hardest. Conversely, there was a feeling that bigger charities are getting bigger and taking a much larger slice of the fundraising pie – brand recognition is critical. Funding is also unpredictable which makes it difficult to plan. Where funds have been withdrawn from an on-going programme, it’s not only beneficiaries that suffered, but also the charity’s reputation. Some charities, however, reported that they had had recent successes with lottery funding. There was a mixed experience of fundraising among delegates, with a couple that didn’t fundraise at all, and one of whom was about to embark on fundraising for the first time. In this instance, trustees were mindful of new regulations and keen to ensure an appropriate framework was in place. While many agreed that the pressure on staff costs and pensions is being exacerbated, some pointed out that the increase in the National Living Wage is welcomed as a positive development for their beneficiaries. The continuing negative press coverage of charity fundraising is damaging and it’s difficult to change the public’s perception. It will only happen with a continuous, collective effort from the Charity Commission and all umbrella organisations. One table noted that charities are taking a much more robust approach to governance, although given their resources, small charities found it more difficult. Finally, many felt that we need to challenge Government for better demarcation between the state and the voluntary sector’s responsibilities.

Partnerships, joint ventures and mergers

While there’s a generally positive view of partnerships and joint ventures, some had looked at building partnerships but these had rarely worked and exacerbated operational inefficiencies. Mergers are seen as much more of a challenge, because of the need to unify trustees and staff across different organisations, and the cost and the time and cost involved. It was recognised that most mergers happen to protect beneficiaries where a charity is in difficulty. Concerns were expressed around the potential loss of local connection when charity mergers were purely predicated on efficiency savings and perhaps an umbrella structure may be a more appropriate route to take.

Investment v reserves

A common thread throughout this discussion was the negative impact of reserves on donor perceptions, with donors raising concerns about growth in reserves. On one table, charities felt their own specific characteristics were more important than any macro-economic impact from funding. Recent strength in investment portfolios had prompted one charity to proactively start to run down reserves. This opened up the issue of CC19 encouraging charities to build up reserves for a rainy day. One charity had been improving its buildings and services funded from the investment portfolio. If there was an impact from higher wages and inflation, they had other financing options available such as cheap loans and other grants. Another charity described how income from fundraising and trading was far more important to them than investment, so investment strategies weren’t key for them. Some charities do consider today’s requirements over preserving investments for future generations but often portfolios are not substantial enough to make a meaningful difference.

Session 2

James Brooke Turner‘s presentation on governance highlighted the huge variations across charities in both size of portfolios, governance structures, and ability to buy-in specialist consultancy. However many of the points he made resonated with charities of all sizes. Funding structures and size of portfolios were both key factors in determining acceptable levels of risk, return trade-offs and the degree of involvement that trustees had in managing a charity’s investment portfolio. Charities represented at the conference varied significantly in their primary source of income generation, with some securing funding through subscriptions and memberships and others depending primarily on their portfolio for income.

Investment committees

Concerns were raised over how to deal with a committee which did not have the expertise particularly around understanding and setting a risk budget that was appropriate for the organisation. In addition some expressed concerns about trustees being overly cautious in fear of rather than making decisions for the long-term future of the charity, and noted the need to ensure that the amount of time devoted to discussing investments was commensurate with its importance to the charity as a whole. Another issue raised was the importance of ensuring the board, investment committee and decision-making wasn’t dominated by one person who was seen as expert in investments, even if they are an investment professional, with some commenting that it was worthwhile reminding the board of the ‘equal voice and equal responsibility’ ethos. For some, a lack of dialogue between boards and investment committees had proved problematic, but had mitigated this by having a lay trustee on the finance committee, who could also give an objective view of any changes in a charity’s operating environment which might influence its investment strategy.

When to source expert help

When should charities employ an investment consultant? And if you do employ one, how do you ensure they’re working hard for you? Again, there was a split between those charities who either couldn’t afford external support (or who felt it was difficult to justify it) and those who could. Questions were raised and discussed about how effective charities are at challenging their investment managers, with some reporting that rather than setting the agenda, investment committees were following that of their investment manager. Small charities should not feel like second-class citizens. In a competitive market with a wide variety of investment managers, small charities should have high expectations and challenge their investment manager where they feel unloved. Clear communication between the charity and its investment manager about trustees’ expectations on the remit and level of service is critical. Charities should review investments regularly and serious consideration should be given to whether manager is value for money and delivering the returns that enable the charity to meet its objects.

Asset allocations

For some, asset allocation decisions are made by the charity itself if they have an experienced investment team on board. However, for charities who don’t have this capacity it is likely to be a two way communication between the charity and the investment manager, with or without the involvement of a consultant. In order to determine the asset allocation policy the charity must decide what it has to achieve in the short term and what it aspires to achieve in the medium and long term. It was agreed that getting advice was essential and mandatory, in line with the Charity Commission’s CC14. To find out more about CC14 and the key principles of charity investment, CFG’s Foundation Investment Course was recommended. Offered in association with Sarasin and Partners, the course also covers the Charity Investors’ Group advice on writing a charity investment portfolio. The next course is in London on 19 April, and is open to members and non-members.

Session 3

Trevor Williams’s presentation on the impact of Brexit on charities was welcomed by delegates, with one reporting that it was ‘very interesting, albeit sobering’. Uncertainty around the terms of Brexit, and the possibility of reduced economic activity, which in turn will reduce charity donations and fundraising opportunities, was the overwhelming theme of the discussions that followed. Many acknowledged that the struggle to get the sector’s voice heard within Government would be made even more difficult with the political focus on Brexit negotiations. Charities had already seen positive and negative impacts as a result of the fall in value of sterling. Some reported an uplift in domestic tourism, others a rise in the cost of overseas grants. In terms of investments however, the fall in sterling had been one of the drivers behind the FTSE 100 soaring above 7,000 and the increase in value of international investments. One delegate wondered whether charities should take profits and redeploy funds elsewhere, but the dilemma was to where, as neither cash nor government bonds offer protection against inflation. Maybe social investment was the answer, but charities were unsure how charities should access this. One participant had experience in social investing and warned that it should be considered carefully. If a project is directly linked to a charity’s objects, it’s possibly worth considering, but it is critical to ensure you seek advice and have a clear understanding of risk versus reward. One of the biggest concerns following UK’s decision to exit the EU was the supply of skilled labour, particularly in the medical and veterinary sectors and the rise in cost of imported goods. One educational charity voiced concern over freedom of movement for fellows and students, and the availability of EU research budgets. Were there any silver linings? A possible relaxation of the rules of irrecoverable VAT and the wider regulatory framework were mooted, but most relented that the latter was very unlikely. Investment 2018 will be in the same roundtable format and is now open for bookings. See the full programme and secure your place now. This article first appeared in February's edition of Finance Focus.