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Charles Angus, Finance Director for Masonic Charitable Foundations, explains why the Masonic Charitable Foundation became the first charity in the UK to sponsor its own charitable authorised investment fund, or CAIF, and shares his experience as a lesson for other charities.

A CAIF is a relatively new investment vehicle, announced in 2016. It is an investment vehicle specifically designed for the charity sector and is both a charity and a unit trust. It has dual regulation, coming under the oversight of both the Charity Commission and the Financial Conduct Authority.

Only a few have so far been set up, and all of those have been by professional investment managers, mostly to replace a previous vehicle – the common investment fund.

Our decision to set up the fund was largely in response to our unusual and complex structure.

Who is the Masonic Charitable Foundation (MCF)?

The Masonic Charitable Foundation (MCF) is one of the largest grant-making charities in the country. It is funded entirely through the generosity of Freemasons and their families, and that generosity in the past has been such that it now has a substantial investment pot. It was formed on 1 April 2016 from the merger of several related charities.

In addition to the support provided to Freemasons and their families, MCF awards millions of pounds each year to local and national charities that help vulnerable people, advance medical research and provide opportunities for young people. MCF also helps fund vital services such as hospices and air ambulances and regularly contributes to worldwide appeals for disaster relief.

Why sponsor a CAIF?

The foundation brings together the work of a number of charities which had been operating separately under various names since the early 18th century. MCF and its related charities collectively had investment portfolios of over £300m with a number of different investment managers, with different mandates and materially different expected cash flows and other sources of income. The problem is that these different mandates could not easily be legally combined. But separate, they were extremely difficult and time-consuming for trustees and finance staff to oversee, and it was difficult to understand the combined exposure of all the various mandates.

To tackle these difficulties, the trustees of the various charities delegated powers to our investment committee, which worked with Asset Risk Consultants (ARC) to design a plan for what to do next. In December 2017 the investment committee decided to create a CAIF to hold the investments of all the charities within the MCF group.

ARC organised a due diligence review and selection process for a fund administrator for the CAIF. MCF decided to appointed Thesis Unit Trust Management (Tutman).

Tutman with the support and input of MCF and ARC then managed the creation of the CAIF, with legal input from Macfarlanes, among others. MCF, advised by ARC, helped Tutman select appropriate sub-managers and negotiate mandates and engage them on competitive terms. MCF, ARC, Tutman and the selected ongoing managers carefully managed the transition of assets from segregated accounts to the CAIF to minimise transaction costs and timing risks.

The CAIF is a unit trust, and each of the charities which merged into MCF own their own units.

The unit trust employs four sub-investment managers, with complementary mandates, targeting growth of 4 per cent over inflation, with 80 per cent of the risk in world equity markets.

The new structure offered effective and efficient governance, a tax-efficient structure, cost savings and improved risk management, which combined with other strategic policies elegantly addressed challenges that are common to many charities.

In addition to the CAIF we also have a property fund – known as a COIF – and a cash manager.

So long as the long term investment portfolios are doing well, expenditures are funded from investments but should markets fall significantly, the cash reserves are used, to avoid the need to sell investments in distressed market conditions, allowing the re-investment of portfolio income to support the recovery of the investment portfolio.

Each charity, under advice from their investment consultant, holds a customised blend of the cash, property and investment funds. In every case except for in-house managed property, transfers of money and reporting of income and expenses are documented transparently by external independent, regulated agents, simplifying reporting.

Data can be reported across the whole CAIF, or for each manager. MCF retains control of the strategic asset allocation and for the appointment/replacement of the sub-investment managers.

In theory, it would be possible for other charities, outside MCF, to also buy units in the CAIF. However this would lead to the CAIF losing out on a withholding tax on US dividends, worth a considerable sum, and so, for now, the decision has been taken not to open the CAIF to other charities.

Wider lessons

The project worked because we were large enough, and complex enough, for it to make sense.

The benefits of scale and the tax-efficient nature of the funds used (with VAT exemption on managers’ fees and other tax benefits) deliver all the above at considerably less than the cost of the old structure with its opaque complexity, the multiplicity of discretionary accounts and control and reporting challenges.

While a number of leading charity investment managers have sponsored CAIF under their own names, at the time of writing, MCF is the only group of charities that have sponsored their own collective scheme.

There will be relatively few charities which have similar sets of circumstances which would suggest it might be suitable to create your own CAIF. In particular, the CAIF structure is likely to be useful primarily to older charities with more funds, and more complex structures which could usefully be simplified.