For many charities, the funding environment feels harder than it did a few years ago. Donations and grants can be less frequent, smaller or more difficult to secure, while demand for services continues to grow. Charities with ethical and sustainable investment policies face particular pressures: a long-term commitment to communities and beneficiaries, changing patterns of giving and a responsibility to steward assets in a way that reflects deeply held values.
When donations become less predictable, trustees may need to look beyond fundraising and ask whether every part of the balance sheet is supporting the charity’s mission.
The instinctive response is often to concentrate on fundraising and whilst that remains essential, it is only one side of the equation. Trustees should also ask a broader question: is the charity’s existing capital doing enough?
That does not mean chasing the highest possible return or taking unnecessary risk. It means making deliberate choices about investments, reserves and cash so that each pool of potential capital has a clear purpose, an appropriate time horizon and a return objective that supports the charity’s planned projects.
An investment portfolio should not sit apart from a charity’s strategy. Its purpose is to help the organisation deliver for beneficiaries, whether by generating income, preserving the real value of reserves, funding future projects or supporting a sustainable level of spending.
Trustees can begin by dividing the charity’s financial needs into three broad time periods:
money required for day-to-day operations and near-term commitments;
capital earmarked for projects or spending over the next few years; and
assets that can remain invested for the longer term.
Different objectives call for different solutions. Cash needed next year should not ordinarily be exposed to the same investment risks as capital intended to support the charity over decades. Equally, long-term money held entirely in cash may lose spending power to inflation.
This is why the first discussion should not be “Which investments should we buy?” but “What must this money achieve, when will we need it and how much uncertainty can we tolerate?” LGT’s guide for trustees similarly recommends linking investments to the charity’s strategy, income needs and short, medium and long-term goals. Read our policy matters document here.
While there is no one-size-fits-all solution for every charity, we believe a useful way to think about portfolio construction is through a ‘three-pot’ framework. The portfolio is managed as a cohesive whole, but its underlying components are grouped according to their specific purpose. This enables trustees to see how different assets support short-term cash flow needs, medium-term spending requirements and long-term growth ambitions, whilst retaining the benefits of a fully integrated investment strategy.
The three pots are an illustrative way to discuss different purposes for a charity’s assets, not a prescribed allocation. Investments can fall in value, income can vary, and a charity may not meet its return or inflation objective. The appropriate approach depends on its circumstances, including when funds may be needed.
An investment policy should be a working governance document, not something approved once and filed away. A tougher funding environment is a good reason to review it. Trustees may wish to revisit:
the portfolio’s purpose and required level of income or total return
the time horizon for each pool of assets
the charity’s ability and willingness to tolerate fluctuations in value
liquidity requirements and anticipated withdrawals
ethical, values-based or faith-based restrictions
the balance between income today and capital growth
the benchmark used for comparison
how often performance, risk and the policy itself will be reviewed
This review may reveal that the portfolio is targeting a return inherited from a different financial environment, measured against an unsuitable benchmark or invested in a way that no longer reflects the charity’s spending plans.
For practical guidance on what to consider and include in an investment policy, see our ‘Policy Matters’ brief.
A return target should connect the charity’s investment strategy to its real-world commitments. If trustees want to preserve spending power while drawing income, for example, the objective may need to reflect both inflation and planned withdrawals.
The benchmark should then provide a meaningful test of whether the strategy is delivering what the charity needs. It should be relevant, measurable and agreed by the charity and its investment manager. Where a charity has several pots with different purposes and time horizons, a single benchmark may not be enough.
When considering benchmarks, two main factors stand out:
Performance vs Return Target: How have your investments performed in absolute terms against your above inflation returns target?
It may be that an inflation target and a peer review target are not enough and working to a composite benchmark which reflects the asset allocation of the portfolio also needs to be discussed and applied, to test the portfolio against the individual market components.
A benchmark should not simply be the easiest index to quote. Trustees should understand what is being compared, whether it reflects the portfolio’s risk and restrictions, and whether performance is being considered over a suitably long period. Short-term results can be noisy; the more useful question is whether the portfolio remains on course to meet the charity’s objectives.
When a portfolio disappoints, attention often turns first to manager performance. But the bigger issue may be the desired asset allocation: the mix of equities, bonds, cash and other assets that determines much of the portfolio’s long-term risk and return potential.
A charity seeking stronger returns may need to consider whether its existing allocation gives it a realistic chance of meeting its objective. That does not automatically mean adding more investment risk. Trustees should examine the full picture: the charity’s reserves, cash flow, expected spending, other sources of income and ability to withstand a fall in portfolio value without cutting services at the wrong time.
Long-term charities often need to balance two risks. One is market volatility and the possibility that investments fall in value. The other is less visible but equally important: inflation gradually eroding what the charity can deliver. Assets such as equities, property and infrastructure may offer greater potential for long-term growth, but their values can fluctuate and they will not suit every time horizon or requirement.
The aim is not always maximum return. It is the most appropriate balance between return, risk, liquidity and mission.
For faith-based charities, stronger financial stewardship does not have to mean compromising values. The investment policy can set out exclusions, positive priorities and expectations for stewardship or engagement, while also defining the financial outcomes the portfolio must pursue.
The key is clarity. Restrictions can affect the opportunity set, risk profile and performance, so trustees should understand those implications and record the rationale for their choices. The policy should also align with the charity’s wider approach to donations and partnerships. A disconnect between the organisations from which a charity would accept funding, and those in which it is prepared to invest, can lead to reputational questions.
Cash is essential. It funds grants and expenses, and provides reassurance when income is uncertain. But there is a difference between holding cash for a defined need and allowing large balances to accumulate without review.
Trustees should discuss:
how much operational and emergency liquidity the charity genuinely requires
when earmarked cash is likely to be spent
the interest rate received on each account
whether notice accounts or term deposits are appropriate for part of the balance
whether money not required for several years should remain in cash at all
Even apparently modest differences in interest can matter when applied to meaningful balances over time. At the same time, yield should not be considered in isolation: access, security, diversification and administrative practicality remain important.
The objective is not to invest every available pound. It is to ensure that every pound has a job and that it is held in the right place to facilitate that job.
When funding is plentiful, an outdated policy, an overly cautious portfolio or low-yielding cash may attract less attention. When every donation must stretch further, those inefficiencies become harder to ignore.
A thoughtful review can help trustees answer four questions:
What must our capital achieve for beneficiaries?
Is our return target ambitious enough, but still realistic for the risk we can bear?
Does our asset allocation give us a reasonable chance of meeting that target?
Is our cash working as effectively as it can while remaining available when needed?
For trustees, making capital work harder is not simply an investment exercise. It is part of responsible stewardship: protecting resilience today while increasing the charity’s capacity to deliver tomorrow.
This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Wealth Management UK LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Wealth Management UK LLP, employees and associated companies for any direct or consequential loss arising from this document.
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