Fit for the future: Ten questions Charity Trustees should Ask About their investments

Trustees should begin by establishing the role the investments are expected to perform. Are they intended to fund regular expenditure, provide a financial reserve, meet a future commitment or support the charity indefinitely? This purpose should translate into a clearly defined return objective, specifying whether it is nominal or inflation-linked, before or after fees, and inclusive of planned withdrawals. The required return, an aspirational return and the benchmark used to assess an investment manager are not necessarily the same thing.  

A portfolio may grow in pounds while still losing purchasing power. Inflation, fees and withdrawals can all reduce the amount of future charitable activity that investments can support. Trustees should therefore decide whether preserving capital means protecting its nominal value or maintaining its real value after inflation. A strategy that appears cautious today could weaken the charity’s financial capacity over time. 

Trustees should decide whether the portfolio should deliver social or environmental impact directly, or primarily generate the financial returns that support the charity’s work. Some charities may combine both approaches.  

This should be a deliberate choice. Trustees should consider the implications for diversification, cost, liquidity and return, as well as how financial performance and impact will be measured. Any compromises that are made should be justified. The sustainable investment policy should then clearly document the chosen approach. 

The strategic allocation between equities, bonds, cash and other assets should have a reasonable prospect of meeting the charity’s objectives. It should reflect the investment horizon, liquidity requirements and capacity for loss. Trustees should consider whether the portfolio was deliberately designed around the charity’s needs or whether its objectives have gradually been fitted around investments selected in the past. 

Descriptions such as “balanced” or “medium risk” do not explain what a difficult market could mean for the charity. Trustees should consider how far the portfolio might fall, how long recovery could take and whether spending plans could continue during that period. It is also important to distinguish willingness to accept volatility from the organisation’s financial capacity to withstand it.  

Trustees should understand the portfolio’s underlying drivers of risk and return, including its exposure to different asset classes, geographies, currencies, investment styles and factors. This can reveal hidden concentrations, show how the portfolio may behave under different market conditions and reduce the risk of unexpected outcomes. 

The charity should hold enough accessible capital to meet foreseeable expenditure and contingencies without selling long-term investments following a market decline. This can reduce sequencing risk, where withdrawals during a downturn permanently weaken the portfolio’s ability to recover. However, holding excessive cash can create cash drag and erode purchasing power and forgo future returns. The balance should be deliberate rather than accidental. 

Trustees should assess whether the portfolio is meeting its targets over the appropriate timeframe and understand the reasons for any shortfall. Underperformance may reflect poor decisions by the investment manager, but it could also indicate that the target was unrealistic or poorly defined, the strategy was misunderstood or incorrectly implemented, the asset allocation was unsuitable, or fees and other constraints were too restrictive. Tackling underperformance issues head-on to identify the cause is essential before deciding whether to change the manager, the portfolio or the objective itself. 

An investment strategy should not rely on the knowledge of a few long-serving trustees. The investment policy should clearly document what has been decided and why, including the portfolio’s objectives, constraints and governance arrangements. This document is a single source of truth and should allow new trustees, or anyone else reviewing the organisation’s investments, to quickly understand its objectives and how the portfolio is structured to achieve them. 

Trustees remain responsible for investment decisions, even where aspects of the process are delegated. They should assess whether the board has sufficient knowledge and experience to make informed decisions and seek appropriate professional advice where necessary. The nature of that advice will depend on the charity’s objectives, assets and the complexity of its arrangements. Trustees should also ensure that advisers are suitably qualified, understand the charity’s circumstances and provide advice that supports its objectives. 

Trustees may delegate day-to-day investment management, but the overall responsibility remains theirs. They therefore need clear decision rights, effective oversight and appropriate escalation arrangements. 

Reporting should show whether the portfolio is progressing towards its objectives, where returns and risks are coming from, whether agreed limits are being observed and what fees are being paid. It should help trustees identify decisions, not merely describe the previous quarter.