How an Investment Policy can help a Not-for-Profit

By Andrew Gillon - July 12, 2017

All Not for Profit (NFP) organisations are required to have an Investment Policy (IPS) that is consistent with their minimum regulatory reporting requirements . This needs to be designed to, at least, comply with minimum fiduciary requirements, and ideally provides a framework that meets both the values and the long-term financial goals of the organisation.

NFPs, like any organisation, need surplus funds and cash flow to roll out their giving, training or education programmes and achieve their long term goals.

At Pitcher Partners, we believe that all NFP organisations are unique and regardless of their size, cause or association, should develop an Investment Policy that is robust and functional, as well as broad and flexible enough to cater for both the ever-changing Board and Committee make up and to meet the long-term goals of the organisation in an ever-changing market.

Mr Andrew Gillon, Director of Pitcher Partners Investment Services (PPIS) Melbourne, specialises in providing advice to the NFP sector. Andrew is firmly of the view that all organisations – not just NFPs – will benefit from spending time designing and implementing the right investment and governance framework.

“In our experience, it’s in the interest of stakeholders and the long-term strategy of any NFP to have a policy that marries the needs for checks and balances with guidance on long-term investment risks and returns.”

A good IPS is clear and functional, and doesn’t need to be overly complicated or legalistic. For example, the guidelines from the Australian Charity and Not-for-profit Commission (ACNC) are a good start, however they don’t address the roles and actual portfolio management function. This will need to be established by the NFP.

An IPS can provide clear structures and processes, or be prescriptive and narrow, but the bottom line is that it needs to be flexible enough to accommodate the requirements of the NFP.

Andrew said, “We recommend a blend of both structure and flexibility, but every organisation is different and you need to address your own unique needs and operational processes.”

Below is a summary of the minimum requirements for registered charities, as explained by the ACNC:

  • Establish guidelines on how a charity can invest its funds
  • Consider how the funds will ultimately further the NFPs charitable purposes
  •  It is best practice for charities to seek appropriate financial advice about investments
  • A charity should invest its funds as part of a financial management plan that includes risk management policies and procedures
  • A charity can invest its funds by purchasing bonds, stocks or term deposits. However, high risk investments are generally not appropriate for charities
  • Any investment decisions made by a charity must comply with the requirements set out in the ACNC governance standards

You can read a full copy of the Guide here Managing Charity Money: Guide for Board members on managing finances and meeting ACNC duties

Public and Private Ancillary Funds have slightly different obligations as set out in their respective guidelines, but the minimum requirements are broadly consistent and must include:

  1. An investment strategy setting out appropriate investment objectives and how the fund will achieve those objectives; and
  2. Identify the purpose of the fund, in particular:
    • The risks involved in achieving a likely return consistent with the funds’ objectives and expected cash flow requirements
    • Composition and diversification of the investments
    • Liquidity
    • Discharge of liabilities
    • Perceived or actual material conflicts of interest

These guidelines provided from legislation and the ACNC are relevant across the NFP sector. The need for a relevant and disciplined IPS does not discriminate whether you are a University, large NGO, faith-based organisation or small community based organisation.

We have identified five initial steps in establishing a well-crafted Investment Policy Statement:

Purpose

The central starting point is defining the purpose of the investments. To do this, the organisation needs to identify the strategic goal and requirements of the funds.

For example, is capital preservation for a rainy day the central purpose? Is it a long-term plan for capital base growth to stay ahead of inflation? Is it a steady, reliable income to support the day-to-day running expenses of the NFP?

Andrew said, “Every Board or Investment Committee member must understand the purpose of the funds in relation to the NFPs long term goals. That means they need to work within a clearly defined framework that benefits the NFP. It also means that regular reviews of the funds’ purpose is paramount.”

Governance Responsibilities and Structure 

Central to a good IPS is to identify and establish decision-making process, minimum reporting requirements, conflicts of interest and review requirements.

These requirements will, of course, vary between organisations due to differing NFP structures and governance frameworks.

A clearly defined governance policy as part of the IPS provides clarity to the members of the team, who are often time-poor or volunteers, to implement it with ease and frees them up to focus on the organisations core activities.

Andrew said, “It’s worth finding Investment Managers who reflect the values and culture of your NFP, as they’ll be able to provide a disciplined and consistent decision-making process.”

The NFP should also consider:

  • The role and tenure of an Investment Manager
  • The structure of management and the execution of the fund
  • The composition of the Investment Committee
  • Setting up allowable investments and portfolio construction guidelines

Investment Objectives (Risk and Return)

NFPs need to establish from the outset that Risk and Return are self-fulfilling; one can’t exist without the other. The key question is, which one is more important to your organisation?

The ACNC guidelines say “…high risk investments are generally not appropriate for charities.” This advice is somewhat contradictory, as the same guidelines state a charity can “…invest its funds by purchasing bonds, stocks…” and ‘stocks’ are generally considered a high-risk investment compared to most asset classes.

We believe most NFPs should define the level of Risk they’re willing to tolerate with their funds over the Return objectives. Their Investment Committee should then be able to determine other important factors, like investment time horizon (which is how long it will take to achieve the stated goals) and what is the best way to achieve this within their stated Risk parameters. 

Andrew said, “Since the GFC, as global interest and cash rates have moved towards 0%, many NFPs have found that their goals haven’t been achieved and have been forced to move up the assets class risk curve away from cash and into equities to meet these needs. I caution NFPs on taking these decisions lightly, especially if the organisation’s attitude to investment risk hasn’t changed.”

Environment, Social and Governance (ESG) Factors 

ESGs are often a consideration in NFP investment portfolios, as they directly reflect the core values and principles of the organisation. Andrew said, “A clear ESG policy is encouraged but I do recommend a high-level approach. For example, explicitly excluding tobacco and armaments may be simple.”

“Beyond that, however, we recommend that the Investment Committee develops a broader policy document. This allows for two things; firstly, the sitting Investment Committee can express its own attitudes to ESG and, secondly, enables the Investment Committee to implement its own views on ESG without unilaterally changing the IPS every time the view of the Committee changes.”

NFPs also need to consider what is acceptable to those who donate, relevant stakeholders and the brand reputation.

When it comes to defining the ESG policy, a professional Investment Advisor should be capable of identifying an appropriate implementation methodology. It’s also important that any IPS provides clear guidance on ESG factors, especially when ESG factors may have an impact on the stated Risk and Return parameters of investments.

Legislative Requirements

There are many different types of NFP organisations and the same goes for the rules that govern them. It’s critical that NFPs understand their regulatory obligations. Nationally, they need to consider Australian tax laws and most NFP organisations that operate as Trustees will also need to adhere to State-based trust laws too.

Board and Committee members of NFPs registered with the ACNC, for example, need to be aware of their responsibilities to comply with the relevant legislation and the minimum governance standards in order to have a compliant and positive working experience with their NFP.

The ACNC clearly outlines the requirements of NFPs as follows:

  • Manage financial affairs responsibly
  • Disclose and manage conflicts of interest
  • Act with reasonable care and diligence
  • Act in the best interests of the charity
  • Be in compliance with Australian law

Andrew said, “Good governance helps the organisation achieve its goals, and shouldn’t hinder the work they’re doing. A well thought out, well executed IPS delivers not only good governance, but also sets up a robust decision making process and better long-term performance outcomes.”

Conclusion

Any NFP management and governance team member will be aware of the organisation’s mission and the kinds of programs most likely to achieve its goals. Having the financial resources to back these programs is critical.

An IPS is a key step in ensuring that the financial resources are available when they’re needed, and longer term, are on a path that will deliver the goals and values of the organisation. 


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