How to get the most out of your investment arrangements
A significant part of every board member’s role is to set and monitor their not-for-profit’s (NFP’s) investment strategy. This requires:
- identifying investment objectives
- implementing a strategy with the required risk and return characteristics
- employing a governance structure to ensure that investment strategy remains on track.
Senior Manager at Macquarie Wealth Management, Wendy Scott-Hamilton, specialises in providing advice to the NFP sector. She says most NFP boards would be described as ‘low-risk investors with a focus on keeping their capital safe’. Traditionally, this has meant that term deposits, which have a guaranteed return and preserve capital, featured heavily in NFP investment strategies. But, with falling deposit rates, many NFPs are now considering changing their investment mix – potentially creating a need for more accountability to stakeholders.
“Board members are understandably keen to protect the value of their investment portfolios so the organisation can continue to meet its short- and long-term obligations. Stakeholders of NFP organisations are particularly sensitive to short-term movements in value of organisational assets. But with interest rates as low are they are, the real value of money – as in the purchasing power – is potentially going backwards with the effects of inflation. Boards must walk the difficult line of engaging other options, without taking inappropriate risks.”
This can be a real challenge for board members who are faced with making increasingly complex investment decisions. To those in this position, Scott-Hamilton offers the following ‘rules of thumb’:
- funds must support your strategic goals – There’s no point having an investment portfolio that doesn’t relate back to your organisational and strategic goals. You should be clear on all the commitments coming up and when and how funds will be employed. If you don’t need to use the funds for a longer period of time, then you could responsibly invest a proportion of your portfolio in higher growth asset, such as shares. But if you do that, you should understand and be prepared to accept the ups and downs of the market.
- accountability and transparency are front of mind for stakeholders – If you’re moving into different investment areas, it’s even more important to have a clearly articulated investment policy. Stakeholders need to understand why you made certain decisions and what that’s likely to mean in both the short and the long term. This means taking a ‘no surprises’ approach. Stakeholders want to know exactly what’s happening to their funds – and why.
- understanding risk is key – To justify any investment strategy, you need to understand and accept the risks within that strategy. The best way to do that is to seek advice and model the different investment options that you are considering under different conditions. Through this process you’ll come to understand what the best and worst case scenarios might be. This process can give comfort that you’re making appropriate decisions and this paves the way for a clear understanding and agreement with your stakeholders.
- not all borrowings are bad – NFP boards tend to shy away from taking on debt, but their special tax status means they can operate differently from a corporate enterprise. When companies invest in assets, like cars and equipment, they depreciate these assets on their balance sheet to reduce their tax bills. But for NFPs – as non-tax-paying entities – this strategy doesn’t deliver any benefit. Assets remain on the balance sheet, getting less and less valuable. In some circumstances NFPs may be better off using asset finance to lease these vehicles or equipment – often at very low rates – and then using the funds that would have been invested in these assets for other purposes.
- cash is not always the safest option – Given the falling deposit rates in recent years, keeping long-term funds in cash could decrease the ‘real’ value of the funds over time as inflation eats away at the purchasing power. This could be detrimental to your organisation delivering its mission in years to come. If capital protection is an important priority, you may have to take a different approach to retain the purchasing power of your portfolio. This is something that should be discussed by the board.
- no ‘one size’ fits all – Your finance or investment solutions needs to be built specifically for your NFP. Everything should relate back to your goals, risk appetite, cash flow and expenditure. Don’t compromise with an off-the-shelf solution.
Scott-Hamilton advises boards to remember that every NFP is special. “You have worthy goals and a unique tax-free status. There are smart ways you can make this status work for you in terms of investment choices and after-tax returns. Make sure you get the most out of your investment arrangements.”
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