How an investment policy can help a not-for-profit

How to

Why having an Investment Policy Statement will pay dividends for your not-for-profit organisation

Not-for-profits (NFPs), like any organisation, need surplus funds and a healthy cash flow to continue their operations and achieve their goals. Making sound investment decisions can help this to be a reality. However, investing is a complicated business so having a well-articulated Investment Policy Statement (IPS) can mean the difference when it comes to a NFP delivering its mission.

An IPS is essentially a roadmap for funds management; it sets the ground rules for investing and it outlines how investment decisions will be made and what steps need to be taken to ensure good governance.

Senior Manager at Macquarie Wealth Management, Wendy Scott-Hamilton, specialises in providing advice to the NFP sector. She says it is important for NFPs to devote time up-front to ensure that the right investment and governance framework is in place.

“In our experience, organisations that have a clearly articulated Investment Policy Statement and a process for monitoring portfolios find it easier to make decisions during uncertain times.”


What constitutes a good Investment Policy?

“It doesn’t have to be War and Peace for the small organisations,” says Scott-Hamilton, “it really should do a few things: it should articulate the governance of the funds, it should define how the funds are to be invested, and it should confirm what outcomes are expected in terms of returns. It should also articulate any constraints that need to be in place.”

“A lot of NFPs have ethical and social overlays so they won’t invest in certain things like alcohol and tobacco - it’s essential that these restrictions are articulated in the IPS”.

From a broader perspective it’s about managing the risk of the organisation,” says Scott-Hamilton.

A robust IP will provide certainty that investment decisions are being made in-line with the NFP’s stated risk appetite.

“Anyone should be able to go to the IPS, pick it up and understand exactly what can and can’t be done with the funds.”


Steps to take when creating an Investment Policy

  1. Define your goal

    When creating an IPS, the first step is to define what the NFP’s strategic goal is. For example, an organisation might have a particular capital need – such as the purchase of an asset or equipment in a defined period of time. Alternatively, an NFP may have a pool of funds it wants to preserve, and requires a plan to ensure the funds grow by CPI each year to keep up with inflation, or it could be that to deliver a particular mission, the NFP will need a certain amount of income each year.

    “It’s a bit like when you do a personal budget – it’s about sitting down and working out, ‘what are we trying to achieve, how do we get there, what funds do we need to do that and how do we actually create that outcome’,” says Scott-Hamilton.

    “Even some of the biggest NFPs have historically taken a bit of an ad hoc approach - they’ve had some funds come in, they’ve put it in an investment and hoped for the best. Often it has become lazy money that isn’t working as hard as it should be.”

    “Or they’re hoping they’re going to get to a particular goal at point in time without actually working out whether that’s possible and what kind of portfolio they should have in order to reach their goal.”

  2. Determine the right level of risk

    Once the organisation’s goal is clearly articulated, the next step is to understand the NFP’s risk appetite.

    One way to do this is to model different scenarios to show the likelihood of different returns, volatility and risk over a certain timeframe.

    “There’s no point taking the money and putting it all into a share portfolio and then panicking the first time the market has a bit of a wobble,” says Scott-Hamilton.

    “Once the objective is clear, then we can have an in depth conversation with the Investment Committee or the Board to discuss ‘if you want to achieve this goal in this timeframe, then this is what you’re going to have to do to get there’. We ask them if they are comfortable with the level of risk in the required portfolio, or if we need to change the goal or extend the timeframe,” says Scott-Hamilton.

    Anyone should be able to go to the Investment Policy Statement, pick it up and understand exactly what can and can’t be done with the funds.

    The way the assets are selected for the portfolio should reflect the level of risk that the NFP is comfortable with.

    Many NFPs, particularly the large ones, moved their investments to cash during the global financial crisis (GFC), notes Scott-Hamilton however, while cash investments are considered among the safest investment class, it might not always be the most appropriate choice.

    “What we’re seeing now is that with cash rates at historical lows, the organisations are no longer supported by the interest being earned and the value of the funds may be going backwards in real terms. While board members might recognise that they should be doing something different, they often struggle to agree on the right asset mix for a different portfolio and have different views about how the portfolio should be managed.”

    Engaging in a collaborative process to create an IPS can help Boards to move forward.

  3. Outline any ethical or social overlays

    A number of NFPs include ethical and social constraints in their IPS to ensure funds are not invested in areas contrary to their mission.

    “We recently worked with a medical council and the fact that they’re in the medical space meant they didn’t want to invest in anything that was alcohol or tobacco related. We’ve also worked with another client who said they don’t want any exposure to the coal seam gas industry. There’s a whole array of different filters that can be applied when putting together the Investment Policy Statement,” says Scott-Hamilton.

    These constraints should be spelt out clearly in the IPS and provide a clear roadmap for portfolio creation.

  4. Consider legislative requirements

    Each NFP organisation will have its own set of rules that govern it. NFPs can have different requirements under our Australian taxation laws and most NFP organisations that operate as trustees will need to adhere to various state based trust laws, which often involves the ‘prudent person’ test.

    “You have to be able to say hand-on-heart I did the best I could with that money and I didn’t take any unnecessary risk with it,” says Scott-Hamilton.

    “This doesn’t necessarily preclude NFPs from investing in certain assets, it just means that they need to demonstrate that they’ve used best practice in selecting those assets and that they align with the prudent management of the funds.”

    “The requirements reinforce why it’s helpful to have a well-considered IPS, because it can help NFPs demonstrate that there has been a robust process when making those investment decisions,” says Scott-Hamilton.

  5. Outline the governance framework

    A good IPS will outline the decision-making process for the NFP, as well as the ongoing monitoring and reviewing process for the portfolio.

    The Australian Charities and Not-for-profits Commission (ACNC) says it’s good practice for charities to seek appropriate financial advice about investments1. Many NFPs do choose this route, and engage investment advisers to help create the IPS, to execute the strategy and for ongoing support.

    “A lot of the people who sit on NFP Boards come to that situation because they are passionate about a cause, but many of them bring with them expertise in areas other than investing and the world of finance is becoming more and more complicated,” notes Scott-Hamilton.

    Professional service providers, such as financial advisers and accountants can assist with facilitating thoughtful decision-making, and a more process-driven approached to investing.

IPS Checklist

A robust IPS will set the ground rules for:

  • preservation of capital
  • diversification across asset classes and managers
  • liquidity requirements
  • passive / active management
  • performance measurement
  • portfolio review frequency
  • legislative compliance
  • ethical and Social overlays
  • appropriate fee structure.

We can help your organisation reach full potential and make a difference. Learn about our smart business solutions for not-for-profits, or reach out to a specialist today by contacting notforprofits@macquarie.com. All of our financial recommendations are tailored to your organisation’s specific needs and aspirations.

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