What every trustee should know about investing for charities

 In my book, Investing for Charities (2024), I try to present a distinct and perhaps provocative perspective on how charitable organisations should manage their investments, fundamentally challenging traditional approaches that often prioritise capital preservation above all else. The central premise that sets this book apart from any other on charity investing is its argument that a constantly growing investment portfolio, while seemingly a marker of success, can in fact signify a failure—specifically, a failure to spend money on the charity’s core mission and beneficiaries. 

Conventionally, charity investment practices lean towards extreme caution, aiming to protect capital and avoid risk. My book, however, flips this on its head. I suggest that the true measure of a charity’s success lies in what it spends to fulfil its purpose, not in how much it accumulates. This redefinition of success encourages charities to adopt a more dynamic and impactful approach to their financial resources, recognising that over-protectiveness of capital can inadvertently hinder their ability to make a real difference. Underpinning this entire concept is that trustees must always make an active decision about what to keep (and not spend on the charity’s purpose) and what they can spend on advancing their mission. It is not possible to do both. 

A key differentiator highlighted in the book is the unique dynamic of investing for a charity compared to, for instance, a pension fund. While pension funds focus on future liabilities, charities should align their investment strategies with their historic aims of either growing to meet a specific objective, staying the same size, or shrinking.  This extended outlook allows charities to embrace a stronger equity focus and make more extensive use of higher retuning assets, which might otherwise be considered too risky under a more conservative, short-term view. 

I also try and challenge the common understanding of “risk” in investment. Rather than viewing risk as solely volatility or unpredictability, I encourages charities to see it as an “opportunity.” My argument is that since stock markets generally trend upwards over time, ‘opportunity is a better word than ‘risk’, especially given a greater tolerance for short-term unpredictability, which should lead to higher long-term returns. This perspective liberates charities from what I call “reckless caution,” a state where an unduly conservative approach prevents trustees from maximising their financial potential and, consequently, their impact. 

Further on, the book delves into the legal framework, clarifying that while prudence is required, it is very different to caution. For example, it can sometimes be prudent to take calculated risks to advance the charitable purpose, and losses incurred through proper conduct are permissible. A cautious decision would try anything that might not work. This nuance empowers trustees and financial managers to make more informed and courageous decisions. Problems only arise when trustees act outside their powers, and not in appointing poorly performing managers. Trustees have great scope. 

Another important departure from conventional practice is “total return investing” in preference for investment strategies focused solely on “natural income.” My argument is that chasing high-yielding companies or bonds to generate income can skew portfolios towards poor assets and undermine overall returns. Instead, investing for total return allows charities to generate higher overall returns, which can then be strategically deployed to fund their operations and initiatives. An important, and I believe underrated part of the book, is how total return investing needs to be accompanied by a financial mindset which can adopt total return accounting – something the charity SORP is not well placed to support. 

Beyond these financial principles, “Investing for Charities” distinguishes itself by being highly accessible and cutting through the often-mystifying jargon of the investment industry. It is specifically aimed at trustees, CEOs, and staff involved in charity finance, regardless of their prior investment knowledge. The book provides straightforward, pragmatic principles and some enjoyable, but fictional, case studies where all sorts of things go wrong, enabling non-specialists to understand how to make sensible and well-informed investment decisions. In demystifying the investment landscape, my aim was to empower charities to optimise their financial strategies and, ultimately, maximise their societal impact. The emphasis on aligning investment portfolios with the charity’s values and engaging with companies for ethical behaviour also underscores a holistic approach to responsible investing. 

After all, what makes a charity charitable is what it spends, not what it keeps. It’s not our money, it’s for someone else: what’s best for them? 

James Brooke Turner is the author of the best-selling title, Investing for Charities, a simple but powerful guide to putting spending on your beneficiaries at the heart of your investment policy. He is the co-founder of Yoke and Company, an investment consultancy for charities and their investment governance. You can buy a copy of his book here.