With bespoke management, collective investment vehicles, and advisory solutions, the investment options available to UK charities can seem endless. Here we explore expectations on charity trustees, alongside best practice for finding an investment manager.

Choosing the right investment manager is a crucial decision for charities. Trustees may be familiar with Charity Commission guidance but ensuring a selection process that meets these expectations can be challenging. Below, you’ll find a step-by-step guide for trustees on appointing a discretionary investment manager or re-tendering investment management.

Do you need an investment manager?

If the trustees of your charity have decided to invest charity assets, be it long term reserves, an endowment or cash reserves, seeking professional advice is sensible and often a requirement.

Sources of professional advice include investment consultants, independent financial advisors, and discretionary investment managers. Discretionary investment managers will be able to manage your charity’s investments on your behalf. However, we would recommend first seeking advice from investment consultants or independent financial advisors. This approach ensure that your charity’s full circumstances can be accounted for, long term plans considered, and an appropriate discretionary investment manager or managers selected for your charity.

What does the Charity Commission say about selecting an investment manager?

Full details of their guidance around selection of investment managers can be found in the ‘Taking advice and delegating’ section of the Charity Commission’s investment guidance for trustees (CC14), which can be found here.

In summary, they stress the importance of finding a manager, or managers, that trustees can be confident will adhere to their charity’s investment policy statement, be adaptable to the needs of the charity, have relevant experience and competitive charges.

What process should trustees follow to meet these requirements?

1. Define investment objectives and policies with an Investment Policy Statement (IPS)

Before engaging an investment manager, trustees should clearly define the charity’s investment objectives. This includes setting out the purpose of the investments, whether it’s to generate income, preserve capital, or achieve long-term growth. A robust IPS should be drafted, detailing the charity’s risk tolerance, ethical considerations, and specific investment criteria. This document can also serve as a reference point for evaluating potential managers.

Charities structured as a trust, or an unincorporated association, that appoint a discretionary investment manager are legally required to have a written IPS. Charities structured as a company are not legally required to have a written IPS but are expected to. You can find out more about guidance for Investment Policy Statements here.

2. Create a long list of potential managers

Once you are clear on your charity’s investment objectives and have an IPS, drawing up a list of potential managers should be the next step. There are hundreds of options, and many charities may turn to online searches, industry publications, investment manager websites or other charities to help. Whilst these can narrow down potential options, solely relying on these resources may mean that you end up with a long list of managers that aren’t best suited for your charity.

Seeking professional advice in this area can save you significant time and ensure that you have a longlist of managers that are appropriate for your charity and its objectives. We recommend creating a longlist of between 6-10 potential managers, depending on your particular circumstances and requirements.

3. Request proposals

The next step is to create a request for proposal (RFP), which should be sent to your longlisted managers. This stage can support with the due diligence on managers as the same information can be requested from each. Managers should be provided with your IPS, information about your charity, and the assets you are looking to invest. They should be asked to set out a proposal for how they would manage these assets. Areas that should be considered, if not already explored in the creation of your longlist, include:

• Firm and team overview: Request information about the firm, the team managing your investments, and their experience with charity clients.

• Investment approach: Ask for details on their investment philosophy, approach to asset allocation, and how they will address ethical or ESG considerations.

• Performance and fees: Review their performance record, risk metrics, and all applicable charges, ensuring transparency and alignment with your IPS.

Professional advisors can run this stage for you and establish all the information required.

4. Evaluate proposals & create a shortlist of managers

Investment managers’ proposals should be evaluated on how each of the solutions would align to your charity’s interests and IPS. Past performance is not a reliable guide to future returns. However, where trustees can satisfy themselves that multiple solutions would be appropriate, comparisons between the returns achieved and the risk taken in achieving those returns can then be useful indications of the potential skill of the manager.

Understanding the fee structure and all applicable charges is also important. The compounding effect of high charges can significantly reduce net returns over the long term. When looking at performance, you should make comparisons of returns net of all charges.

In our experience, the details provided by investment managers can often be obscure and difficult to use for making fair comparisons. Without professional guidance, trustees may struggle to interpret the data provided, ensure that comparisons are accurate, and follow a fair evaluation process. This can result in a shortlist that doesn't fully meet the charity’s needs. Our expertise can help navigate these challenges, ensuring that expectations are met, comparisons are thorough, and the most suitable managers are selected.

We recommend narrowing down to a shortlist of 3-4 potential managers.

5. Conduct interviews & appointment

Shortlisted managers should then be asked to present their proposed solutions to the trustees. This will give you a chance to meet the managers face-to-face, ask them further questions, and see which feel like the best fit for your charity.

Having assistance at these presentations from advisors or consultants can ensure that relevant questions are asked, fees are negotiated where possible, and a formal recommendation for the appointment of a manager can be provided. Where your advisers are regulated by the Financial Conduct Authority, like Buzzacott’s Investment Consultancy team, these recommendations may provide your charity with additional protections.

Trustees should then independently discuss the relative benefits and drawbacks of each manager, or discuss the recommendation provided by an independent advisor, and decide on the best approach for the charity. Depending on your investment objectives and value of invested assets, appointing multiple managers might also be an option to consider.

6. Ongoing monitoring and reviews

It is crucial that once investment managers have been appointed, your investments and the performance of the manager are monitored and reviewed regularly. This is not only a requirement for Trustees but helps provide strong ongoing governance of your charity’s assets and ensures that your charity’s assets continue to work in its best interests.

The value of professional assistance

Selecting an investment manager is a complex and resource-intensive process. Engaging professional support enhances the effectiveness and efficiency of this process.

Our independent investment consultants can run parts of, or the whole investment manager selection process, or retendering process for your charity. Not only will this save you time, it will also mean that your charity benefits from:

• Tailored Investment Policies: We assist in developing or reviewing your Investment Policy Statement (IPS) to align with your charity’s objectives and regulatory requirements, providing a solid foundation for investment management.

• Comprehensive Due Diligence: We conduct thorough due diligence on potential investment managers, assessing performance, fees, and alignment with your charity’s values to support informed decision-making.

• Performance Monitoring and Reporting: We offer ongoing support in monitoring and reviewing investment performance, ensuring transparency and accountability through detailed reporting.

How we can help

Selecting the right investment manager requires a strategic approach, aligning the charity’s financial goals with ethical considerations and regulatory requirements. By following these steps and leveraging our expert advice, trustees and charity management can make informed decisions that help safeguard their charity’s financial future.

Trustees are expected to ‘take professional advice, where appropriate, on your charity’s attitude to risk, and the types of risk that may be relevant to your charity’.

Buzzacott Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate some forms of investment consultancy. Some investment consultancy services may not be available to existing Buzzacott audit clients.