In the current economic climate charities may wish to reconsider their investments and in doing so might like to investigate pooling their resources to reduce costs, spread risk and achieve better results.
Charities may be able to achieve greater returns from their funds and pay lower administration costs by participating in common investment Funds (“CIF”). The schemes are open to charities in England and Wales and appropriate bodies elsewhere, i.e. Scottish and Northern Irish charities. A scheme is made under s. 24 Charities Act 1993 establishing the CIF which has charitable status in its own right. CIFs are similar to unit trusts but are not required to be authorised by the Financial Services Authority. CIFs can provide diversification of investment to reduce risk, are tax efficient, administratively simple and can be cost efficient for participating charities. There are currently around 45 commercial CIFs managing just over £8.2 billion. The Charity Commission establishes such schemes to provide a legal vehicle for investing but does not in any way “approve” or indemnify such vehicles. Buying “units” in these schemes spreads the risk of particular investments between all participants who all share proportionate risk and profit. Each Fund has a Board of independent individuals, a trustee and a manager. Charities wanting to establish such schemes need to firstly find a good fund manager who will run their fund for them. Early approaches to the Charity Commission will help define what the policy of the Fund should be. Model schemes and information can be found on the Charity Commission website.
Common Deposit Funds share most of the same characteristics as CIFs but the funds are not “unitised”. Capital is pooled with other charities’ capital and then a large sum is placed on deposit in the money market. The advantage to pooling in this case is that a much greater rate of interest is paid where the funds are large. Generally, in the current climate Trustees may wish to consider pooling their assets increasing the sum invested, in order to negotiate better deals with fund managers, deposit takers and others in finance. It is common practice that fees and charges for investment services run at around 1% p.a. but it is less well known that most managers retain discretion to apply different rates. As a general rule there can be significant savings to be enjoyed depending on the amount invested and charities may enjoy a discount of up to 40% depending on the size of the fund.
In the current economic climate if new funds were launched it is highly likely that charities would be in a position to negotiate the maximum discount on fees and charges.