In the last few months, I’ve been asked more than once about the kind of process a charity should follow, when getting ready to appoint an investment manager.  What kinds of questions are worth asking? 

If your charity is in the position of appointing an investment manager for the first time, or is perhaps getting ready to review its investment manager as part of a due diligence process, here are some practical  pointers on things you might like to consider.  The legal background here is sections 93 and 94 of the Charities and Trustee Investment (Scotland) Act 2005, which sets out the need for suitability and diversification to be taken into account. 

1          Prepare an investment policy statement

Once your board has agreed on the investment criteria, this can be reflected in an investment policy statement which, although not a mandatory part of Scots law, is certainly good practice.  What to include in an investment policy statement is worth an article in itself, but broadly speaking, you want your investment policy statement to answer these questions :

• what’s the goal for the funds being invested?  Is it income, growth or a combination?
• What investment powers do you have?  What does your governing document say on this?
• What’s the time horizon in which you might need access to the funds?
• What currency would you like to operate in?  Is it sterling?
• What’s your approach to risk : can you cope with short term fluctuations in investment values?
• Are any ethical criteria to apply? 
• How will performance be assessed – will you set a benchmark?
• What’s your preference for frequency and scope of reporting; and how often do you want to meet your investment manager?

2          Invitations to tender : your long list

Unless you are a public body, there is no formal procurement process to follow.  How you go about selecting an investment manager is up to you. One option is to send your investment policy statement with a covering letter inviting tenders to a range of investment managers who are active in the charities sector.  A deadline for responses four to six weeks ahead is quite normal.  Some charities work with their accountant or other professional advisers to identify this long list. 

In this covering letter, charities often indicate their overall timeline in terms of when a shortlist will be decided, the date for presentations, and the likely date when the new investment manager will be appointed.  You can also set expectations about the length of presentation you’d prefer, for example ten minutes, allowing around half an hour for Q&A.  You’ll also want to ask some questions of the investment manager, which might include :

• what’s their experience in the charities sector?
• What’s their investment style – will it be through pooled funds or directly held shares?
• Can they provide references from similar charity clients?
• What’s their historic performance data?
• What’s their proposed investment solution for you?
• What’s their fee?  Some charge a flat fee, others may apply different charges for different types of work.  You might want to ask for this to be explicitly broken down to provide the total expense ratio (TER) which will bring out any hidden third party charges.

3          Your short list

 From the written responses you receive, a short list is compiled, typically involving three to five investment

1. A date is set for presentations, and it’s usual for the investment firms to come to you. 

4          The presentations and timings

Some charities move directly to a short list for presentations.  It’s quite common for 45 minutes to be allocated for each meeting.  If your appointments start on the hour, this gives you some time in-between to reflect on what you’ve heard and get ready for the next meeting.  Each meeting combines a presentation and Q&A.  You can set expectations in advance on any time limit you want to apply to the presentation element. 

It can be a fairly exhausting day or half-day of meetings to host, and the depth of the questioning will depend on the investment expertise you have available to you, either on the board or via one of your advisers.  Some charities co-opt external members onto their Finance Committee, to give them access to investment expertise, albeit such external members are not formally trustees. 

As for the decision, it tends to be a combination of how well the investment firm has answered all of your questions, as well as whether you have formed an impression that you would like to work with the team you’ve met at the pitch : relationships and rapport matter.

For more information on investment policy statements, the Charity Finance Group has guidance which is worth a look. 

The information in this blog or any responses to comments should not be regarded as financial advice.  Laws and tax rules may change in future.  The information here is based on our understanding in May 2016. Standard Life Wealth is not responsible for the content of external websites.