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Decisions and choice - Decisions and choice

Who makes the important decisions for your charity’s investments?

Trustees need to understand what the overall risks in the investments as a whole are and to take proper advice. By John Redwood, Chief Global Strategist, Charles Stanley Wealth Managers

Larger charities often have a number of investment managers and advisers. They might go to one for bond management, to another for equities and a third for property. They might buy into various actively-managed funds with fluctuating exposures to financial assets. They might buy some exchange-traded funds to have part of the portfolio in low-cost index trackers, so they have a core position in world shares or some other asset class. They may choose some good individual managers and some successful funds. They may think they can say they are properly advised because they are using these experts to run parts of the money.

The most important question for the manager of the fund as a whole is how much money should they put into shares or bonds or properties or some other type of asset? In some cases, the Trustees themselves make this decision by deciding at a particular meeting to buy Fund A or reduce the money with Manager B. These are usually the most important questions, the ones that will have the biggest impact on performance. Most good active managers of shares will still lose you money in an equity bear market. No amount of good bond management can make up for the fact that advanced country bonds typically yield very little and will go down in value if and when interest rates rise, short of selling out.

As a past Trustee of funds, I am very conscious that the Trustees as a whole have to take proper advice about the overall disposition of the assets as well as about the varied sections of the portfolio that are invested in different assets or with different managers. The Trustees are responsible, and need to understand what the overall risks in the investments as a whole and to take proper advice. Some think that if they just leave the overall asset allocation as it is, they cannot be blamed because they have not made a decision. Unfortunately, there is no such easy way out. Keeping the allocation the same is a decision, and one that may prove to be wrong. Conditions do change. Valuations change substantially. The Trustees do need to review things regularly or commit them to managers who have a reliable system of review and risk-based investing.

Those funds which invest an important part in index trackers need to remember that in a growing and increasingly competitive market new issue exchange-traded funds may come in with lower costs than the older versions, so switching may be good idea just to reduce the costs of investing. A portfolio of exchange-traded funds indexes your investments in each market or asset class, but there is no index solution to how much you should have in any given market or asset. That still requires decisions.

One of the problems of having several active managers is keeping track of how your overall portfolio is invested. The different managers might all go in the same direction in asset classes, increasing the concentration of your fund and its risks. Alternatively, they might go in different directions, entailing costs for you but little overall change in the underlying mix of the fund. Either way it helps to have someone trying to keep some check of where the complete portfolio is, and leading a Trustee conversation on whether you have the right balance.

The value of investments can fall as well as rise. Investors may get back less than invested.

Charles Stanley Wealth Managers is a trading name of Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.