Why investment monitoring and reporting matters for charities
Once a charity has invested its assets, ongoing monitoring and transparent reporting are essential to ensure that investments are performing as expected, risks are being managed, and ethical commitments are upheld. Trustees have a legal duty to oversee the charity’s investments, ensuring they support the organisation’s financial sustainability and mission.
Effective monitoring helps trustees:
- Assess whether the investment strategy is meeting financial objectives.
- Identify potential risks and adjust strategies when necessary.
- Ensure compliance with ethical investment policies and governance regulations.
- Provide transparency and accountability to donors, regulators, and stakeholders.
The Charity Commission’s CC14 Guidance highlights that trustees must regularly review investment performance and ensure that reports are clear, accurate, and accessible.
Key metrics for monitoring investment performance
To effectively assess investments, trustees should track key performance indicators (KPIs) that measure financial returns, risk exposure, and ethical impact.
Financial performance metrics
- Total Return on Investment (ROI) – Measures overall portfolio gains, including income (e.g., dividends, interest) and capital growth.
- Annualised Returns – Evaluates average annual performance over multiple years, smoothing out short-term fluctuations.
- Benchmark Comparisons – Compares performance against relevant market benchmarks, such as:
- FTSE All-Share Index (for UK equities).
- MSCI World Index (for global equities).
- UK Government Bonds Index (for fixed-income investments).
- Volatility and Risk-Adjusted Returns – Analyses how much risk was taken to achieve returns, using measures like:
- Sharpe Ratio – Compares returns relative to risk.
- Standard Deviation – Measures portfolio fluctuation.
Risk management indicators
- Asset Allocation Stability – Ensures portfolio diversification remains in line with strategy.
- Liquidity Ratios – Assesses whether assets can be easily accessed if funds are needed.
- Exposure to Market Downturns – Evaluates how portfolio value changes in different economic scenarios.
Ethical and ESG performance metrics
• Carbon Footprint of Investments – Tracks exposure to fossil fuel-based industries.
• Social Impact Scores – Measures contributions to community projects, healthcare, or social enterprises.
• Engagement and Voting Records – Reviews how fund managers vote on environmental, social, and governance (ESG) issues.
How charities should monitor investment performance
Trustees should establish a structured approach to reviewing investments, including setting up regular reporting mechanisms and engaging with investment managers.
Quarterly and annual investment reviews
- Investment managers should provide quarterly reports detailing portfolio performance, changes in asset allocation, and risk analysis.
- Annual reviews should assess long-term trends and whether the investment strategy remains aligned with the charity’s mission and objectives.
Trustee and investment committee oversight
- Many charities establish an Investment Committee, composed of trustees and financial experts, to oversee performance.
- The committee should meet regularly to:
- Review performance reports from investment managers.
- Assess risks and ensure compliance with ethical policies.
- Recommend adjustments to the investment strategy.
External performance audits
- Independent investment audits can provide additional oversight and identify areas for improvement.
- Charities with large investment portfolios may benefit from hiring an external investment consultant for an objective assessment.
Transparency and stakeholder reporting
- Trustees must communicate investment performance to donors, regulators, and the public to maintain trust.
- Annual reports and financial statements should include:
- Clear summaries of investment returns and strategy.
- Explanation of ethical and ESG investment policies.
- Justification for any significant changes in investment approach.
How to respond to underperformance or changing investment needs
If an investment portfolio underperforms or no longer aligns with the charity’s financial requirements, trustees should take proactive steps to adjust their approach.
Identifying causes of underperformance
- Is the underperformance due to short-term market fluctuations or fundamental strategy issues?
- Is the investment manager failing to meet expectations?
- Are the chosen benchmarks still appropriate?
Adjusting asset allocation
- If risk exposure is too high, shifting funds to lower-risk investments (such as bonds or cash) may be necessary.
- If returns are too low, reviewing whether the investment mix is too conservative is crucial.
Changing investment managers
- If an investment manager consistently underperforms or fails to adhere to ethical guidelines, trustees may consider replacing them.
- The investment management contract should outline performance expectations and termination conditions.