Best practices for selecting and monitoring investment managers.
Why investment managers matter for charities
Many charities rely on professional investment managers to oversee their portfolios, aiming to ensure sustainable returns while aligning with their mission and risk tolerance. Charities often have unique investment needs, including long-term sustainability, ethical considerations, and the need for income generation. Investment managers play a key role in helping charities balance these priorities effectively.
Key considerations when selecting an investment manager
Experience with charities and institutional investors
- Investment managers with experience in charity sector investments understand the regulatory requirements and governance expectations unique to charities.
- Consider managers who have a track record of managing endowments, restricted funds, and ethical investment strategies.
Investment approach and philosophy
- Ensure the manager’s investment style aligns with the charity’s objectives.
- Key questions to ask:
- Do they focus on long-term capital growth, income generation, or a balance of both
- How do they incorporate risk management strategies?
- What is their approach to ethical and responsible investing?
Ethical and ESG (Environmental, Social, Governance) Considerations
- If the charity has ethical investment policies, trustees should ensure the investment manager can implement and adhere to these principles.
- Questions to ask:
- Do they offer screened funds that exclude harmful industries (e.g., fossil fuels, tobacco, arms manufacturing)?
- How do they engage in shareholder activism and responsible stewardship?
- Are they signatories to the UK Stewardship Code and Principles for Responsible Investment (PRI)?
Fee structure and costs
- Investment management fees can impact overall returns, so understanding the fee structure is crucial.
- Common fee models include:
- Percentage of Assets Under Management (AUM) – The most common model, typically ranging from 0.25% to 1%.
- Performance-Based Fees – A manager takes a percentage of profits if they exceed a certain benchmark.
- Flat Fees – Less common but may be suitable for large portfolios.
- Ensure transparency in fees, including transaction costs, advisory fees, custody fees, and hidden charges.
Reporting and communication
- Regular reporting helps trustees monitor investment performance and make informed decisions.
- Key reporting considerations:
- Frequency of reports (quarterly, annually).
- Clarity of reporting – are the results easy to understand for trustees with varying levels of financial expertise?
- Accessibility – do they offer online dashboards for real-time tracking?
- Availability of regular review meetings with trustees.
- Transparency on all reporting.
Performance and track record
Review past investment performance, but also consider how they have managed portfolios during financial crises or market downturns.
- Compare performance against relevant benchmarks, ensuring realistic and sustainable returns.
- Consider long-term performance over multiple economic cycles rather than just short-term gains.
- However, past performance is not a reliable indicator of future performance.
Governance and compliance
- Verify that the investment manager is regulated by the Financial Conduct Authority (FCA) in the UK.
- Check compliance with UK charity investment regulations, including the Charity Commission's CC14 guidance.
The process of appointing an investment manager
1. Define Investment objectives and policy
- Before selecting a manager, trustees should develop a clear investment policy statement (IPS) outlining the charity’s goals, risk appetite, ethical considerations, and return expectations.
2. Conduct market research and shortlist candidates
- Use professional networks, recommendations from other charities, and industry resources such as:
- Charity Finance Group (CFG) Investment Forum
- UK Sustainable Investment and Finance Association (UKSIF)
- Pension and Investment Consultants Association (PICA)
3. Issue a request for proposal (RFP)
- An RFP allows investment managers to submit detailed proposals outlining their services, strategies, fees, and past performance.
4. Interview and assess candidates
- Arrange presentations from shortlisted managers and assess their responses to key criteria.
5. Conduct due diligence
- Check references from other charity clients.
- Review compliance with Financial Conduct Authority (FCA) regulations.
6. Negotiate terms and appoint the manager
- Ensure that the investment management agreement aligns with the charity’s investment objectives and fee expectations.
Monitoring and working with investment managers
Once an investment manager is appointed, trustees should actively monitor and engage with them to ensure continued alignment with the charity’s objectives.
Regular performance reviews
- Schedule regular reviews to assess:
- Portfolio performance against benchmarks.
- Risk exposure and adjustments in response to market conditions.
- Adherence to ethical investment policies.
Trustee engagement and oversight
- Establish an investment committee within the board to oversee investment management decisions (larger charities only).
- Provide training for trustees to enhance financial literacy and governance skills.
Holding managers accountable
- If the investment manager consistently underperforms, fails to comply with ethical guidelines, or has poor communication, trustees should consider renegotiating terms or replacing the manager.
Resources for selecting investment managers
Financial Conduct Authority (FCA) Register
Check if an investment manager is FCA-regulated.
UK Sustainable Investment and Finance Association (UKSIF)
UK-based membership organisation that promotes sustainable and responsible finance. It supports financial institutions in driving the transition to a greener, fairer economy by influencing policy, sharing knowledge, and fostering collaboration across the sector.
The Charity Finance Group (CFG) Investment Forum
Provides training and guidance on working with investment managers.
By carefully selecting and actively managing investment managers, charities can optimise returns, align investments with their mission, and ensure compliance with governance and ethical standards.
Explore the next section
Monitoring and reviewing investments.