Citizens Advice has been reviewing its investment strategy. Alistair Gibbons describes the lessons learned.

Current financial conditions present FDs with a vexing investment challenge: we are faced with having to accept higher risk or lower returns.

Most charities are risk-averse and therefore pre-disposed to invest in cash or near-cash products. With the banking industry being more consolidated than ever before – yet still remarkably fragile – there is no golden solution. In the light of this, at Citizens Advice we have recently reviewed our investment strategy, trying to look at the issues with fresh eyes.

We have about £10m to invest on average. This is not a huge sum by the standards of some large charities, but it’s certainly big enough for us to need to be clear about what we are trying to achieve when investing our surplus cash.

Reserves and responsibilities

At Citizens Advice we make the distinction between our forecast minimum reserves (which we invest for longer periods) and workingcapital requirements (where we invest funds until required). Our investment income is not material, which means we focus on liquidity and risk first, and the level of return is secondary.

In setting an investment strategy it is essential to understand one’s responsibilities. The Charity Commission’s guidance in CC14, Charities and Investment Matters, sets out trustees’ responsibilities as follows: “Trustees have overall responsibility for the investment of a charity’s funds.” Of course, the day-to-day management of investment matters is generally delegated, but trustees should be satisfied that management is operating within an agreed framework – ie the investment strategy.

Any investment strategy should be set in the context of the organisation’s overarching risk appetite. If there is a significant difference between the risk appetite within the core risk-management strategy and the investment strategy, the organisation needs to seriously challenge itself.

In addition to the charity’s overall risk context, the investment strategy needs to be set in the context of a plethora of underlying risks: capital risk, liquidity risk, inflation risk, exchange-rate risk, counterparty risk…the list goes on – although, thankfully, not all will apply to every charity.

The key point is that CC14 states that charities should invest to seek the best returns “within the level of risk considered acceptable”. To focus the mind, it points out that the overall level of risk needs to be right not just for the charity but also for its beneficiaries. Would your beneficiaries, who have a vested interest in your investment income, agree with your investment strategy?

At Citizens Advice, we are looking at changing our product mix to extend beyond pure cash investment to a Common Investment Fund (CIF). This is an area given significant attention in CC14. We felt that the difference in risk between a CIF and cash products was marginal and that we would tolerate it if we found a suitable provider.

In addition to looking at different products, we also aimed to tighten the investment decision-making and management process. We have aligned our investment portfolio more closely to our cashflow requirements, differentiating between forecast reserves and working capital. We have also embedded into our decision-making framework a review of a counterparty’s credit rating and share price at the point of investment.

Setting the strategy

Testing out drafts of the strategy crystallised concerns several of us had about liquidity. In tight financial times, I imagine many trustee boards will be more concerned about liquidity than before. It is for this reason that, while we were tempted to diversify into other products, we felt that the liquidity we would lose in doing so would outweigh the positives.

Which leads me to my final point – the process of setting the strategy is, in many ways, as valuable as the strategy itself. It has reminded both executives and trustees of our respective responsibilities. It has tested, and confirmed, our risk appetite, and it has created a good level of engagement and ownership.

At a time of tight financial conditions and heightened risk, that is a firm bedrock to work from.

Alistair Gibbons is head of finance at Citizens Advice