Adopting a total-return strategy will soon be easier for permanently endowed charities

The Charities Act 2011 and subsequent guidance from the Charity Commission will soon give trustees of permanently endowed charities the right to adopt a total return approach when managing their investments.

In the past charities have had to apply to the Charity Commission for permission to use a total-return strategy. The change in guidance, expected to come into force on 1st January 2014 removes the need to apply and, as a result, will allow greater flexibility to those managing permanently endowed funds.

At the moment, permanently endowed charities are required to maintain a distinction between income and capital returns. Usually trustees of these charities can only spend the income received. The capital returns, however must be retained with the intention of preserving the spending power of funds and provide for future returns.

Moreover, adopting a total return approach gives trustees the power to supplement income with capital to meet the charity’s expenditure needs helping to support a more consistent spending rate. It enables trustees to make investment decisions to optimise the overall investment return, rather than being forced to adopt an income-biased policy. This often provides exposure to a wider range of asset classes resulting in greater diversification of risk and return.

Whilst we support the move, we would of course stress the need for the regular review of a charity’s spending rate and suitability to current investment policy and asset allocation. Total return can, in some cases rely largely on capital returns, which could result in an uncomfortably large drawdown of capital during times of market stress. Jane Hobson, Head of Policy at the Charity Commission, puts the essence of the regulatory changes very well by (quite simply) stating that, it is “giving trustees the freedom to act in the best interests of the charity”

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director