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”
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