The link between good governance and managing investment risk Phil Smithyes Managing Director Crowe Clark Whitehill Financial Planning Limited

Quantifying Risk

Risk is defined as: The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that there exists (or existed) a choice which has an influence on the outcome exists.

Quantifying Risk Risk means different things to different people Risk is subjective Risks are not easy to quantify Fear of risk is often irrational Reconciling risk as an individual can be tricky Reconciling risk as a board of trustees can be even more challenging…………!

Risk Controls Two areas of risk to consider: Compliance and Regulatory Risk: Process, Due Diligence, Recording, Reviews Investment Risk: 9/11 Banking Crisis Eurozone Crisis Some risks can be controlled, some are beyond your control!

Trustees Duties & Responsibilities Good practice Clear written processes and procedures Strong governance Independent 3 rd party advice Regular monitoring and formalised review process

Trustees Duties & Responsibilities Charity Commission CC14 Revised Investment Guidance New thinking has emerged over the last decade Explains legally permissible charity investments Sets out broad principles trustees must follow Trustees unlikely to be challenged on their investment decisions, as long as they can demonstrate due consideration to all the options and have sought professional advice where appropriate

Trustees Duties & Responsibilities Legal requirements Charities Commission advises: it is ‘good practice’ for charities to formulate written Investment Policy Statements (IPS) for investment of funds The Trustee Act 2000 stipulates it is a legal requirement for an IPS where investment powers delegated externally on discretionary basis The IPS should be kept under regular review to ensure it remains appropriate (at least annually) Trustees are personally liable if an IPS not in place and kept up to date

Trustees Duties and Responsibilities The Trustees will adhere to the requirements of the Trustee Act 2000, if they: Regularly review the Investment Policy Statement. Review the measures in place to manage risk. Employ advisers to provide independent oversight. Re-tendering/appoint an appropriate Investment Manager upon whom appropriate due diligence has been done. Agree a process and timescale for on-going monitoring and reviews. Put it all down in writing……………..

What is the purpose of the money? ‘Nest Egg’ ‘Rainy Day Money’ ‘Emergency Reserve’ ‘Security Blanket’ ‘Financial Buffer’ ‘Sole Source of income’

What is the purpose of the money?

Investment Strategy Is the priority income and capital preservation, growth and income, or purely capital growth? What does ‘good’ look like in the current climate – manage (realistic) expectations? Don’t let industry benchmarks such as the WM Charity Index dictate your investment strategy.

Investment Strategy

Managing Expectations Targeted Return - CPI* + 3% = 5.6% Bank of England Based Rate - 0.5% 1 Year Term Deposit % 3 Year Term Deposit % 5 Year UK Gilt - 0.7% 10 Year UK Gilt % FTSE 100 Dividend Yield- 3.7% FTSE All Share Dividend Yield - 3.6% CPI at July 2012 was 2.6%AXA & Total currently yielding 5.6%

Investment Policy Statement Investment Policy Statement should include: general objectives of the trust capital objectives (preservation) income requirements – targeted yield or fixed sum required level of reserves

Investment Policy Statement Investment Policy Statement should include: the function delegated to the Investment Manager acceptable level of investment risk investment parameters and exclusions ethical restrictions and exclusions The importance of the IPS cannot be overstated

So who should manage your money? Discretionary Fund Managers (DFM’s) in the charity sector: Ansbacher Barclays Barings Berry Asset Management Brewin Dolphin Brooks Macdonald CAF C Hoare & Co Charles Stanley Citi QuilterCredit Suisse GAMInvestec J O Hambros Kleinwort Benson Jupiter Merrill Lynch Nat West Newton Rathbones RothschildsSarasin Schroders Seven IM Standard Life WealthUBS to name but a few……………….

Caveat Emptor Potential minefield for Trustees: Investment Managers can have a tendency to tell Trustees what they want to hear – and then go and do what suits their business model, often deviating away from the IPS Commoditised models – one size fits all Accountability – inappropriate benchmark

Caveat Emptor Beware the Investment Management ‘gravy train’: Initial & exit charges High management charges High transaction charges – dealing commissions & possible ‘churning’ Initial and annual renewal commissions Use of own funds – double charging Use of ‘retail class’ funds Performance Charges (against inappropriate benchmark)

Good Governance Trustees should consider the appointment of a Investment Committee in order to exercise: Control Governance Expertise Responsibility

Investment Committee -Scope of IC powers should be clearly defined and documented -Monitor and review the performance of Investment Managers -Meet the Investment Managers on a regular basis -Ensure adherence to the IPS

Investment Committee -Allow the freedom for the Investment Managers to operate in accordance with the terms of engagement and discretionary powers -Maintain impartiality to avoid perceived conflicts of interest -Adhere to the principles set out in CC14 -Report back to the Board of Trustees

Investment Committee Specific Considerations Establish maximum levels of exposure to individuals funds/stocks Review the option to draw down capital to subsidise income Review and define the target distributions for the charity Distribution as a % yield rather than fixed monetary amounts Review the exclusion of certain asset classes/investments e.g. property funds and ethical criteria

Summary Checklist -Revisit and redefine fundamental objectives of your portfolio -Is there an Investment Policy Statement (IPS) and would it benefit from a review? -Ensure regular review meetings with investment managers present -Obtain clear transparency on fees and charges -Seek clarity of benchmarks (targeted returns and/or indices) and the exposure to asset classes and risk -Confirm roles and powers of Trustees and/or Investment Committee -Seek independent advice and support

Compliance Matters Crowe Clark Whitehill Financial Planning Limited is authorised and regulated by the Financial Services Authority. Crowe Clark Whitehill LLP Chartered Accountants are authorised and regulated by the Financial Services Authority. The information given in this presentation does not constitute advice and may not be appropriate to you personally. You should seek specific advice prior to undertaking any planning. The information given in the presentation is based upon our current understanding of HMRC legislation and limits and could be subject to amendment by Her Majesty’s Revenue & Customs at any stage in the future.