How Charities Can Assess Their Investment Performance

In the current economic downturn, it is more important than ever for charities to take a good hard look at how their investment portfolio is working for them. Trustees cannot afford to be relaxed about their invested capital. Hopefully you will already have found an expert and impartial independent investment adviser and manager to steer you in the right direction and devise an investment strategy tailored to achieve the specific financial goals of your charity. Without support from experienced and trusted investment professionals, you could find yourself in dire trouble.

Assessing and Managing Risk

Let’s start at the beginning. First analyze your Statement of Investment Principles (SIP). Are your investment objectives sensible? Are they realistic? Have you sufficiently weighed up the potential risks and possible rewards? Take a good look at your charity’s investment portfolio. Is it structured to earn enough return?

Diversification is a great way to cushion against any downward market fluctuations, ensuring your investments are not made in one company, commodity, sector or geographical location, but over diversification will mean that you won’t reap enough rewards from upward market fluctuations. Work with your independent investment adviser and manager to strike the right balance. Focus on the level of loss you have financial resilience against and measure the risks you take against it. It is very useful to set an amount of loss you can tolerate in any given year.

Using Performance Benchmarks

There are three key approaches to setting performance benchmarks. These are:

* Absolute Return: Obviously, your investment objectives should be geared towards achieving financial goals. However, absolute return is a target and is not something that is realistically achievable at all times. It is therefore difficult to use your financial aspirations as a benchmark, market fluctuations mean that your financial objectives will sometimes not be met. However, you must remain realistic and not make knee jerk strategy changes whenever a particular investment shows signs of a downturn.

* Index Benchmarks: If you create a weighted mix of equities and bonds, measuring their stability against your calculated risk tolerance, they will prove useful as a performance benchmark. Be sure to invest cheaply in them and remember not to attach emotional ties to any of your investments. You need to remain level-headed at all times.

* Peer Benchmarks: Using peer benchmarks to calculate what you might have achieved is a useful endeavour, but they only reveal so much and most charities have a combination of 80 percent equities to 20 percent bonds.

You can glean valuable information from all the above benchmarks. However, the one to focus on is index benchmarks, particularly when evaluating long term investment performance. Agree upon an index benchmark with your independent investment adviser and manager and set it out clearly in your SIP.

Identifying Performance Issues

Ask the following questions to your independent investment advisor and manager when you are concerned about your investment performance. After all, you are paying for their experience and expertise.

* Question whether your independent investment advisor is better skilled in certain markets, which leads them to have a bias in their favour.

* Ask your independent investment advisor for a clear statement of how they plan to add value to your investment portfolio and what they are doing to achieve your financial goals

* Question whether they are focusing on returns or whether they are doing enough to cushion against possible downturns

* Gain a clear idea of the type of environment they are striving to develop for investment portfolio for. Conduct your own research into this targeted market environment

* Ask them to give a clear account of what worked for your investment portfolio and what was less successful for the period in which you are assessing performance

Working closely with your independent investment advisor and manager will enable you to set clear objectives, set valid performance benchmarks and keep track of the overall performance of your charity’s investment portfolio. You must be able to quickly assess how your investments are working for you in order to constantly evaluate the level of risk you are taking and your financial resilience. The only way to achieve this is to regularly scrutinise your investment strategy and your independent investment advisor and manager.

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George currently writes finance related posts for a number of sites including Jeffrey Epstein, Riches Corner and many more. You can find his work all across the globe.

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