Total return investment for charities
21.As explained at paragraph 9 above, charities with permanent endowment are ordinarily restricted in their investment decisions, since they must keep separate income available for current use and capital held to produce future income. Because investment returns that trust law classifies as capital cannot be spent on current charitable purposes, trustees of charities with permanent endowment have to pursue an investment strategy which produces sufficient income yet maintains a balance between capital and income returns. A strategy that produced too little income would limit the funds available to provide public benefit (even if a healthy overall profit had been made taking into account capital returns). A strategy that produced too much income would reduce the level of permanent endowment available to produce future income. Trustees must therefore invest with a view to the likely form of the receipt – as income or capital – in an endeavour to ensure that future investment receipts do not favour income or capital disproportionately.
22.By contrast, under a total return investment scheme, trustees invest with a view to optimising the overall investment return, no matter whether that takes the form of capital or income. The trustees then decide how much of that overall return should be allocated to be expended on current charitable purposes and how much should be retained to produce future returns; even if that means spending funds which would be classified as capital, and accumulating (adding to capital) returns classified as income. While in taking those decisions trustees have to balance the need for current expenditure and the need to maintain the long term capital value of the fund, decisions on investment are not influenced by the requirement to generate returns that take the form of income or capital, as the case may be. The usual considerations when trustees invest – in particular, the need to balance risk and return – still apply.
23.At present, trustees of charities with permanent endowment can only operate total return investment if they apply to the Charity Commission for an order enabling them to do so, in accordance with the Charity Commission’s scheme for total return investment set out in its Operational Guidance.(3) The Act gives the Charity Commission power to make regulations enabling total return investment, and enables trustees of charities with permanent endowment by resolution to operate total return investment in accordance with those regulations, without having to make an application to the Charity Commission for an order.
Charity Commission, Operational Guidance 83 Endowed Charities: A Total Return Approach to Investment (available at http://www.charity-commission.gov.uk/About_us/OGs/index 083.aspx).
