Common investment is sweet charity

Solicitors involved with smaller charities should consider common investment funds to make the most of the money they raise, argues Garon Watkins. Garon Watkins is director of the charities division at Lazard Asset Management.

What are the options available to those solicitors confronted with issues of charity investment management?

They will be aware that charities have very specific requirements and investment powers often more restrictive than those of other groups. And, since July 1997, their tax status has also become unique because, unlike pension funds, they continue to benefit (at least for the next six years) from compensation payments in lieu of the now abolished advance corporation tax credit.

While management of a sizeable portfolio can be delegated (with the proper authority) to one of the several investment houses with specialist charities units, options are more complicated for smaller accounts.

Clearly pooled vehicles would be appropriate since administration is best kept to a minimum, but there are 1800 unit trusts available in the UK, and in most cases these vehicles would be liable to pay stamp duty on purchases of UK equities from which charities are exempt.

No discussion of investment for smaller and medium-sized charities would be complete without exploring the world of common investment funds.

These vehicles, charities in their own right, and regulated by the Charity Commission, have grown in popularity in recent years and now account for over #3bn of charity assets. Their popularity is justified by the advantages they offer to charities from the point of view of administration, tax efficiency, cost and performance.

From an administrative point of view they offer all the advantages of unit trusts, but they also distribute income gross, thus avoiding the need for tax reclamation and the impact that can have on charity budgets, not to mention the extra administrative effort.

These vehicles have special range status under the Trustee Investments Act 1961. This means that where the funds governed by this Act would be compelled to split their assets 75 per cent/25 per cent between a wider range (allowing use of equities) and a narrower range (just cash and bonds), the use of a common investment fund will allow trustees to invest the entire fund in an equity-based vehicle – thus circumventing this anachronistic legislation.

The reason for the popularity of these vehicles is not simply their administrative benefits. They are also significantly cheaper than their unit trust counterparts. The most expensive is 1 per cent per annum, with the majority well below that. In most cases initial charges are minimal and are usually waived for reasonable sums.

But the key to their success has been performance. Of the seven UK equity funds with a five-year record, six have equalled or bettered the elusive FTSE All Share Index. During 1997, five of the 10 equity funds available beat the index with all of the remainder being within two percentage points. This was at a time when many high-profile active fund management houses were experiencing publicised performance problems.

There is now plenty of choice in the common investment fund market, with a variety of investment houses and investment styles catered for. Many charity magazines frequently publish performance tables to ensure that advisors and trustees can monitor performance effectively.

The growth of the common investment fund sector has been rapid. It is not surprising since it offers trustees and advisors cost effective, tax efficient options while also delivering excellent performance in vehicles which are designed specifically for charities.