Australia

Governance Best Practice: Investment approaches for Australian charitable trusts

The best performing for-purpose Boards and Investment Committees (ICs) recognise their primary role is one of governance, not operations and certainly not stock picking.

The Endowment Approach to investment  

For many organisations, investment management was traditionally outsourced to a Trustee company.  Over time high costs and indifferent performance has meant that many Boards are now taking on this responsibility internally. This decision is difficult to make for some Boards who do not possess adequate investment experience to understand the complexity of investing or the skills and resources required to manage large endowments. In some cases, cash becomes the default and returns have plummeted.

Boards and ICs need to ensure those individuals responsible for investing are doing so in compliance with agreed investment policies. Virtually every asset-owning for-purpose organisation should maintain a clear divide between investment governance and investment implementation.

The Endowment Approach is linked to leading institutions such as Yale and Harvard University as well as Australia’s Future Fund. Yale’s Chief Investment Officer David Swensen has pioneered some of the most successful modern investment approaches for long term investors. Sensible long-term investment policies, asset allocation, target returns, informed market judgement and risk management underpin the success of these institutional approaches.

Investment management has evolved beyond the basic building blocks of earlier models to include modern risk management techniques, tactical asset allocation, value-added relationships with niche asset managers and creative co-investment strategies across many asset classes.

Investment solutions

Endowments and Foundations differ from other types of institutional investors in several ways, as they have:

  • Relatively long investment time horizons, but a need for annual income
  • Far less peer-group sensitivity
  • The ability to take advantage of tax exemptions

The key advantage is understanding that long term investors should outperform short term investors if they take full advantage of this horizon through appropriately balanced allocations to liquid and illiquid asset classes and building all-weather portfolio structures that cope with the market’s ups and downs by implementing more stable risk profiles.

The preferred investment approach

In today’s increasingly complex investment environment, outsourcing a Chief Investment Officer ‘CIO’ role is a good approach for many Endowment and Foundation investors who often find it difficult to commit the necessary time and resources to making swift and often complex investment decisions.

This enables Trustees of Boards and/or ICs to spend more time focused on high-level strategic matters like investment objectives and asset allocation while leaving the day-to-day operational decisions to professional investment managers. Other benefits include being able to access independent advice from a larger pool of specialist resources such as senior investment professionals, portfolio management teams, research teams with deep expertise in multiple asset classes, portfolio analysts and more effective operations, administration and reporting teams.

Examples of the types of groups taking advantage of this approach include university endowments, private school endowments, independent foundations, religious groups, public benevolent institutions, indigenous corporations, environmental protection organisations, private family foundations, museum endowments and charitable hospital and medical research foundations.

Board’s making decisions about the best fit and working with an outsourced CIO, should keep in mind that the goal is for an integrated approach working in unison with external professionals including the Endowment’s internal team and the investment committee to develop a clear long-term investment strategy usually covering the full asset position or balance sheet.

Services typically provided by the outsourced CIO model will take on full responsibility for executing that strategy including overall portfolio asset allocation and populating the portfolio with best in class asset managers in line with the agreed risk budget and any other specific mandate requirements such as sourcing responsible/sustainable investments.

Best Practices for Investment Committees

The best performing investment committee should:

  1. Bring relevant and complementary experience to the investment strategy. Less is more in terms committee members.
  2. Have an explicit understanding of the purpose and objective of the assets and a clear definition of success in determining whether the portfolio fulfils that purpose and meets that objective.
  3. Create a clear Investment Committee Charter covering the fiduciary duties of each member, terms of engagement and policies to which they commit – e.g., conflict of interest.
  4. Adopt a clear Investment Strategy, Policy and Governance Plan which includes investment objectives, risk tolerance, expected returns and the basis for establishing annual withdrawals, liquidity constraints, parameters for diversification, limitations for maximum manager and underlying position size, environmental, social and governance considerations; decision making and approval processes; and target asset allocation and ranges around that allocation.
  5. Clear means of measuring short term and long-term performance, including benchmarks.
  6. Simple evaluation criteria and a process for hiring managers to implement an investment strategy.

Meeting Agendas for ICs

Most meetings should cover a small number of broad topics including:

  1. Investment performance assessment
  2. Macroeconomic assessment and related tactical asset allocation moves
  3. Monitoring compliance with the investment policy
  4. Pressure testing external advisor processes (e.g., risk management, manager due diligence, tactical asset allocation, ongoing assessment and reporting accuracy)

Experience and global case studies in excellence and success demonstrate that the Endowment approach combined with good governance and sound investment policies can have a material impact on for-purpose organisations long term performance and sustainability.

 

Further Information

To find out more about visit our Family Office service page or contact us.

Governance Best Practice: Investment approaches for Australian charitable trusts

Andrew Bradley

Andrew Bradley is a key member of William Buck’s bespoke Family Office team and provides high level advice to select individuals and families with significant assets that require a more sophisticated and tailored approach for managing their assets including investment, philanthropy, family governance and family office advisory services.

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