Does the election make any difference to your approach to cash and investments?
It remains to be seen what the impact on the wider charity sector will be following the Conservative's general election victory, but in terms of financial markets the reaction was immediate.
Financial markets hate uncertainty and the removal of concerns over future economic direction and a policy vacuum while a coalition was pieced together had an immediate impact: Sterling soared immediately following the publication of the election night exit poll. The FTSE100 Index saw a relief rally on the day after the election of 2.3%. Led by energy and banking stocks, sectors that would have faced increasing regulatory scrutiny under a Labour government.
While near term uncertainty has been removed, considerable challenges lie ahead. As we approach the European referendum in 2017 the increased uncertainty surrounding possible British exit from the Eurozone (BREXIT) could lead to higher volatility in price levels and send Sterling and UK stocks sharply lower. The importance of appropriate portfolio diversification, including international equities and other asset classes, will be reinforced.
In one important respect, a clear election result delivered certainty. The UK's borrowing costs will not be forced higher by market expectations of a tax and spend Labour/SNP government and the Bank of England will be able to stick to its carefully measured approach of rates rising gradually based on favourable economic data. This suggests that while interest rates will rise at some point, low rates are likely to continue for now. When they do rise charities will welcome the boost to returns on their cash savings, but will need to be mindful of the impact on their other investments.
Received wisdom ranks possible investments in order of their volatility (the amount they fluctuate in value) as a proxy for their safety. Cash, followed by bonds are perceived to be less risky than equities and this is certainly true over very long time periods. Over shorter time periods this may not be the case. Many charities hold bonds in their portfolios as safe investments but after a near 20 year period of rising bond prices and in the current environment of record low interest rates they need to be very wary. While we do not know when it will happen, when interest rates do start to rise this will have a marked impact on the capital value of bonds. In general terms, an increase in interest rates to normal levels would correspond to a 15% fall in the 10-year government bond price. Charities need to be wary of bond markets that might be set for a fall.
Charity Authorised Investment Funds
The March 2015 Budget seems a long time ago but there was an interesting announcement concerning a new charity authorised investment fund structure. Top of Form
A new regime of Charity Authorised Investment Funds (CAIFs) will be created, modelled on the current Common Investment Fund regime. CAIFs will be charities and will be registered with the Charity Commission for England & Wales, but will also be regulated by the Financial Conduct Authority (FCA), giving a greater degree of regulatory oversight. An exemption from VAT on investment management fees will be possible under the CAIFs regime and existing Common Investment Funds will be able to covert to CAIF status. While it is unclear at present whether or not CAIFs will be able to be created in Scotland (and thus registered with the Office of the Scottish Charity Regulator (OSCR)), it is expected that Scottish charities will be able to invest in CAIFs in the same way that they may currently invest in English and Welsh Common Investment Funds.