Charity -funds

Fund managers working for charities are no different to those acting on behalf of any other organisation or individual; we aim to find the best risk-adjusted returns for our clients' unique needs. Of course, there are specific issues for charities, both challenges and opportunities, that mean we can take a slightly different approach to our colleagues who are looking after individuals or family offices.

One such important area for consideration at the moment – and one that is most definitely of benefit to charities – is a change in the type of funds that are on offer to our sector. Many people may not know there are a subset of investment funds that have been solely available to charities, so-called Common Investment Funds (CIFs). The advantages of these funds have been primarily in their tax structure; they are established with a quasi charitable status, which means that they can avoid many of the taxes that are imposed on companies and investments – while the main tax advantage of reclaiming dividend tax credits was removed some years ago, the exemption from stamp duty on UK equities and property purchases remains. Another benefit is that they have been designed with charities in mind in terms of their investments, so they are an important potential resource to those organisations that may not have the funds that could justify the creation of a segregated portfolio at an investment house (more than two thirds of charities now are exclusively or predominantly invested in pooled structures, according to Newton Investment Management).

However, they also have some issues: firstly, their original establishment under English law posed a problem (at least at first) in their being used by Scottish charities; second, the funds have until now been regulated by the Charity Commission, which has found this task increasingly difficult due to stretched resources and as financial markets become more complicated; thirdly, they have charged VAT on management fees – a costly imposition, especially when Open Ended Investment Companies (OEICs) and unit trusts, available to all and sundry, don't have to pay such a charge; finally, the difficulties outlined here mean that there has not been sufficient demand for the funds to justify investment companies building a broad range of strategies. While there is a good level of choice in UK equity funds and mixed asset funds there is surprisingly little choice in global and overseas equities.

The environment is hopefully set to change after the announcement of the new Charity Authorised Investment Fund (CAIF) structure in the budget earlier this year. These proposed new funds are designed specifically for our sector (old CIFs will be allowed to transfer to the new regime) but with the weaknesses of CIFs ironed out. They are planned to have all the tax benefits of the old regime but will also be exempt from VAT, thereby increasing their potential returns. The funds will also now be regulated by the Financial Conduct Authority, which will be much better placed to make sure they are overseen properly.

Those two aspects alone may make them a more suitable investment for some of our clients. After all, the return on an investment is a key consideration for any manager and the VAT exemption may have just eased quite a few funds over the line in terms of what they can achieve for their investors. In other words, when considered against the vast range of funds on offer, the money that we can make through these investments may bring some to the front of the pack in terms of those risk-adjusted returns that we mentioned at the start of the blog.

More importantly, if these new style of funds start to attract more money, then we may find ourselves in a virtuous circle where investment firms start to increase the range of asset classes covered in these structures. We have been at the forefront of telling our charity clients that they need to think outside of a primarily UK-centric approach to ensure they are making the most for the important causes they support. We hope that in a couple of years' time, we may be able to find more of the key asset classes that we recommended within the CAIF structure.

This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.