The ultimate risk for not-for-profit-organisations (NFPs) when it comes to investing is when they begin to manage their assets like every other investor in the market and focus only on the ‘total short-term return’.
Adopting a total return approach may increase the risk of not realising the principle objective of most NFPs – to deliver a consistent income stream each year to fund their ongoing activities.
A focus on total return will lead to volatile budgets as total returns can vary significantly from one year to the next.
Sudden falls in asset values result in an investment’s year on year income moving with market fluctuations, compromising the organisation’s ability to meet its funding commitments. The current crisis highlights that a steady investment stream is vital for charitable organisations.
In a perpetual investment model, funds are invested to deliver a consistent income annually with some capital gain and a focus on delivering a regular income stream. Partnering with a specialist who offers investment mandate services for the NFP sector is a good starting place for organisations whose aim is to manage for the longer term.
At ANZ Trustees, our approach to investment portfolio construction includes securing the bulk of desired income streams through fully franked dividends. This is in recognition of the long-term consistent growth delivered through dividends when compared to returns from traditional fixed interest and cash.
Now, more than ever, donors and the community expect NFPs and charities to adopt responsible investment strategies that mitigate the risk of market volatility that impacts on income. NFPs also need to take the time to ensure their investments are structured for long-term growth.