Guide to Investing Money for Community Organisations
-
Upload
our-community -
Category
Documents
-
view
221 -
download
4
description
Transcript of Guide to Investing Money for Community Organisations
Financial Literacy for Community Groups
Proudly supported by:
Guide to Investing Money for Community Organisations.
1
Contents.Contents. 1
The Guide for Community series. 2
Introduction: Making every cent count. 3
A note on terms. 4
Understanding the basics. 5
Whatisinvesting&whyisitrelevantfornot-for-profitorganisations? 5
Whyinvest? 6
Choosing where to invest. 8
Whatareassetclasses? 8
Cash 9
Bonds(Australian&InternationalFixedIncome) 10
Property(Australian&International) 12
Shares(Australian&International) 12
Thechoiceisyours 14
Things to consider before you dive in. 15
Diversification 15
Assetallocation 15
Fees 17
Activevspassiveinvestment 17
Waystoinvest 18
Performancebenchmarks 18
Selectinganadviser 19
Puttingitalltogether 20
Investment sub-committees. 21
Responsibilities 21
InvestmentPolicyStatement(IPS) 21
Externaladvisers,consultantsandmanagers 21
Reviewandmonitoringprocedures 22
Termination 22
Sub-committeemembers 23
Investment Policy Statements. 24
PurposeoftheInvestmentPolicyStatement 24
Investmentobjectives 24
Assetallocation 24
Investmentdiversification 25
Constraints 25
Ethicalinvestment 25
Implementation 26
Performancebenchmarks 26
Sample Investment Policy Statements. 27
Smallorganisation:PQRInc. 27
Mediumorganisation:Variety,theChildren’sCharity 29
Largeorganisation:TheGoodFoundation 31
Glossary. 32
Community Banking Solutions for not-for-profit organisations. 34
2
ThisguideisthethirdinaseriesdesignedtohelpbuildthefinancialcapacityofAustralia’s600,000communitygroupsandnot-for-profitorganisations,whichareabsolutelyvitalinthedevelopmentofathrivingandvibrantAustralia.
Togetherwithitscompanionvolumes,theGuide for Community Treasurers and Understanding Finances: A Guide for Community Board Members,thisguideispartofongoingworkbyOurCommunityandWestpactomakesurethisimportantsectorhasreadyaccesstotheinformationitneedstooperateeffectivelyinourcomplexandchangingfinancialenvironment.
Formoreinformationaboutthepartnershipvisitwww.ourcommunity.com.au/finance
Our Community.Morethan65%ofAustraliansbelongtooneormoreofthe600,000communitygroupsthatexistinthiscountry.OurCommunityassistscommunitygroupstomeetthechallengesthey facebyprovidingpracticaladvice,toolsand training.
Ourmajorofferingsinclude:
•www.ourcommunity.com.au–comprising16onlineKnowledgeCentresandpublishinghouse
•GiveNow.com.au–helpingindividualsandbusinessesgivemore,givesmarter,givebetter,Give Now!
•AustralianInstituteforCommunityPracticeandGovernance–practicalandaccessiblecertificated trainingdeliveredlocallythroughourtraininginstitute
•AustralianInstituteofGrantsManagement–theuniquesuiteofgrantsmanagementservices,includingthegroundbreakingonlinegrantsmanagementsystem,SmartyGrants
•AustralianInstituteforCorporateResponsibility–cuttingedgecorporateresponsibilityresourcesfor large,mediumandsmallbusinessandcommunityorganisations
Westpac Social Sector Banking.AtWestpac,we’vebeenworkingwithcommunityorganisationsofallsizesformanyyears—andwhetheritbelocalsportsclubs,schoolsornationalagedcarefacilities,we’velearnedthatthedemandsandopportunitiesofthenot-for-profitsectorarebothuniqueanddiverse.
Weoffermorethanjustbanking.Wearecommittedto:
•understandingourcommunitycustomers’uniqueday-to-dayfinancialworkingsandrequirements
•designingandinnovatingourproductsandservicestoalignwiththeneedsofthesocialsector
•providingspecialistbankersandfinancialadvisers, whoarespecificallytrainedtoservicethenot-for-profitsector
•connectingourcustomerswithfinancialeducation,training,resourcesandotherareasbeyondjustbankingthatwillhelpstrengthentheirorganisationandachievelong-termvisions.
Wewanttoprovidethecommunityandnot-for-profitsectorwiththemostbeneficialbankingpartnershipin Australia.
Formoreinformationvisitwww.westpac.com.au/socialsectorbanking
The Guide for Community series.
3
Introduction: Making every cent count.Not-for-profit organisations exist for a number of reasons. Some want to improve the environment, some want to conserve a historical element of their community, some want to connect people with a common interest, and some want to help those most in need.
Althoughonthesurfacetheseorganisationscanappeartohavesimilaroperationstofor-profitbusinesses–theymayemploystaffatsimilarlevels,useproductsandservicesjustasbusinessesdo,andaresubjecttomanyofthesamelawsandregulationsthatbusinessesaresubjectto–theyareremarkablydifferent.
Whilefor-profitorganisationsexisttoturnaprofit,not-for-profitsworktocontribute somethingtosociety.Thatmeanstheyhavedifferentpurposes,operate underdifferentpressures,havedifferentculturesandserveadifferentgroupofstakeholders.
Butthatdoesn’tmeanthatnot-for-profitscan’t(orshouldn’t)generatesurplusfunds–quitethecontrary.Allorganisationshavetoraiseincomeiftheyaretobeabletofundtheiractivitiesinthecommunity–afterall,theyalsoneedtopaystaff,rentoffices,providemail-outsornewsletters,andpayphoneandelectricitybills.
Anot-for-profitorganisation’ssocialmissionmakesitallthemoreimportanttosqueezeeveryounceofvalueoutofeverydollarraised.Theyneedtomakesureanysparecashisputtoworkashardaspossibleinawaymostlikelytomaximisethefundstheyhave.
Investingidlefundscanbeafantasticwaytomaximisecashflow.Investment,however,isaconceptmanynot-for-profitorganisationsshyawayfrom,andtherearethreeverygoodreasonsforthis:(1)becausefeworganisationsthinktheyhaveenoughmoneyinthebanktobotherthinkingaboutinvestments;(2)becausewhentheydohavemoney,mostgroupswanttospendit;and(3)becauseallinvestments,bytheirnature,involvesomeelementofrisk.
That’snottosaythatnot-for-profitsshouldshyawayfrominvestment.Infact,theoppositeistrue.
ThisGuideaimstohelpyouunderstandwhenandhowyourorganisationmightconsiderpursuinginvestmentsandwhatyouroptionsmightbe–whatthedifferenttypesofinvestmentsare,whatrisksareinvolvedineach,andhowyoucanuseyournewfoundknowledgetoincreaseyournot-for-profit’sfunds.
SpecificallyithasbeenwrittenforBoardandseniorstaffmembersofnot-for-profitorganisationstohelpyouunderstandtheoptions;investmentmanagersandinvestmentsub-committeemembersshouldhaveorseekmoreindepthknowledge.
“Understandingthedosanddon’tsofaninvestmentstrategyisessentialforanynot-for-profitorganisation,especiallywhenitcouldmeanfindingextrafundstosupportyourcauseoutsideofyourdonors.Byrecognisingtherolethatinvestmentshaveinyournot-for-profitorganisation,youwillbemoreinformedwhenmakingfinancialdecisions.”
Julienne Price, Head of Westpac Social Sector Banking.
4
The not-for-profit sector operates in all Australian states and has to cope with a number of different legal formats. The result is that there are a number of terms used for things that essentially mean much the same thing. To make life easier, in this Guide we’ve used one set of names.
Whenwesay ‘Board’ wemean ‘Board’or
‘Council’or
‘CommitteeofManagement’
Whenwesay ‘not-for-profit sector’ wemean ‘socialsector’or
‘nonprofitsector’or
‘communitysector’or
‘thirdsector’or
‘voluntarysector’
Whenwesay ‘not-for-profit organisation’ wemean ‘IncorporatedAssociation’or
‘CompanyLimitedbyGuarantee’or
‘Cooperative’
Whenwesay ‘Board member’ wemean ‘Boardmember’or
‘Committeemember’or
‘Trustee’or
‘Director’
Whenwesay ‘Chief Executive Officer (CEO)’
wemean ‘CEO’or
‘Director’or
‘Manager’or
‘ExecutiveOfficer’
Whenwesay ‘clients’ wemean ‘clients’or
‘customers’or
‘users’or
‘consumers’or
‘members’
Howeverthere’salsoahandyglossaryattheendofthisGuideifyouneedmoretechnicalexplanations.
A note on terms.
5
What is investing and why is it relevant for not-for-profit organisations?
Not-for-profitorganisationsinvesttheirmoneyforseveralreasons,orforacombinationofthesereasons.
1. To keep it safe and protected Ifyoudon’tneedallyourmoneyrightnow,butknowyou’llneeditlater,youwant
toputitsomewherethatwillnotonlykeeptheprincipalsafebutwillpreserveitsvalue.Youalsowanttoensureyourmoneykeepstrackwithinflationbygettingbackalittlemorethanyouputin.
2. To generate an income Ifyourorganisationisspendingitsmoneyondoinggood,everydollarthatyou
canearnfrominterestincomeisadollaryoudon’thavetorattlethetinfor.
3. To increase it
Ifyoudon’tneedyourmoneyrightnow,andarepreparedtodowithoutituntillateron,youcanlookforaninvestmentthatwillgrowtomorethanyouputin.
Mostnot-for-profitstendtoconcentratetheireffortsonkeepingmoneysafe.Goodcausesneedtobeaddressedtoday,ifnotsooner,somostgroupswillwanttoputeverycenttheyhaveintotheworkthattheydo.
However,manynot-for-profitshavesignificantamountsofmoneytoinvestwhen:
• They receive a grant
Afundergenerallywritesachequeforthewholeamount,andthenot-for-profitorganisationthenspendsthemoneydownovertime.Ifyougetagranttohireastaffmemberforayear,forexample,itwillbe50weeksintotheyearbeforeyoumakethelastpaymentfromthatfund–50weekswhenthatmoneycouldbeearningincome.
• They want to build or develop
Whenanorganisationisrunningacapitalappealtobuildanewhalloralibraryorheadquarters,itworkstheotherway–themoneybuildsupovertimetowardsthelevelyouneed,andthengoesoutinalump.
• They have a float or buffer
Organisationsthathavealotgoingonliketohaveacoupleofmonths’worthofreserve–somethingtosmoothoutcashflow,somethingtocarrythemoversuddengapsinthefundingstream.Theseamounts,too,canbeusedtosqueezeoutmoreincome.
• They have a corpus of funds
Someorganisationshaveahistoricalcorpusoffundsontheirassetbasethatcanbeinvested.Thesefundsareoftengeneratedthroughbequestsandotherlargedonationsandhelptoensuretheorganisationhaslongevitythroughcontinualre-investmentofthefundsyearonyear.
Circumstanceswillvary,ofcourse–somenot-for-profitshaveverylargeendowments,enoughtocoveragoodpartoftheirexpenses,andothernot-for-profitsexisttodistributemoneytoothersthroughgrantssohaveverylargereserves–butforsomeorganisationsaninvestmentwillbelimitedandcomparativelyshort-term.It’simportanthowever,tounderstandallyouroptionssothatiftheopportunityarisestoputyourfundstowork,youareabletomakethemostsensibledecisionforyourorganisationnowandforthefuture.
PartofbeinginformedisensuringyourBoardisfinanciallyaware.AfinanciallyawareBoardwilllookatavarietyofinvestmenttypes,orasset classes,includingsecurecashinvestments(e.g.savingsaccountsandtermdeposits),property,sharesorbonds.There’salsotheoptionofinvestingviamanaged fundswhichallowyoutoinvestyourmoneyinavarietyofassetclassesbyhavingaprofessionalfundmanager
Understanding the basics.
6
poolyourmoneywiththoseofotherindividuals,businessesororganisationsandmakedecisionsdailyonhowyourfundsarebestplacedtomaximisereturns.
Not-for-profitandcommunityorganisationsare,generallyspeaking,morecautiousinvestorsthantraditionalprofit-generatingbusinesses.Andsotheyshouldbe.Boardmembersneedtoweighuptherisksofinvestmentsgoingwrong,erodingratherthanbuildingonfundswhichwouldotherwisehavebeenemployedtofurtheracause,andpotentiallyseriouslydamagingfunderanddonortrust.
Asanot-for-profit,youneedtoensureyoucompletelyunderstandthepossiblerisksandreturnsofeachassetclassbeforeyoudecidetoinvestinthem.
Why investWhilstinvestinghasthepotentialtoprovidegoodreturnsforyourorganisation,investingingeneralcanbeacomplicatedaffair.Evenaninvestorwithmanyyearsexperiencerisksmakingthewrongdecisionandlosingmoney.That’sbecausetheinvestmentmarketcanbeextremelyvolatile–especiallywhenprofitmaximisationisthepriority.
Makingsoundinvestmentdecisionsbecomesevenmoreimportantfornot-for-profitorganisationsbecauseeverycentcounts.Butwithalittlebitofknowledge,someriskminimisationstrategies,andarealisticlong-terminvestmentplan,thepotentialfordevelopingahealthyprofitcanbecomeareality.
Cash investmentsMostnot-for-profitorganisationsarefamiliarwithhigh-interestsavingsaccountsand termdeposits.Theyarethemostpopulartypesofinvestmentswithnot-for-profitorganisations.
Botharebasic,cashtypeinvestments,whichprovidearelativelylowreturnforlow,orno,risk.
Termdepositsandhigh-interestsavingsaccountsprovideareturnbasedontheconceptofcompound interest,wherebyyouearninterestoninterestinordertomultiplythefundsavailableinyouraccount.
For example:
Let’sassumeyourgrouphad$1,000cashinasavingsaccountearning6%ayear.Your$1,000growsto$1,060afteroneyear,and$1,123.60aftertwo.Theextra$3.60comesfromcompoundinterest–interestontheinterest.Andalthoughitmayseemasmallamountinthiscase,ifyouthinkaboutlargerinvestmentamounts,andlongerinvestmentterms,andevenchangesininvestmentrates,theconceptofcompoundinterestbecomesmoreimpactful.Asmallchangeintheinterestrate,inparticular,canprovideasignificantdifferenceinreturnsovertime.
Table 1providesinformationonhowmoneygrowsovertime,giventheannualrateofcompoundinginterest.
Table 1: Compound Interest
2500
2000
1500
1000
500
0
Interest Earned
2nd year
3rd year
4th year
5th year
6th year
7th year
8th year
9th year
10th year
Total Funds
Did you know?Ifyourorganisationinvested$1,000incashattracting5.5%pa,itwouldtakeabout13yearstodouble.
HadyoudecidedtoinvestinAustralianshares,yourorganisationcouldhavepotentiallyearned9.1%paonyourinitialinvestmentanddoubledyourmoneyinapproximately5years.
* Based on annualised returns of the UBS Bank Bill index over 13 years (5.5% pa) and the annualised returns of the ASX 200 (including dividend) over 13 years (9.1% pa). The ASX 200 is an index that tracks the performance of the 200 largest publicly listed companies on the Australian Stock Exchange.
Understanding the basics.
7
Makesureyouhavetheinvestmentskillsandknowledgeyouneedonyour Board.
Tip Surveying your optionsCashinvestmentssuchastermdepositsandsavingsaccounts,however,arenotyouronlyoption.Youraimistomaximisethereturnsonanyinvestmentyoumake.
Ofcourse,thereisnofreelunchwhenitcomestoinvesting.Higherreturnsareusuallyassociatedwithhigherrisk,soyourBoardwillneedtodecidehowmuchrisktheorganisationiswillingtoputupwithinordertohavethepotentialofhighergains.
Another,ratherlessdramaticconsideration,isliquidity–howreadilyyourinvestmentcanbeconvertedintocashwithoutcompromisingthevalueoftheinvestment.Asanexample,cashisconsideredmoreliquidthanpropertybecauseyoucanusuallygetyourhandsonyourcashquicklybutitmaytakeseveralmonthstosellapropertyatfairvalue.
Everyorganisationhasdifferentrisktolerances,returnobjectives,andliquidityneeds.Asanot-for-profitorganisation,youarenodifferent.Theorganisation’sinvestmentpathwillneedtobesetdownbyyourmanagementteamandtheBoard.
IftheBoardhaslittleunderstandingaboutinvesting,thentheorganisationislikelytosuffer.Understandingwhatinvestmentsareavailableandtheuniquecharacteristicsofeachwillhelpyoutoachieveyourimmediatefundingneedsandmaximisethereturnsonyourinvestments.
8
Where you decide to allocate your organisation’s funds is important. Each investment class possesses its own unique set of risks and returns, so the key to a solid long-term and successful investment strategy is selecting the right type and mix of investments.
Did you know?Academicstudieshaveshownthat90%ofaninvestor’sreturnsaredeterminedbyhowyoudecidetodivideupyourinvestmentdollars–i.e.where(cashversusbondsversuspropertyversusshares)youchoosetoplaceeachpercentageofyourtotalinvestedamount.
WheninvestmentguruWarrenBuffettwasaskedwhatthesecrettohisinvestment successhadbeenovertheyears,hesaiditwasstickingtohis“circle of competence”.
Ofcourse,veryfewpeoplehavethesameinsightandknowledgeasWarrenBuffet,butcertainlybroadeningyourBoard’s“circleofcompetence”whenitcomesto investingisadiligentapproachtodecidingwhattypesofinvestmentsaremost suitable.
What are asset classes?Assetclassesareessentiallydifferentcategoriesoffinancialsecurities–ortypes of investments.Theyincludecash,shares,bonds,andproperty.Wecanfurthersubdividetheseintointernational,domestic,directinvestment,andindirect investment.
Thereturnsexpectedfromeachassetclassdependontheirriskcharacteristics.By‘risk’wemeanthetendencyfortheactualinvestmentreturntodifferfromtheexpectedinvestmentreturn.Naturally,peoplewouldonlyinvestinariskierassetiftheexpectedreturnswerehigher.
Thegraphbelowhighlightswhereeachassetclasssitsontherisk/returnspectrumrelativetotheothers.Cashinvestments,asyoucansee,holdverylittlerisk,butofferarelativelylowrateofreturn.Thesharemarket,ontheotherhand,canoffersomegreatprofit-makingopportunities,buttherisksaremuchhigher.
Risk vs Return
Risk
Expe
cted
Ret
urn
InternationalShares
AustralianShares
InternationalProperty
AustralianProperty
InternationalFixed Income
Australian FixedIncome
Cash
Understandingtheserisksallowsustoexaminethedifferentcharacteristicsofeachinvestmentclass.Nextwegothroughtheoptionsonebyone.
Choosing where to invest.
9
Cash
Low risk Low expected returnCashinvestmentsareconsideredamongthesafestinvestmentclass.Thevarietyofoptionsavailabletoinvestorswhenseekingtoinvestincashincludetermdeposits,savingsaccounts,cashmanagementtrusts,andmanagedfundsthatinvestintheshort-termmoneymarkets.
Termdeposits,asdescribedabove,arebasicsavingsaccountswhereaninterestrateisguaranteednottochangeforanominatedtermbasedonafixedamountoffunds.Thismeansyouwillknowexactlywhatyourinvestmentwillbeworthattheendofthetermbeforeyouevenbegin.Fornot-for-profitsorganisations,thereareupsidesanddownsidestotermdeposits.
Whilsttermdepositswillgiveyousuretyininvestmentoutcomeandwillallowyoutoplaninadvancetouseanyincomegenerated,theytendtohavelowerinterestratesthanvariablesavingsaccounts.Theyalsolockyourmoneyinforaprescribedperiodoftime–youwillbechargedifyouwanttowithdrawfundsearlyordepositextrafundsintotheaccount.
Savingsaccountsareoftenseenasamoreliquidalternativetotermdepositsastheyallowyoutomovemoneyinandoutwithouttheneedto‘lockmoneyin’.Sometimestheyhaveaslightlyhigherinterestratethantermdepositswithashorterterm,particularlywhennowithdrawalsaremadeinamonthandfundsareonlyaccessedonline,howevertheyarevulnerabletofallinginterestrates.ThatmeansthatiftheReserveBankofAustralialowersinterestratesyouwillfindthatyourearnedinterestwillprobablyfall,whereaswithatermdeposityourinterestwouldhaveremainedstableuntilmaturity.
Thekeytochoosingbetweenatermdepositandasavingsaccountislookingat(a)whetheryourorganisationrequiresafixedreturnand(b)whethertheamountyouaregoingtoinvestissetornot.Ifyoudorequireafixedreturnwithouttheneedtoinvestmore,atermdepositisyourbestoption.However,ifyouareflexibleandcanriskthefixedreturninordertopotentiallymakemoreoffofahigherinterestrate,and/oryouwanttheabilitytoaccessyourmoneyregularly,asavingsaccountisprobablybestforyou.
Thereareothercashoptionsaswell.CashManagementTrustsandManagedFundsareon-callinvestmentfundswhichpoolyourmoneywithotherstofacilitatetheinvestmentofyourorganisation’scashintogovernmentguaranteedandbackedsecurities.Thesetypesofinvestmentsusuallyyieldcomparablereturnstoothercashinvestmentsbutlikesavingsaccounts,cannotguaranteeinterestreturns.
Historically,cashinvestmentsprovidethelowestreturnovertime,whencomparedwithotherinvestmenttypes.Thisis,ofcourse,offsetbycashbeingtheleastvolatileassetclass,withveryhighliquidityandeasyaccessibility.
ReturnsarebasedontheofficialcashratepublishedbytheReserveBankofAustralia.ThisrateisadjustedperiodicallytoinfluencetherateofeconomicgrowthinAustraliaandtocontrolinflation.
Cashinvestmentsreturned6.8%paonaverageoverthelast20yearstoDecember 2010.
Understanding credit ratingsCreditratings,determinedbyagenciessuchasMoody’s,Standard&Poor’sandFitch,provideaguideastohowstrongthecapital,liquidityandfundingpositionsofaparticularfinancialinstitutionare.AAratedfinancialinstitutions(suchasWestpac)aredeemedtobemorefinanciallysecureandarelessriskywhencomparedtofinancialinstitutionsthatareAratedorbelow.
What does this mean for you?WestpacwillofferyourorganisationinterestratescomparablewithotherfinancialinstitutionsthathaveanAAratingorabove.FinancialinstitutionsratedAandbelowmayofferyourgrouphigherinterest,butremembertoweighuptheincreasedriskthatthisinvestmentmayattract.
10
Bonds (Australian & International fixed income)
Low risk Low expected returnWhenacompanyorgovernmententitywantstoraisefundstoexpandorfinancenewprojectstheysometimesusebonds.Thesearealsoknownasfixed-interestorfixed-incomesecurities.
Bondsareeffectively‘IOUs’inwhichaninvestoragreestoloanmoneytotheissuerinexchangeforapre-determinedinterestratereturndeliveredonapre-setdateinthefuture,knownasthematuritydate.Therecommendedinvestmenthorizonisbetween3to5years.
Thistypeofinvestmentcaneitherbeissuedbygovernmentsorcorporations.Suchinvestmentstypicallyprovideahigherrateofreturnthancashbecausetheyhavelongermaturitydates,arelessliquidthancash,aresubjecttoafluctuatingmarketprice,andarehigherrisk.
Bondsissuedbydifferentcorporationsorgovernmententitiesdifferinreturns.Thisisbecauseeachissuerhasdifferingcredit‘riskcharacteristics’,bywhichwemeantheprobabilityofdefaulting,i.e.beingunabletopayitsdebtandobligationsastheyfalldue.
InvestorsdemandhigherreturnsfromweakercorporationsthanbondsissuedbytheCommonwealthofAustraliabecauseCommonwealthbondsareconsideredtohavelittleriskofdefault.
However,evenbondsissuedbytheCommonwealthGovernmentarenotrisk-freeunlessheldtomaturity.Ifabondwastobesoldbeforethematuritydateitmightbeworthmoreorless,dependingonthemarketpriceatthetime.
Generally,ifyousellabondbeforeitsmaturitydateandtheinterestratehasfallen,thebondprovidesagreaterreturn.Conversely,ifyousellabondbeforeitsmaturitydateandtheinterestratehasrisen,thebondwillbeworthless.Thelongerthematurityofthebond,thegreaterthemovementinvalue.
Bondscanperformbetteratdifferenttimesoftheeconomiccycle,sotheycanhelpyoudiversifyyourportfolio.Bondsaregenerallyregardedasalower-riskassetclassinvestmentthansharesorproperty.
Therearemanydifferenttypesofbonds,includingasset-backedbonds,governmentbonds,inflation-linkedbondsandcorporatebonds.Buttypically,not-for-profitorganisationsrestrictinvestmentinbondstothosethatare‘investmentgrade’and above.
WhenconsideringinternationalbondfundsandAustralianbondfunds,thereisanadditionaldimensionofriskthatneedstobeconsidered.Asthereturnsfromaninternationalbondfundaretakenoutinforeigncurrencies,thereisanelementofexchangerateriskthatwillimpactonthereturnoninvestment.Therefore,ifthecurrencyofthecountryyoutookthebondoutfromfallsinvalueagainsttheAustraliandollar,youwillbevulnerabletofluctuatingvalueswhenconvertedbackintoAustraliandollars.
How do you know which bond to choose?Ifyoudecidetoinvestsomeorallofyourorganisation’sfundsinbonds,youwillneedtoresearchthetypeofbondsthatwillsuityourorganisation’sobjectives.
Someoftheworkhasbeendoneforyoubycreditratingagencies,suchasMoody’s,Standard&Poor’sandFitch.Theseagenciesoftenratethedifferenttypesofbondstoassistinvestorsindeterminingthecreditriskinvolved.Table 2showsthedifferentratingscategoriesasdeterminedbycreditratingagencies.
Choosing where to invest.
11
Table 2: Credit ratings for bonds
Description Moody’s Standard & Poor’s Fitch
Highest QualityAaa AAA AAA
Aa1 AA+ AA+
High Quality
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
Upper Medium Grade
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Medium GradeBaa2 BBB BBB
Baa3 BBB- BBB-
Speculative Grade
Ba1andbelow BB+andbelow BB+andbelow
Rating differences explainedTypically,thedifferenceinreturnsbetweenAAAandBBBratedbondshasbeen1%,withthelower-gradebondsyieldinghigherreturns,thoughthisnumberhaswidenedduringtimesofeconomicdownturn.Intermsofthepotentialrange,in1932theAmericanbondmarketsrecordedadifferenceof5.65%onaveragebetweenAAAandBBBratedbonds.ThelowestspreadonrecordinUSbondmarketsoccurredin1966,witha0.32%difference.
Australianbondshaveprovidedanaveragereturnof9.2%paandInternationalbondshavereturned9.6%paonaverageoverthe20yearsleadingtoDecember2010.
12
Property (Australian & International)
Moderate risk Moderate expected returnPropertyinvestmentsencompassawholerangeofsectors,includingresidential,commercial,retail,hotelsandindustrial.Theseinvestmentsincludebothlandandanyfacilitiesonit;forexample,officebuildings,shoppingcentres,hotelsandresorts,farmsandindustrialcomplexes.
Investorsareabletogainexposuretopropertythroughdirect property investments, unlisted property trusts,andlisted property trusts.
Buyingaresidentialorcommercialpropertytorentoutisawayofinvesting directlyinpropertyandearningaregularincome,thoughthiscanbecapitalintensiveandthereisariskthatyoumayhaveperiodswithoutatenant.
Inanunlisted property trust,aninvestorcanpurchaseunitsinatrustthatpurchasespropertiesonbehalfofinvestors.Thisusuallyallowsinvestorstogainexposuretoabroadrangeofinvestmentswithoutrestrictiveminimuminvestmentamounts.
AnAustralianlisted property trustisaninvestmentthatislistedontheAustralianStockExchangeandprovidesexposuretoaportfolioofdirectpropertyinvestments.Thesearemoreliquidthanunlistedpropertytrusts,butcanbemorevolatile.Intheshorttomediumterm,thevalueoflistedpropertytruststendstofluctuatewiththemovementinthesharemarket.
Bothtypesoftrusts(listedandunlisted)areabletoborrowmoneyaspartofthetruststructuretopurchaseproperties.Thedistributionsandreturnstoinvestorsaremadeafterborrowingcostshavebeendeducted.Atthesametime,certainborrowingcostsanddepreciationcanbeusedtoprovidetax-deferredincometoinvestorsandallowforinterestratedeductionstobeclaimed.Naturally,thelevelofdebtusedinthetrustaffectstheriskinessoftheinvestment.
Propertysecuritiesprimarilyearnincomefromrentandthecapitalappreciationofthelandandproperty.Thisisconsideredalong-terminvestment,withhigherriskthanfixedincomebutlowerthanshares.Theinvestmenttimeframeforpropertyistypically5+years.
Australianlistedpropertyhasprovidedanaveragereturnof9.8%p.a.forthe20yearsleadingtoJune2008.
Shares (Australian & International)
High risk High expected returnShares,alsoknownasequities,representapartownershipofacompany.YoucaninvestininternationalandAustralianshares.
Thereturnsavailablefromsharescomebywayofdividendsandcapital gains.
Dividendsarepaymentsmadebycompaniestotheirshareholders,andarenormallypaidtwiceayear.Remember,though,thatcompaniesactuallyhavenoobligationtopayadividend,andmayinsteaddecidetoreinvesttheirprofits.
Incertaincases,thesedividendshavefranking creditsattached,whichareeffectivelytheequivalentofataxrefundprovidedbytheAustralianTaxOffice(ATO)toshareholdersfortheincometaxanAustraliancompanyhasalreadypaid.Notalldividendshavefrankingcreditsattached.
Notethatmanynot-for-profitorganisationsareexemptfromincometaxsothefrankedcomponentofthedividendwillbefullyrefundable.
Choosing where to invest.
13
Table 3showsanexampleofthisfrankingcreditsystem,knownasdividend imputation.
Table 3: Taxation of dividends
Company pre-tax income $100
Corporate Taxes (30%) $30
After-tax income $70
Assuming 100% payout of profits
Dividends $70
Investor tax rate 0%
Franking credit (for corporate payment) $30
Tax due from Investor $0
Total after-tax income for investor $100
Capital gainsoccurwhenthepriceofashareorassetrisesabovethepurchaseprice.Thesharepriceisinfluencedbymanyfactors.Theseinclude,butarenotlimitedto,thingslikeexpectationsofthefutureprofitabilityofthecompany,theeconomicoutlook,investorsentiment(definedasthetendency for the market to move up or down over a set period of time),inflationratesandinterestrates.
Sharepricesconstantlyfluctuate–sometimessharply–andtheeconomywillhaveitsupsanddown.Overtime,however,theprofitabilityofAustraliancompanieshasincreased,withAustraliansharesreturning9.9%p.a.andinternationalsharesreturning6.5%p.a.onaverageforthe20yearsleadingtoDecember2010.
Sharesareconsideredagrowthassetandlong-terminvestment.Therecommendedinvestmenthorizonis7+yearsinordertobalanceouttherisksassociatedwithinvestingintheverydynamicsharemarket.
Table 4liststhehistoricalreturnsfromsharesfrombothdomesticandinternational markets.
Table 4: Average compounded returns
Country Return
Australia 9.9%
Canada 6.3%
Germany 7.0%
Japan -6.5%
Switzerland 6.6%
United Kingdom 4.6%
United States 6.6%
From 1990-2010
Understanding taxWhilstwehavetouchedlightlyonissuesregardingtaxandinvestmentfornot-for-profitorganisations,taxlawisoutsidethescopeofinformationcoveredinthisguide.Ifyouwishtofindoutmoreabouttaxandhowitimpactsonyourorganisation,visittheAustralianTaxOfficewebsiteathttp://www.ato.gov.au/nonprofit/
14
The choice is yoursWhichevertypeofinvestment,ormixofinvestments,youchoosetherewillalwaysbeyearswhereperformanceisgoodandotherswhereperformanceis poor.
Byselectingtherightmixofinvestments(andbymaintainingyourstrategyoveralongertimeframe)youcanminimisetheimpactoftheyearsofpoorerperformance.
Table 5revealsasnapshotoftheperformanceofeachdifferentassetclassoverthepast15years,indicatingwhichassetperformedbestineachindividualyear.Thesefiguresfurtheremphasisethebenefitofhavingagoodmixofassetclassesinanyinvestmentstrategyyoudecideupon.
Table 5: Short-term asset class performance
1-yearrollingreturnsto30June2009(%) Bestperformingassetclassfortheyear
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
Australian cash 5.48 6.99 6.21 5.80 5.56 5.11 4.91 4.77 6.36 5.24 5.09 5.41 7.14 7.89 6.21 5.08
Australian bonds 10.82 4.29 3.70 6.74 4.80 4.17 10.09 2.35 11.82 1.79 6.65 15.68 12.56 12.80 2.37 6.00
Australian property -42.27 -24.16 28.62 18.48 19.97 13.94 13.84 17.38 13.03 2.91 4.26 28.76 19.95 4.71 1.82 17.38
Australian shares -18.56 -7.21 22.03 30.22 25.40 23.83 -11.93 12.42 3.48 14.25 10.86 17.51 13.62 20.92 -2.33 23.13
International bonds 9.96 8.01 6.38 4.85 6.82 7.66 13.38 5.73 10.83 1.66 8.43 12.55 10.01 14.58 5.55 5.83
International shares -16.24 -14.56 1.47 27.96 8.80 13.74 -33.38 -12.67 -7.05 27.06 18.40 56.60 9.13 12.51 4.56 14.05
Source: UBS Bank Bill 0+ Years, S&P/ASX 200 Accumulation Index, MSCI World ex-Australia (net dividends) Standard in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Lehman Brothers Global Aggregate Hedged in AUD. You need to distinguish between operating and capital expenditure.
Choosing where to invest.
15
There are several key principles and risks that need to be considered before any investment strategy is undertaken. This section provides an outline of these to help you make the best decisions on behalf of your organisation.
Things to consider before you dive in.DiversificationDifferenttypesofinvestmentstendtofollowdifferenttrends,sohavingallyourassetsinoneclassexposesyoutogreaterfluctuationsinvalueasthemarketrisesandfalls.
Diversificationmeansspreadingyourriskacrossarangeofinvestmenttypes.Thisallowsyourorganisationtotakeonlessoverallriskthanifyouinvestedinoneinvestmenttypealone.
Inshort,adiversifiedinvestmentstrategywillhelpyoutomanageriskwithoutsacrificingreturns.
Buthowdoesitallwork?
Diversificationcanbewithinanassetclassand/oramongdifferentassetclasses.Forinstance,youcanbuysharesfromAustralianaswellasoverseascompanies,orfromdifferenttypesofcompanieswithinAustralia,oryoucouldinvestinavarietyofshares,aswellasproperty,bonds,andcash.
Anorganisationthatspreadsitsinvestmentfundsacrossanumberofdifferentinvestmenttypeswillhavelessriskofsufferingabigdropinthevalueoftheirinvestmentatonceasit’slesslikelythatallinvestmenttypeswillalldropatonce.
Asset allocationHistoryshowsusthatabout90%ofthereturnoninvestmentisdeterminedbyasset allocation–whereandhowyouchoosetosplitinvestmentamountsintodifferentinvestmentcategories(e.g.30%cash,70%Australianshares).However,assetallocationsareinturndeterminedbyyourorganisation’scomfortwithriskandyourdesireforprofit.Itfollowsthatyourriskandreturnobjectivesarewhatwilldeterminetheappropriateassetallocationforyourorganisation.
Asastartingpoint,Tables 6 and 7containsomesuggestionsofpossibleassetallocationweightingsbasedondifferentlevelsofrisk(conservative,balanced,growth).TheyhavebeentakenfromVanguardInvestments,FidelityInvestmentsandT.RowePrice,whichareleadinginvestmentfundcompanies.
16
Things to consider before you dive in.
Table 6: Asset allocation suggestions
Vanguard Cash / Short-Term Bonds Stocks
Conservative 40% 30% 30%
Balanced 20% 30% 50%
Growth 5% 25% 70%
High Growth 0% 10% 90%
Fidelity Cash / Short-Term Bonds Stocks
Short-Term 100% 0% 0%
Conservative 30% 50% 20%
Balanced 10% 40% 50%
Growth 5% 25% 70%
Aggressive Growth 0% 15% 85%
Most Aggressive 0% 0% 100%
Table 7: T. Rowe Price Matrix
Time Horizon
3-5Years 6-10Years 11+Years
Higher
20%cash
30%bonds
40%stocks
10%cash
30%bonds
60%stocks
100%stocks
Risk Tolerance
Moderate
30%cash
50%bonds
20%stocks
20%cash
40%bonds
40%stocks
20%bonds
80%stocks
Lower 100%cash
30%cash
50%bonds
20%stocks
10%cash
30%bonds
60%stocks
17
FeesFeeshaveanimportanteffectonyourultimateinvestmentreturn.Themoreyoupayinfees,thelessyourprofitwillbeattheendofyourinvestmentterm.However,youwillneedtoconsidertheaddedadviceandsupportthatafee-for-servicemodelcanprovideyou.
Therearemanytypesoffees,butsomeoftheminclude:
●● Entryorestablishmentfees–payablewhenyoufirstopenanaccount●● Contributionfee–payablewhenyoumakesubsequentinvestmentsintoyour account
●● Withdrawalfee–payablewhenyoumakewithdrawalsfromyouraccount●● Exitorterminationfee–payablewhenyouterminateyouraccount●● Ongoingfees–payableeachyearyouareinvestedinthefund;typicallycoversadministrationcostsofthefund
●● Switchingfees–payablewhenyouswitchyouraccounttoanotherfundwithinthesamefirm
●● Advisertrailingcommission–whenyourfinancialadviserrefersyoutoaninvestmentopportunity,theytypicallyarepaideitheranupfrontreferralfeeorongoingfee.
Mostinvestmentshavesomesortoffeeattachedtothem,andasyouwouldexpect, feesareoftenreflectiveoftheamountofworkrequiredbyanexternalinvestmentprovider.
Ofcourse,yourorganisationmightbecomfortabletakingmoreofanactiveroleinmanagingyourowninvestments,thuspotentiallyminimisingyourfees,butmostgroupswillchoosetopaysomeonewithmoreinvestmentexpertisetodothatforyou.Inanycase,youcanexpecttopaysomefeesforyourinvestments.Makesureyouhaveaclearpictureofallthefeesyourorganisationwillbeliabletopaybeforeyoumakeanycommitments.
Active vs passive investmentInvestmentfundsaredividedintotwocategories–actively managed fundsandpassively managed funds.Eachstylehasitsownadvantagesanddisadvantages.
Actively managed fundsdependontheskillanduniqueinsightsoftheinvestmentmanagerinachievingsuperiorratesofreturnoninvestment.Activeinvestmentshavethepotentialtoperformabovemarketbenchmarksandachievehigherratesofreturn,thoughthat’snotguaranteed–academicstudieshaveshownthatonthewhole,slightlyhalfofactivelymanagedfundshaveperformedbetterthantheoverallmarketwhenyouexcludefees.However,whenyouincludecommissioncosts,loadfees,andmanagementcosts,approximatelytwo-thirdsofactivelymanagedfundsunderperformedthemarket.
Passively managed funds,ontheotherhand,typicallyarelowcostandtracktheperformanceofanindex,e.g.theASX300.Passiveinvestingallowsinvestorstogainexposuretoanassetclasswithouttheneedtodecideonthequalityoftheinvestmentmanager.However,usingthisstrategywillmeanthereisnopotentialforgettinganybetterreturnsthanthemarketbenchmarks.
We’vealreadydiscussedhowfeesplayacrucialroleinyourultimateinvestmentreturn,soregardlessofyourchoice,youneedtomakesureyouarereceivingvalueformoneythroughthequalityoftheinvestmentmanageryouchoose,andthelevelofserviceyoureceiveinrelationtotheleveloffeestheycharge.
18
Ways to investDependingonthetypeofinvestment/syourorganisationprefersandtheamountoffundsyouhaveavailabletoinvest,thereareavarietyofoptionstochoosefrom.Togiveyouanoverallpicture,we’velistedtheseoptionsbelowandhaveprovidedashortdescriptionabouthoweachoneworks.
●● Direct investment–thisinvolvesdirectlypurchasingstocks,investingcashinasavingsaccount,orstoringfundsinatermdeposit.Topurchasestocksandotherpubliclylistedsecurities,youtypicallyopenatradingaccountwithabrokerorthroughoneoftheonlinebrokingservicesavailable.TheAustralianStockExchangewebsite(www.asx.com.au)providesalistofbrokersandthedifferentlevelsofservicetheyeachoffer.Savingaccountsandtermdepositaccountscanbeopenedatbanksandotherfinancialinstitutions.
●● Managed Funds or Index Funds–thesecanbefoundinfinancialpublicationsliketheAustralianFinancialRevieworratingserviceslikeMorningstar(www.morningstar.com.au).Eachfundtypicallyhasaminimuminvestmentamount,rangingfrom$5000upwards.
●● Master Trusts and Wrap Platforms–financialinstitutionsandmajormoneymanagerstypicallyhavealistofinvestmentsavailableonamastertrustorwrapplatform.Theseallowinvestorstodiversifyacrossmanydifferentassetclassesthattheymaynormallynothaveaccesstobecauseofavailabilityofminimuminvestmentthresholds.
●● Exchange Traded Funds–analternativetomanagedfundsareexchangetradedfundsorETFs.ThesearelistedontheAustralianStockExchangeandallowinvestorsaccesstointernationalsharesandcanreplicatetheperformanceoftheAustraliansharemarket.
●● Investment Manager–iftheamountofmoneyyourorganisationhastoinvestissufficientlylarge(typically$1million-plus),manylargemoneymanagersofferdedicatedinvestmentmanagerswhoprovideassetallocationadvice,portfolioconstructionservicesandinvestmentmanagementservices.
●● Financial Advisor–financialadvisorstypicallyhavealistofpreferredinvestmentoptionsavailablethattheycanprovidetoinvestors.TheAustralianSecurities&InvestmentsCommissionwebsite(www.asic.gov.au)listssomeusefultipsonlocatingafinancialadvisor.
Performance benchmarksWhenassessinginvestmentperformance,itiscommonpracticeforinvestorstobenchmarkthemselvesagainstanindex.Suchindexesactasausefulreferencepointtohelpyoudetermineifyourinvestmentstrategyisperformingwell.
Table 8listssomecommonlyusedbenchmarksforavarietyofinvestmentclasses.
Things to consider before you dive in.
1919
Table 8: Benchmarks
Asset Category Market Index Name
Australian Equity General S&P/ASX200Index
International Equity General MSCIWorldExAustraliaIndex
Australian Fixed Interest UBSWACompositeBondIndex
International Fixed Interest JPMorganGlobalBondIndex
Cash UBSWABankBillIndex
Listed PropertyS&P/ASX200PropertyTrustsAccumulationIndex
Direct Property MercerDirectPropertyIndex
Selecting an adviserManyinvestorsengageinvestmentadviserstocreateaninvestmentstrategy,toexecutethestrategyandforongoingsupport.
Ifyourorganisationchoosesthisroute,youshouldensurethatyouarecomfortablewiththeexperienceandjudgmentoftheadviserthatyouchoose.
Belowisalistofquestionsyoumaywishtoaskwhenscreeninganinvestment adviser:
●● How many years of financial experience do you have?Ideally,yourinvestmentadvisorshouldhaveaminimumoffiveyearsexperience.Themoreyourorganisationplanstoinvest,themoreexperienceyoushoulddemandofanadvisor.Asinanyfield,themoreexperienceanadvisorhas,thebettertheiradviceislikelytobe.
●● What is your educational background? Youradvisorshouldbetrainedappropriatelytoissuethefinancialproductsyou
require.Ensureyoucheckpotentialadvisors’credentialscarefullyinordertomakesureyouaregettingadviceyourorganisationcanrelyupon.
●● How are you compensated for your services? Therightanswertothisquestionisthroughanasset-based,fixed,orhourlyfee,
notcommissions.Youshouldnotselectadvisorswhoarecompensatedwithcommissionsunlessyouhavenoalternative.
●● Do you understand the not-for-profit sector? Whiletheknowledgeandprofessionalismofpotentialadvisersshouldbeyour
organisation’skeyconcern,it’shelpfulalsoiftheadviseryouchoosehassomeknowledgeofthenot-for-profitsector.Itcanhelptoshapetheiradviceiftheyhaveanunderstandingofthedifferentimperativesthatyourorganisation,asanot-for-profit,operatesunder.
20
Someadditionalquestionsyoumightwishtoaskofpotentialinvestmentadvisers:
●● Whatisyourinvestmentphilosophy?●● Howcanyouhelpusachieveourgoals?●● Howwillyoutrackandreportourprogress?●● Whatinvestingapproachdoyoubelieveismostsuccessful,andwhatevidencecanyoushowmethatyouhaveachievedthatkindofsuccessforyourclients?
●● Whatdoyoudowhenaninvestmentperformspoorlyforanentireyear?
Putting it all togetherUnderstandingthedifferentriskandreturncharacteristicsoftypesofinvestmentsandhowtheymightcombinetocreateabalancedinvestmentportfolioisacriticalfirststepforanyorganisationwithmoneytoinvest.
Dependingonyourobjectivesandcircumstances,anaggressive,moderate,orconservativeassetallocationmaybeappropriate.
Yourultimatechoiceofinvestmentshouldnotbesolelybasedonpastreturnsastheyarenotaguaranteedindicatoroffuturereturns.However,pastreturnsareagoodtooltohelpyouunderstandhowaparticulartypeofinvestmentcanworkandwhattoexpectwithpricemovementsandreturns.
Whenmakingyourinvestmentchoices,thereareanumberofconsiderationsyouneedtotakeintoaccount,including:
●● Investmenttimehorizon;●● Desiredlevelofreturns;and●● Acceptablelevelsofrisk.
Diversificationisakeyinvestmentconcept.Itisprudenttohaveseveraldifferenttypesofinvestments(orasset classes)inyourorganisation’sportfoliosothatyouspreadyourrisk.
Asuitablyqualifiedfinancialplannerorinvestmentadvisercanhelpyoutoselectarangeofinvestmentswhichwillsuityourorganisationbest.
Finally,youshouldalsoconsultyouraccountantabouttaximpactsonyourinvestmentstrategy.Ultimately,havingyourfinancialadviser,youraccountantandyourbankerworkingtogethertocreatethebestinvestmentoptionsforyourorganisationisaverygoodoutcome.
Things to consider before you dive in.
“Individualdecisionscanbebadlythoughtthrough,andyetbesuccessful,orexceedinglywellthoughtthrough,butbeunsuccessful,becausetherecognisedpossibilityoffailureinfactoccurs.Butovertime,morethoughtfuldecision-makingwillleadtobetteroverallresults,andmorethoughtfuldecision-makingcanbeencouragedbyevaluatingdecisionsonhowwelltheyweremaderatherthanonoutcome.”
Robert Rubin, former US Secretary of Treasury.
21
In an uncertain world, good process more often than not leads to good outcomes, though this is by no means guaranteed – the best laid plans can go awry. When it comes to investments, each organisation must determine its own preference for risk and returns.
Investment sub-committees.Anynot-for-profitconsideringinvestingmoneyshouldfirstestablishaframeworktoguideitsreviewoftheoptionsanddecision-makingprocesses.Youneedtobesurethatyouhaveclearlyarticulatedpoliciesandstrategiesthatarespecifictoyourorganisation’sownuniqueneedsandcircumstances.
ExamplesofinvestmentplanningpoliciesareprovidedattheendofthisGuide,butyoushouldusethisasastartingpointonly.Yourorganisation’spolicyshouldofcoursebetailoredtoyourorganisation’sowncircumstances.
UltimateresponsibilityforinvestmentsrestswiththeBoard.However,whenthesizeofyourorganisation,orthesizeofyourinvestments,reachacertainlevel,itisadvisabletoestablishaninvestmentsub-committeetoadvisetheBoard.Alternatively,someorganisationsincorporatethefunctionsofaninvestmentsub-committeeintothefinanceandriskmanagementsub-committee.
ResponsibilitiesWhetheraformalinvestmentsub-committeeexistsoranalternativestructureisused(orindeediftheBoardretainsthesefunctions),theareasofresponsibilityremainthesame.Broadly,theseinclude:
●● Establishtheinvestmentobjectives,constraintsandguidelinesthatreflectthefinancialgoalsoftheorganisation.
●● RecommendaninvestmentpolicyforapprovalbytheBoard.●● Determinetherequirement,selectionandusageofexternalinvestmentprofessionalstoguideandadviseonstrategy.
●● FormulateanappropriateassetallocationstrategywiththeBoard.●● Implementinvestmentstrategiesconsistentwithinvestmentpolicyandassetallocationstrategy.
●● Conductreviewsandmonitorinvestmentresultsagainstappropriatelyestablished benchmarks.
●● Approveanyandallsignificantinvestmentactions.●● Monitorcashbalancesforconsistencywithinvestmentstrategyandliquidity needs.
Investment Policy StatementAnInvestmentPolicyStatement(IPS)isacrucialdocumentformulatedbytheinvestmentsub-committeethatbridgestheunderstandingbetweenwhatisapprovedbytheBoardandhowtheinvestmentmanagerexecutesthestrategy.Thisiscoveredinmoredepthinthenextsection,andsamplestatementshavebeenincludedinthelastsectionofthisGuide.
External advisers, consultants and managersDependingontheskillsetoftheinvestmentsub-committee,itmaybeprudenttoengageanexternalinvestmentconsultant,assetallocatororfinancialadviser/plannerwhocanassistwiththefollowingfunctions:
●● Helpingtodetermineorganisationallevelofriskanddesiredoutcome.●● Developmentandreviewofinvestmentpolicies.●● Reportingoninvestmentperformance.●● AdvisingonassetallocationtoachieveobjectivesoftheIPS.●● MakingrecommendationsontheselectionofinvestmentmanagerstoimplementtheIPS.
●● RecommendingpotentialinvestmentsthatachievetheIPS’objectives.
22
Whetheraninvestmentmanagerisappointedinternallyoranexternalprofessionalisengagedbytheinvestmentsub-committee,theresponsibilitiesinclude:
●● Purchasing,selling,andholdingsecuritiesinlinewiththeIPSguidelines.●● Regularinvestmentperformancereporting.●● Communicatingwiththeinvestmentsub-committeeonchangesthatmayimpactachievingtheIPS’objectives.
●● ComplyingwiththeIPS.●● Reportinganychangesinpersonnelorstylethatmayimpactfutureperformance.●● RebalancingtheportfoliotocomplywithassetallocationguidelinesstipulatedintheIPS.
Whendecidingonaninvestmentmanager(whetherinternalorexternal;individualorafirm),thereareafewkeycriteriatoconsider.Theseinclude:
●● Minimumtrackrecordofperformance(suggestedtimeframeof5+years).Themanager’sperformancewillneedtobecomparedwithanappropriatebenchmark,aftertakingintoconsiderationthestrategies,risks,andassetclassesinvolved.
●● Competitivenessoffees.●● AdherencetotheInvestmentPolicyStatement.●● Investmentmanagerprofileandtheirtenureattheinvestmentmanagementfirm.●● Historyofassetsundermanagement.●● Yourorganisation’srapportwiththemanager.●● Investmentstyleofthemanager.●● Ethicalandpublicrelationsconsiderations–doestheindividual/firmhavetheright reputation?
Review and monitoring proceduresAninvestmentsub-committeetypicallymeetsquarterlytodiscusschangesandcarryoutitsduties,butmaymeetmoreorlessfrequentlydependingonthecomplexityofthetasksinvolved.
Certaineventsthatwouldtriggerareviewmayinclude:
●● Significantchangesincashflow–e.g.donations,disbursementsorcapital investments.
●● Changesinperformanceoftheportfolio.●● Changesinliquidityrequirementsandcashreserves.●● ChangesinspendingpoliciesassetdownbytheBoard.
AreviewoftheIPSshouldbeconductedannually.
Whenassessinginvestmentperformance,thesub-committeeshouldcomparetheresultswithanappropriatebenchmarkandcompliancewithIPSguidelines.
Thefeesandexpensesyourorganisationispayingshouldalsobereviewedatleastannuallytoensurecompetitivenessandvalueformoney.
TerminationTherearecertaintimeswhentheinvestmentsub-committeemayconsiderterminatinganinvestmentmanagerorliquidating(selling)aninvestment.Thesemay include:
●● Consistenttrendofunderperformancerelativetoappropriatebenchmarksandpeergroups(suggestedtimeframeforassessmentis3-5years).
●● ViolationsofIPSguidelines.
Investment sub-committees.
23
●● Lossofkeypersonnelorchangeinownershipstructure.●● Significantchangeinassetsundermanagementovera12-monthperiod.●● Changeinyourorganisation’sinvestmentstrategyorstyle.
Ofcourse,theseareonlyguidelinesandcanbeusedtoinformyourownorganisation’sdecision-makingprocess.
Sub-committee membersTheoptimumsizeofaninvestmentsub-committee,presumingthesizeofyourinvestmentwarrantssuchasub-committee,istypicallyconsideredtobethree.The essentialcriteriaforallmembersincludeaninterestintherole,businessacumen,andastrongaffinitywithandcommitmenttothevaluesandmissionofyour organisation.
Potentialcandidatesshouldalsopossess:
●● Knowledgeabouttheorganisation’sprograms,financialrequirementsandlong-termobjectives.
●● Communicationanddecision-makingskills.●● Goodjudgment.●● Integrity.●● Priorfinancialmanagement,investment,and/orplanningexperience.
Areastopotentiallysourcecandidatesinclude:
●● Trustedadvisers.●● Benefactorswithafinancialbackground.●● Largedonors.●● Professionalassociations.●● InternalstaffandBoardmemberswiththeappropriateskills,apassionfortheorganisation’sobjectivesandaninterestintherole.
“Unlessavarietyofopinionsarelaidbeforeus,wehavenoopportunityofselection,butareboundofnecessitytoadopttheparticularviewwhichmayhavebeenbroughtforward.”
Herodotus, 5th Century BC, Greek historian
24
The Investment Policy Statement (IPS) is a roadmap that guides the investment process. It details an organisation’s investment objectives, risk tolerance and constraints. Without identifying these factors, it is difficult to determine whether a particular investment or strategy is suitable or not.
WhilstanIPSdoesnotguaranteeinvestmentsuccess,itdoesprovidedisciplinearoundtheinvestmentprocessandreducesthepossibilityofmakinghastyandinappropriatedecisions.ItalsohelpstoensurethatyourinvestmentmanagerdoesnotmoveyourorganisationoutsidetheparameterscarefullysetbytheBoard.
Dependingonthecomplexitiesandsizeofyourinvestmentprogram,yourIPScanbesimpleordetailed.Table 9outlinesthesectionswhichshouldbeincluded,andyouwillfindafurtherdescriptionofeachinthesectionbelow.AdditionalhelpmaybefoundbyusingthesampledocumentsincludedattheendofthisGuide.
Table 9: Section of IPS
Purpose of the Investment Policy Statement
Investment objectives
Asset allocation
Investment diversification
Constraints
Ethical investment
Implementation
Performance benchmarks
Purpose of the Investment Policy StatementTheopeningsectionofyourIPS,thePurpose,shouldarticulateyourorganisation’sendgoalforyourinvestmentstrategy.Thisendgoalcouldincludeoneoranumberofthings,e.g.:
●● Tocreateaconsistentstreamofcashflowtofundfutureprograms.●● Toenhanceshort-termincomegeneratedbysurplusfunds.●● Tomaximisereturnswhilstminimisingrisk.
Investment objectivesTheInvestmentobjectivesoutlineyourorganisation’sreturnexpectations–whatleveloffinancialreturnyouhopetoreceiveforyourinvestment–andtargets.Indetermininganappropriatetargetrateofreturn,theorganisation’stimehorizonandrisktolerancewillneedtobeconsidered.
Asset allocationTheAssetallocationdecisionisanimportantone.Itisthisdecision,andnottheselectionofspecificstocks,bonds,properties,etc.,thatwillmostlikelydeterminetheperformanceofyourinvestmentportfolioovertime.
InthissectionofyourIPS,minimumandmaximumassetallocationpercentagesinbonds,stocks,cash,andpropertycanbestated.
Investment Policy Statements.
25
Investment diversificationDiversificationisoneofthekeystoreducingrisk.ThissectionofyourIPSshouldoutlineyourorganisation’sdiversificationaims(e.g.“In no case shall more than 15 per cent of the total portfolio be invested in shares in of any one particular company”).Yourstatementmayspecifydiversificationaimsbothamongassetclassesandwithin.
ConstraintsManyoftheconstraintstoinvestingmaybeuniquetoyoursector,organisationorindustry.Theycanbeintheformofliquidityrequirements(howquicklyyouneedtobeabletoturnyourinvestmentsintocash),legalandregulatoryissuesparticulartoyourtypeoforganisation,timehorizons(howlongyoucanaffordtokeepyourmoneytiedup),andtheindividualneedsandpreferencesofyourorganisationanditsstakeholders–funders,donors,clientsandsupporters.
Liquidityisdeterminedbythelevelofcashneededbytheorganisationtosupportday-to-dayoperationsandactasabuffertoabsorbunforeseenexpenses.
Fromalegal and regulatoryperspective,theremaybespecificinvestmentsthatyourorganisationisprohibitedfromconsidering.
Yourtime horizonforinvestmentswilldependonyourinvestmentstrategyandwhenyouexpectmajorexpensestooccur.
Finally,yourorganisationmayhaveunique needs and preferencesthatleadyoutoacertaininvestmentstyle.Forexample,manynot-for-profitorganisationssupportsociallyresponsibleinvesting.Thismeansthattheorganisationisprohibitedfrominvestingincertainindustries(e.g.tobacco,weaponmanufacturersetc.).Thenextsectiondealswiththisissueinfurtherdetail.
Ethical investmentNot-for-profitorganisationshaveaparticularresponsibilitytothecommunity,aswellastotheirstakeholders(funders,donors,clientsandsupporters).Youneedtoensurethatthemoneyyougenerateasincomeisputtouseinawaythatwillprovidethebestpossible“valueformoney”,orsocialreturn.
Thiswillnotonlyimpactonyourorganisation’sdecisionsonwhenandhowtoinvest,butonthetypesofthingsyouinvestin.Firstly,youneedtoensurethatyourmoneyisinvestedresponsibly,anddoesnotsupportbusinessesdoingworkthatraisesethicalconcerns:acancerresearchfundwouldprobablybeill-advisedtobuysharesinacigarettecompany,forexample.Youmayalsowishtouseyourorganisation’sinvestmenttogeneratepositivecommunityimpacts.
Therearethreestrategiestokeepinmindwhenoutliningwithwhomandinwhatyourorganisationwillinvest:
1. Positive screening
Thisstrategyinvolvesreviewingcompaniesinwhichyouinvesttoensuretheyarebusinesseswhichsellpositiveproducts(e.g.energycompaniessellingsolarpanels),oraredemonstratingbest-in-industryapproachestodesign,manufacture,productionanddistributionofgoodsorservices.Youmayalsowanttoinvestthematically.Forexample,ifyouareanenvironmentalgroup(orevenifyou’renot),youmaywanttoinvestincompanieswithalowcarbonfootprint.
2. Negative Screening
Thereverseofpositivescreening,negativescreeningoravoidancestrategiesseeorganisationsreviewingcompaniestheywouldinvestwithtoensuretheydonotbreachpredeterminedsocial,environmentalorethical standards.
26
3. Engagement
Investinginacompanymaygiveyouthepower,asastakeholder,tocampaignfordifferentbusinesspracticeswithinthatcompany.Asashareholder,yourorganisationwillbeabletoattendannualshareholdermeetings,andmayholdmoreswayinundertakingactivecommunication withthecompany’sleadershipteamtocampaignforchange.
Onewayofassessingtheappropriatenessofacertainbusinessistolookattheircorporateresponsibilitypractices.ManyAustralianandinternationalbanksarelistedonratingsandawardsschemeswhichrecogniseethicalorsustainablebusinesspractices,includingbutnotlimitedtoEthisphere’sMostEthicalCompaniesList,theGlobal100MostSustainableCompaniesList,MoneyMagazine’sClimateLeadershipAwards,theDowJonesSustainabilityIndex,theFTSE4GoodIndex,andtheAustralianSustainabilityAwardsforCorporateGovernance,andtheStJamesEthicCentre’sCorporateResponsibilityIndex.
Anotheroptionistoinvestyourorganisation’smoneyinasociallyresponsibleorethicalinvestmentfundthatwillscreenthecompaniesforyou.
It’sagoodideafornot-for-profitstoincludeasectiononEthical InvestmentintheirIPS,takingintoaccountyourorganisation’sattitudetothefactorsdescribedabove.
ImplementationThissectionofyourIPSshouldhelpyouandyourorganisationgoaboutpursuingitsinvestmentstrategy.Thisincludesdeterminingwhetheraninvestmentmanageroradvisorwillbeused,howoftentheIPSwillbereviewed,andhowoftentheinvestmentmanager’sperformancewillbeassessed.
Performance benchmarksAnappropriateperformancebenchmarkshouldbeestablishedtohelpassesshowwelleachofyourinvestmentsareworkingoutovertime.Thiscanthenformthebasisofyourinvestmentreviewprocedure.
Investment Policy Statements.
Case Study: Ethical InvestmentThe Trawalla FoundationTheTrawallaFoundationisaMelbourne-basedfamilyfoundation thatinvestsinsocialenterprisesandotheropportunitiesfocusingonthearts,ideas,innovationandscholarship.
TheFoundationhassetdownamediumrisklevelforitsinvestmentstrategy,withaportfoliocomprising cash,property,Australian andinternationalequitiesanddirectinvestments.
BothnegativeandpositivescreeningstrategieshavebeenappliedtotheFoundation’sinvestments:
•Positivescreen:
–Representationofwomenontheboard,asperASXrequirementsfrom1July2010
•Generalnegativescreens:tobacco,armaments,alcohol,gambling,animaltesting.Specifically(butnotlimitedto):
–CrownCasino
–Tabcorp
–Woolworths
•Furtherconsiderations:
–Ethicalandsustainablelivingpractices,e.g.strategyseekstoavoidfactoryfarminginitiatives
27
IntroductionTheBoardofPQRisresponsibleforensuringthattheorganisationoperateswithinaresponsible,sustainablefinancialframeworkandthattheorganisationhasadequateresourcestocarryoutitswork.PQR’sInvestmentPlanformsanimportantpartoffulfillingthisresponsibility.
PurposeThispolicyisdesignedto:
●● DirecttheuseofinvestmentfundsofPQR;and●● DeterminePQR’sfuturefinancialplanningstrategiestoensuretheorganisationisabletomaintainitsoperatingbudgetandcreategrowth.
PolicyTheBoardofPQRisresponsibleformaintainingandextendingtheassetsoftheorganisation,toprovideforitslong-termfinancialviability.InitsstewardshipofPQR’sfinancialassets,theBoardhasadoptedthepolicytoensurethatanyassetsnotrequiredforthecurrentoperatingbudgetwillbeinvestedinaccordancewithPQR’sInvestmentPlan.
ThepurposeofPQR’sInvestmentPlanistomanagethecashassetsnotrequiredforcurrentoperatingexpensessoastomaximisetheearningsofsuchassets,whileretainingsecurityandminimisingrisks.AllinterestandotherearningsfromsuchinvestmentsaredepositedintoPQR’soperatingaccountandthusbecomepartoftheannualoperatingbudget.
TheInvestmentPlanisdesignedtoensurethat:
●● PQR’sfundsareutilisedtoachieveabalancedoperatingbudget.●● PQRcreatescapitalgrowthandgeneratesincome.●● Therewillbeaccesstocashtocovercurrentliabilities.●● PQRwillhaveaccesstocashforestablishingnewprojects.●● PQRwillhaveaccesstocashforunforeseenexpenses.
Responsibility TheCEOandFinanceManager/Treasurer,inconsultationwiththeInvestmentSub-committee,areresponsibleforrecommendinganInvestmentPlanportfolioforconsiderationbytheBoardinthecontextoftheannualBusinessPlan.
Sample Investment Policy Statements. Small organisation: PQR Inc.This example is drawn from Our Community’s online Policy Bank (www.ourcommunity.com.au/policybank). It may be best suited for a small organisation and may be compared and used in the development of your own organisational policies and statements. Identifiers have been altered.
28
Guidelines●● CapitalfundsthatPQRaccumulateswillbeinvestedininterest-bearingassetsandtheinterestgeneratedbytheseinvestmentswillbeusedtomeettheoperatingcostsoftheorganisation.
●● Unexpendedannualbudgetfundsattheendofafinancialyeararetobeallocatedfortheglobaluseoftheorganisation.
●● PrioritiessetintheBusinessPlanaretobeadheredto.●● TheprogressofinvestmentfundsistobeconsideredattheendofthefinancialyearintheannualreviewoftheInvestmentPlan.
●● Investmentsaretobemadewithlowtomediumriskventures;thatis,investmentsthatprovideforsecurityofcapitaloverthemediumtolongterm.
●● PQRwillonlyinvestwithreputable,established,provenfinancialinstitutions.●● 100percentofanyshareportfoliowillbeinvestedwithethicalinvestments.
Procedure●● TheInvestmentSub-committeewillinvestigateinvestmentoptionsandmakerecommendationstotheBoard,intheformofanInvestmentPlan,aspartoftheannualBusinessPlan.
●● PQRwillretainanindependentinvestmentconsultanttoprovideadviceaboutinvestmentopportunitiesandmaintainaportfolioofinvestments.
●● PQR’sExecutiveDirectorandFinanceManager/TreasurerwillmeetannuallywiththeinvestmentconsultanttodiscusstheperformanceoftheinvestmentportfolioandreporttotheFinanceCommittee,whichwillinturnreporttotheBoard.
●● TheFinanceManager/Treasurerwillreceiveinformationaboutandkeeptrackoftheprogressofallinvestments,andreportontheprogressoftheinvestmentsasrequiredtotheExecutiveDirector,InvestmentSub-committee,andtheBoard.
●● TheInvestmentPlanwillbereviewedevery12monthsaspartofthestrategicplanningfortheBusinessPlan.
Small organisation: PQR Inc.
29
IntroductionVariety,theChildren’sCharityiscommittedtoasustainable,responsiblefinancialframeworkandmaintainingadequateresourcestocarryoutVariety’scorepurposeofhelpingAustralianchildren.Thisstatementofinvestmentreflectstheinvestmentpolicyobjectivesandconstraints.
PurposeThepurposeofthispolicyisto:
●● Defineandassignresponsibilitiesofallinvolvedparties.●● Establishaclearunderstandingforallinvolvedpartiesoftheinvestmentgoalsand objectives.
●● Offerguidanceandlimitations.●● Establishabasisforevaluationofresults.●● ManageassetsaccordingtoprudentstandardsandwithinVariety’sconstitutionandapplicablelaws.
●● Establishrelevantinvestmenthorizons.
Ingeneral,thepurposeofthispolicyistoprovideaframeworkofinvestmentstrategy.Itisintendedtobeflexibleenoughtobepractical.
Principle aim of investmentsWithinagreedriskparameters,theprincipleaimofVariety’sinvestmentstoismaximiseincomeandpreservecapitalforthecorepurposeofhelpingAustralianchildrenwhoaresick,disadvantagedorhavespecialneeds.
General investment principles●● InvestmentswillbemadesolelyintheinterestsofVariety,theChildren’sCharity.●● Investmentswillbemadewithcare,skillanddiligence.●● Cashistobeemployedproductivelyatalltimesbyinvestmentinshort-termdepositstoprovidesafety,liquidityandreturn.
●● Prioritiesinthebusinessplanareadheredto.●● Investmentswillbeethical.
Investment management policy●● RiskAversion–Thefinancecommitteerecognisesthatsomeriskispresentinalltypesofinvestmentsanditisnecessarytoproducelong-terminvestmentresults.Thecommitteeandanyinvestmentmanagerwillmakeallreasonableeffortstocontrolriskandremainwithintheinvestmentstyleandobjectivesbrief.
●● PreservationofCapital–Thefinancecommitteewillmakeeveryefforttoinvestinastyleandproductsthatpreservecapital.
●● Liquidity–Varietyrequirestheabilitytodepositandwithdrawfundsonacontinuousbasis.Thecommitteewillseektomaximisereturnsonshort-terminvestmentswhilemaintainingliquidity.
●● InvestmentDiscipline–Thecommitteewilladheretotheinvestmentpolicyatall times.
●● Long-TermInvestment–Whenpossible,thecommitteewillseektomaximisereturnsthroughmediumandlong-terminvestments.Thefinancecommitteewilldeterminetheamount,eitherasapercentageoffundsavailableorafixedamount.
This example may be best suited for a medium-sized organisation and may be compared and used in the development of your own organisational policies and statements.
Medium Organisation: Variety, the Children’s Charity.
30
Investment objectivesForVarietytomeetitscorepurposeofhelpingchildrenwhoaresick,disadvantagedorhavespecialneeds,theinvestmentobjectivewillemphasisamixofcapitalgrowthandincome.
Investment committeeThefinancecommitteewillprovideoversightfortheinvestmentofanyavailablefunds,establishingtheparametersoutlinedinthispolicyforthetimingofinvestments,theamounttobeallocatedandthenatureoftheinvestment.
Timelines●● Short-termfundswillbedefinedasthoserequiredforoperationswithinareserveperiodofsixmonths.
●● Medium-termfundswillbedefinedasthoserequiredforoperationsbetween6and12months.
●● Long-termfundswillbedefinedasthoserequiredforoperationsbeyond12 months.
Variety’sproceduresrequiregrantstobefundedinatimelymanner.Duediligenceandbudgetingmustapplytoestablishingalong-terminvestmenttopreventanydelayindeliveryofVariety’scorepurpose.
Tax legislationVarietyisregisteredcharitywithincometaxexemption.Assuch,incomefrominvestmentsdonotattractincometaxandallformsofinvestmentshouldbeevaluatedonthegrossreturnwherenoincometaxispayable.
Investmentsinshareswherefrankeddividendsarepaidshouldbeevaluatedgrossofthefrankeddividend,asthefrankedamountwillberefundedtoVariety.
Guidelines for investment classesPermittedassetclassesare:
●● CashandCashequivalents.●● Property.
Permittedinvestmenttypesare:
●● DepositswithanybankregisteredundertheCommonwealthBankingActof1959.●● DepositswithofficialdealersintheshorttermmoneymarketinAustralia.●● Donatedorcapitalraisingproperty.
Potentialinvestmentoptions:
●● Australianfixedinterest,limitedtoS&P/ASX100listedcompaniesanddeposit-takinginstitutionswithintheS&P/ASX200index.
●● Interestinamanagedinvestmentscheme.
Prohibitedassetclassesandinvestmenttypes
●● Futurescontracts.●● Putandcalloptions.●● Warrants.
Review and benchmarkingThefinancecommitteewillreviewandbenchmarktheperformanceofinvestmentsbycomparingresultstocommercialbills.
Medium organisation: Variety, the Children’s Charity.
31
This example may be best suited for a large organisation and may be compared and used in the development of your own organisational policies and statements. Identifiers have been altered.
IntroductionTheGoodFoundationprovidesgrantstocommunityorganisationsacrossAustralia.
TheFoundationhasseveralmilliondollarsundermanagement(thecorpus),theincomefromwhichfundsitsgrantsprogram.
Asset allocationTheFoundationhasappointedadedicatedinvestmentmanager,whooverseesastrategicassetallocationcomprisingamixtureof:
●● Cash.●● Fixedinterest.●● Listedproperty.●● Australianshares.●● Internationalshares.
AnInvestmentCommittee,whichmeetsandreportstotheBoardquarterly,setsthedirectionandoverseestheinvestmentmanager’swork.
Investment policy aimsAllofthisisanchoredbyapolicywhichcomprisesthreekeyaims:
1. Topreservethecorpus;
2. Tomaximiseincome;and
3. ToachievegrowthabovetheConsumerPriceIndex.
GuidelinesTheBoardacknowledgesthatpreservingthecorpus,maximisingincomeandachievinggrowtharelinkedbutalsomutuallyexclusive;thusabalancedapproachis required.
AmongtheotherguidelinessetfortheGoodFoundation’sinvestmentstrategyare that:
●● TheFoundationhassomeriskappetite.TheBoardwilltoleratesomevolatility.●● UltimatelytheBoardwouldliketopreservethecorpus,howeveritwillallowsomeofthecorpustobeusedifextremecircumstances(e.g.theglobalfinancialcrisis)meanthatgrantmakingisnototherwisepossible.
●● Theinvestmentmanagermaymovetheassetallocationby10%.Anygreatermovementthan10%canonlybedoneinconsultationwiththeBoard.
Review and benchmarkingFundperformanceisreportedonquarterlyandmeasuredagainstablendedbenchmarkreflectingtheassetallocationacrossvariousassetclasses.
Large organisation: The Good Foundation.
32
Asset Allocation Howmoneyinvestedisdistributedamongvarioustypesofinvestments,suchasstocks,bondsand cash.
Asset Classes Categoriesofassetsthatarefundamentallydifferentinstructure.Examplesofdifferentclassesofassetsincludestocks,bonds,cashandproperty.
Capital Gains Acapitalgainisaprofitthatresultsfrominvestmentsintoacapitalasset,suchasstocks,bondsorproperty,whichexceedsthepurchaseprice.
Compound Interest Interestthatiscalculatedbothontheprincipalsuminvestmentandtheaccruedinterest.
Diversification Spreadingyourinvestmentsoverarangeofassetclasses,oroverarangeofinvestmentswithineachassetclass,tominimisethepossiblerisksassociatedwitheachtypeofinvestment.
Dividends Paymentsmadebycompaniestoshareholders,traditionallymadetwiceayear,whicharepartoftheprofitmadebythatcompany.
Dividend Imputation Acorporatetaxsystem,inwhichsome,orall,ofthetaxpaidbyacompanymaybeattributedtotheshareholdersbywayofataxcredit.
Equities Anotherwordforsharesorstocks.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.
Franking Credit Incometaxcreditsthatacorporationmaychoosetopassontoshareholdersasarepaymentfortax paid.
Investment Policy Statement
Adocumentoutliningtheinvestmentpoliciesofanyorganisation.
Investor Sentiment Thetendencyforthemarkettomoveupordownoverasetperiodoftime.
Liquidity Howreadilyyourinvestmentcanbeturnedintocashwithoutcompromisingthevalueoftheinvestment.
Listed Property Trust Agroupofinvestorspoolingfundstoinvestdirectlyorindirectlyinpropertywhichislistedonthestock exchange.
Managed Funds Managedfundsrelyontheexpertiseofthemutualfundmanagertoresearchandselectthestocksorbondsthatmakeupthefund’sportfolio.
pa Perannum,peryear.
Portfolio Acollectionofinvestmentsallownedbythesameindividualororganisation.
Return Thepercentagechangeinvalueoftheinvestmentoveragivenperiodoftime,includingbothcapitalappreciationanddividendsorincome.
Risk Thetendencyfortheactualinvestmentreturntodifferfromtheexpectedinvestmentreturn.
Shares Anotherwordforequitiesorstocks.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.
Glossary.
33
Stocks Anotherwordforequities.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.
Unlisted Property Trust
Agroupofinvestorspoolingfundstoinvestdirectlyorindirectlyinpropertywhichisnotlistedonthestockexchange.
Volatility Measureofinstabilityinreturnoninvestment.
34
Westpac Social Sector Banking has developed a unique suite of products specifically for not-for-profit and community organisations. We also have a dedicated team of not-for-profit specialist bankers who can ensure that Westpac and your organisation create the most beneficial banking partnership for your needs.
Everyday Community Banking Solutions for not-for-profit organisations.
Day to day banking solutions EverydaybankingsolutionsincludingtheCommunitySolutionsAccountwithnomonthlyservicefeeandinterestcalculateddaily,plusahostofproductsandservicesthatcanhelpyoumakethesmartestchoicestogetthemostoutofyournot-for-profitstatus.
Managing your cash Managingcashflowiscrucialtorunningyourorganisationsmoothly.Whetheritistheconvenienceofreconcilingyourcostsonlineorthepotentialtomaximiseyourearnings,wehavesolutionstohelpyougetontopofyourearnings.
Investment solutions Makethemostofyourcashreserveswithoursecureinvestmentsolutions.Theyofferhighinterest,similartoatermdepositwiththeaddedflexibilityofaday-to-dayaccountsoyoucanmaximiseyourorganisation’sresources.
Helping your organisation grow and expand Arangeoflendingsolutionswillhelpyoutogrowtoincreaseyourlocalimpact.Themoresuccessfulyourorganisationis,themorethecommunitybenefits–so,ifyouneedthefinancetogrowyourpurpose,wehavemanyoptionsavailabletosupportyourgrowthortransition.
Beyond banking Easyswitchingserviceaswellasfinancialplanningandadvicetosimplifyandpersonaliseyourorganisation’swealthstrategies.
Financial literacy and advice WestpacofferscommunityorganisationsfinancialliteracyhelpandadviceforTreasurersandBoardmembersofcommunityorganisations.
Throughworkwithcommunityorganisationsofallsizes–fromlocalsportsclubstoschoolsandnationalagedcarefacilities–we’velearnedthatthedemandsandopportunitiesofthissectorareenormouslydiverse.Strongbankingiskeybutweneedtooffermorethanthat.Afterall,youwanttomaximisetheimpactofeverydollarthatyourorganisationreceives,ensuringthatasmuchfundingaspossiblebenefitsyourcause.
Formoreinformationvisitwww.westpac.com.au/socialsectorbanking
35
Notes.
36
Notes.
Things you should know: Some of this information is provided by a third party. While such material is published with necessary permission, Westpac accepts no responsibility for its accuracy or completeness. This Guide contains general advice only and is current at the date of publication. Persons should seek their own professional advice whenever making investment decisions.
© 2011 Westpac Banking Corporation ABN 33 007 457 141. CBI200 (05/11) 227772