How To Create And Grow A Future Fund

Scrutiny around how Not for Profits manage their finances is here for the long term says Nicole McCormack the Manager of Wholesale Investments and Not for Profits at the Commonwealth Bank.

Your future fund can protect you against impacts you don’t know about yet. Political agendas and governments come and go, grant funding is not forever, and interest rates and markets rise and fall. All these short-term changes are risks to funding,but you need to provide a long-term service to the communities you support.

Get started
Few would argue that it’s not a priority to create a future fund. The obvious question is ‘where do we find the money to get started’?

Believe me when I say that is not the difficult part. The reality is that it can take as little as a dollar to get started. A future fund can be started with a bequest if your organisation is lucky enough to receive them.

Much trickier, and much more important, are the challenges of earning the freedom to allocate your funds according to your strategic priorities, and being able to move quickly to lock in surpluses and avoid losses.

Lock in surplus and avoid losses
During the GFC many Not for Profits took a hit from inappropriate investments such as Collateral Debt Obligations (CDOs), where they purchased a pool of bonds, loans and other debt assets which lost their value as the market plummeted. To make matters worse, organisations were slow to restructure their investments because they didn’t have a clear responsibility matrix for making and reviewing investment decisions, which lead to even greater losses.

When it comes to being nimble in the face of market changes a robust investment policy is critical. I often meet Finance Managers who are limited in the investment decisions they can make without board approval. Time is of the essence – if the Board meets quarterly and investment markets are moving daily, you won’t be able to act quickly enough to protect your investments in the event of any short-term changes.

A good investment policy should cover the processes that need to be in place to protect your
investment base. If markets drop what are your hold and exit points? If markets rise, when do you decide to lock in profits? What does this mean in relation to your benchmarks?

With a detailed Investment Policy endorsed by the Board, you can remove approval limits that
restrict your organisation’s ability to make the quick decisions that protect your financial position.

Do your homework
But developing a robust investment policy isn’t as simple as assessing the credit rating of your
investments. It’s not uncommon to see Not for Profits specify that they only invest in ‘blue chip
shares’ or ‘blue chip investments’. That sounds very sensible, but consider this: of the ASX top 100 stocks in 1990 only 31 per cent remained in the index by the end of 2000.

A more relevant process for identifying appropriate stocks is to run an analysis of the company’s balance sheet, including parameters such as their Debt to Equity or Interest Rate coverage. Just because a company sits in the top 100 by market capitalisation doesn’t mean that it is a sound investment.

Ask yourself the right questions
With all of this in mind, here are some questions to ask yourself about your Investment Policy:

• Is your Investment Policy aligned to your strategic plan?
• Who is responsible for making the final investment decisions inside your organisation?
• Who is there to support and advise you on your investments outside your organisation?
• What is your organisation’s appetite for risk?
• Can you analyse the investment characteristics of an investment to assess whether it is appropriate to your requirements?
• On a regular basis what events, both internally and externally, will trigger a review of your investments and what is your investment review process?

Nicole McCormack is the Manager of Wholesale Investments and Not for Profits at the
Commonwealth Bank and can be contacted on nicole.mccormack@cba.com.au or 02 9118 7007.