This article suggests things to consider for smaller not-for-profits when setting up an investment mandate and three popular bond choices.
A custodian who invests funds on behalf of others, or for their benefit, is in an extraordinarily trusted position. They are expected to invest wisely and are accountable to a wide group for their actions.
Councils, church and religious groups, schools, universities, charities and social clubs are examples of groups that at various times can hold very large sums of cash and, like individual investors, their aim is to maximise returns while minimising risk. Above all, these investors want to preserve capital. A poor investment decision and subsequent losses could end up on the front page of the newspaper and goodwill from members or next year’s donations vanish into thin air.
In 2010, the Productivity Commission estimated there were about 600,000 not-for-profit organisations in Australia. Currently there are also around 23,000 charities which the ATO describes as “deductible gift recipients”, most of which are also not-for-profits.
Many of these institutions have significant allocations to bonds which ideally suit their objectives. Bonds have known interest payment dates and a maturity date when investors can expect capital will be repaid. Bonds can pay a fixed or floating rate of interest or can be inflation linked. They can range from very low risk such as Commonwealth and state government bonds right through the credit risk investment spectrum. Practically all bonds issued in the Australian market are rated “investment grade” and are very low risk.
The larger and more financially astute not-for-profit organisations will invest in bonds according to their investment mandates which provide a guide as to what they can invest in. For example a mandate might require a minimum Standard and Poor’s credit rating of BBB or even higher in the “A” range.
Smaller, less financially literate organisations without a mandate can draft their own set of guidelines which might include: the investment portfolio objectives including target returns; approved investments or asset classes; access to income and redemption of investments, reporting and review requirements as well as ethical and social criteria.
Savings held in authorised deposit taking institutions that qualify for the government guarantee will provide absolute peace of mind. However, there is a lost opportunity to earn greater returns from slightly higher risk investments that could provide more funds for the not-for-profit cause.
Three “A” range credit rated securities that might be appropriate for not-for profits are:
- National Wealth Management, a subsidiary of National Australia Bank, a fixed rate bond with an expected maturity date of June 2016. The bond has a yield to expected maturity of 4.30 per cent and income for the next year of 6.48 per cent.
- Insurance Australia Limited, a subsidiary of IAG, floating rate bond with an expected maturity date of March 2019 with a yield to expected maturity of 4.92 per cent and projected income of 5.30 per cent.
- Swiss Re, a large Swiss Reinsurer, fixed rate security with an expected maturity date of May 2017 with a yield to expected maturity of 4.81 per cent and a high income of 7.12 per cent.
The National Wealth and Insurance Australia Limited bonds are available from $50,000 and the Swiss Re from $100,000. Learning about and understanding all of the low risk options available to not-for-profits will help you invest with confidence and maximise returns.