Investment Policy

Previous Review: January 2024
Current Review: January 2025
Next Review: January 2026

1. Purpose

The purpose of this document is to define the investment objectives, investment guidelines and the review and monitoring framework for the Endowment Fund of the Charity.

This Investment Policy Statement represents the formal document for the Herefordshire Community Foundation Endowment Fund and complies with the requirements of the Community First programme, Trustee Act 2000, Charity Investment Principles and SORP 2005.

Appropriate extracts of this policy are to be provided to the appointed Investment Manager(s) as the principal framework for developing an appropriate investment strategy and must be adopted by each manager within their respective Investment Manager Agreement(s).

2. Investment Strategy

2.1 Overview

The Trustees of the Herefordshire Community Foundation (HCF) are responsible for the investment of the Endowment Funds and for establishing appropriate policies and practices. All investments shall be made solely in the interest of the Endowment Funds.

The Endowment Funds shall be managed with the objective of creating a total return of 4% of the average annual value of the Funds over the preceding three years or the average six-monthly value if the lifetime of the funds is less than three years. This target will be increased annually in line with inflation.

2.2 Financial Objectives

The financial objectives of the investment fund are:

To provide an inflation proofed 4.0% of the capital value of the Fund as at 31 March each year to be spent on local grant making in the next following twelve months. For example, if the capital value of the Fund is £300,000 as at 31 March 2024, this will provide £12,000 of grant funding between 1 April 2024 and 31 March 2025.
Donations received during the course of a year will pay out a proportion of the return representing the period remaining to the following 31 March after allowing three months for the investment to be completed. For example, a £100,000 donation received at the end of September 2024 will generate £1,000 towards grant making prior to 31 March 2025 being a quarter of 4.0% (three months).
To increase the level of income taken each year by the rate of increase in the Consumer Price Index, which may be calculated on an annual average basis if the rate of increase is unusually excessive. This will be reviewed on an annual basis at the April Investment Committee meeting.

Total Return

Total return will consist of the natural yield of the Endowment Fund and a proportion of the capital growth.

2.3 Risk profile

The longer-term objective of maintaining the real value of the income generated cannot be achieved without a significant exposure to equity-based investments. Although this offers the optimum opportunity for medium to long term capital appreciation, the capital value of equity-based investments can vary significantly both up and down over the short term.

However, the early years of the establishment of an endowment fund are critical to the longer-term achievement of the overall objectives, and high levels of volatility can be devastating.

The risk profile will be reviewed on an annual basis to establish whether a higher or lower risk approach should be adopted as being more appropriate to the longer- term objectives of the Endowment Fund.

2.4 Asset allocation

Notwithstanding the objective of achieving an on-going level of total return per annum, it has been agreed that a conservative asset allocation policy shall be followed. Ideally, the return achieved will increase each year by a level equivalent to that of the Consumer Price Index.

2.4.1 Tactical asset allocation

The long-term requirements are to be met by the strategic asset allocation. However, on-going changes in the economic environment will favour different asset classes at different times.

Therefore, in order to maximise the potential growth resulting from changes in the local economic environmental situation (and minimise any potential fall in value) the actual percentage held in any asset class should be adjusted either higher (overweight) or lower (underweight) relative to the long-term strategic asset allocation. The amount by which the holding can vary around the long-term strategic asset allocation is determined by the ‘tactical range’.

The tactical position will be determined at the half yearly reviews and will be adjusted to best take advantage of the opportunities presented by the prevailing economic conditions (section 4).

2.5 Environmental, social and governance analysis

2.5.1 Overview

The Trustees have determined that the Endowment Fund’s Investment Policy Statement should have full regard to the achievement of environmental, social and governance objectives and should contain certain ethical exclusions for the following reasons.

To ensure that no investments made are contrary to the stated purpose and objectives of the Endowment Fund.
To reduce the potential danger of stakeholder alienation and damage to the revenue base that could result from negative public relations in connection with the Endowment Fund investments.

As it is essential that the financial returns achieved by the investments are optimised, a pragmatic and practical approach has been adopted.

The Trustees have considered the implications of the socially responsible criteria on investment performance and volatility and are satisfied that there should be no material adverse impact from adoption of this approach.

Since May 2021 the Endowment Fund has been invested in the COIF Ethical Investment Fund.

2.5.2 Socially Responsible Investment Strategy

Wherever possible and appropriate, the appointed investment managers should give due consideration to the principles contained within the Third Sector Declaration on Climate Change and regard a company’s adherence to this declaration as a positive criteria in the selection process for potential investments.

Corporate responsibility voting policy

All shareholder voting is to be actively used and conducted in line with corporate governance best practice and shall be for the exclusive benefit of the Endowment Fund.

Social responsibility voting policy

All shareholder voting is to be actively used and conducted in line with the socially responsible guidelines and principles described in this Policy.

3. Investment Guidelines

3.1 Overview

3.1.1 Appointment of external managers

The Trustees may, at their discretion and in accordance with the powers available to them arising from the Trustee Act 2000, appoint regulated investment managers to manage all or a portion of the investments of the Endowment Fund. Investment managers shall be selected from appropriate UK financial organisations that have the required level of authorisation with the Financial Services Authority.

The selection process will involve a disciplined approach that will be fully documented for the Charity’s records.

3.1.2 Diversification

All assets should be properly diversified to reduce the potential of a single security or single sector of securities having a disproportionate or significant impact on the portfolio.

3.1.3 Performance standards

Investment guidelines and performance standards are required to determine whether or not the objectives are being met. They also provide an objective basis for evaluating how well investment managers perform, both individually and collectively. The performance standards are described in Section 4 – ‘Review and Monitoring’.

3.2 Fixed interest investments

3.2.1 Acceptable investments

Bond securities shall mean government securities and appropriately liquid investment grade corporate bonds or asset backed securities.

3.2.2 Yield

The running yield of the fixed interest portfolio is to be retained until instructed otherwise by the Trustees.

3.2.3 Quality

The fixed interest portfolio is to consist of a minimum of 70% investment grade securities.

3.2.4 Diversification

Except for AAA rated government and supranational securities, the bond portfolio shall contain no more than 10% exposure to any one issuer valued at market.

3.2.5 Environmental, social and governance analysis

Investments are to be made in accordance with the guidelines outlined in section 2.6. Any potential problems or issues arising from these guidelines are to be brought to the attention of the Charity for consideration.

3.2.6 Cash reserves

Although the portfolio is expected to be fully invested, and that cash reserves will be limited to 5% of the portfolio, it is acknowledged that within funds, such as a multi asset fund, it might be prudent to hold cash of up to 10% for tactical reasons and to maintain investment flexibility. Cash shall mean short term instruments of maturities less than ninety-two days and carrying a credit rating of at least A1 by S&P or P1 by Moody’s. Pooled funds for cash reserves meeting the above requirements are permitted.

3.2.7 Prohibited investments and activities

Options writing or purchasing
Purchasing securities on margin
Purchasing or selling futures or commodity contracts
Short sales
Derivative securities

3.3 Property investments

3.3.1 Acceptable investments

Property investments shall mean holdings in collective investment schemes with diversified property portfolios.

3.3.2 Yield

The natural yield of the property portfolio is to be retained until instructed otherwise by the Trustees.

3.3.3 Quality

There are no qualitative guidelines suggested with regard to ratings, rankings, etc except that prudent standards should be developed and maintained by the manager.

3.3.4 Diversification

No more than 10% of the property portfolio should be invested in any one property, valued at market

3.3.5 Environmental, social and governance analysis

As far as possible investments are to be made in accordance with the guidelines outlined in section 2.6. The justification for any deviation from the guidelines is to be reviewed at the quarterly review meetings.

3.4 UK and Overseas equity investments

3.4.1 Acceptable investments

Equity securities shall mean the common stocks of corporations registered on recognised stock exchanges.

Authorised Collective Investment Schemes may be purchased to gain suitable diversification.

3.4.2 Yield

The natural yield of the equity portfolio is to be retained until instructed otherwise by the Trustees.

3.4.3 Quality

There are no qualitative guidelines suggested with regard to equity ratings, rankings, etc except that prudent standards should be developed and maintained by the manager.

3.4.4 Diversification

No more than 10% of the equity portfolio should be invested in any one company, valued at market, excluding collective investments.

3.4.5 Environmental, social and governance analysis

3.4.6 Cash reserves

Although the portfolio is expected to be fully invested, the following guidelines apply to all cash reserves. Cash reserves will be limited to cash equivalent instruments of maturities less than one year and carrying a credit rating of at least A1 by S&P or P1 by Moody’s. Pooled funds for cash reserves meeting the above requirements are permitted.

4. Review and Monitoring

4.1 Overview

The Trustees understand that a robust and thorough review and monitoring process is essential to the successful operation of the Endowment Fund for the following reasons:

It provides confidence in potential donors that their donation will be managed in an appropriate manner.
Additional growth, and hence enhanced levels of grant making, can be obtained by regular review of the tactical asset allocation split with appropriate adjustments to take advantage of the prevailing economic conditions.
The phased increase in the equity exposure required by the long-term strategic asset allocation can be customised to the progress and specific requirements of the Fund.
Any potential issues which might affect the achievement of the objectives of the Endowment can be identified at an early stage and appropriate corrective action taken in a timely manner. This could include: Funding levels – Income Levels – Overall investment performance – Individual investor manager performance

However, the level of monitoring must be at a practical level and not overly onerous to the Community Foundation. The process is therefore at three levels: quarterly – half-yearly – annual reviews

4.1.1 Quarterly

Quarterly updates of the value and investment performance of the Fund are to be circulated to the investment committee. Unless the contents of the updates raise issues that require further attention, meetings are not envisaged on these occasions.

4.1.2 Half yearly

Meetings of a quorum of the investment committee will be held half yearly in April and October, following receipt of the respective quarterly update. The overall investment performance and tactical asset allocation will be reviewed and adjusted as required.

4.1.3 Annual reviews

A full review of the strategic and tactical asset allocation of the Fund will be carried out in April each year, in conjunction with a review of the specific income and capital growth requirements.

4.2 Investment Policy Statement review

Each year the Trustees will review this Investment Policy Statement to determine its continued applicability. If, however, the liquidity needs of the Endowment Fund or the risk/return expectations of the Trustees change at any time, these guidelines and objectives will be reassessed and restated in writing for agreement by all parties.

4.3 Endowment performance review

4.3.1 Process

In conjunction with the investment manager performance reviews in April and October, the Trustees will assess the overall performance of the Endowment Fund against the Endowment Benchmark and general expectations. This will include a review of the tactical asset allocation of the Fund and implementation of any changes deemed necessary in light of the prevailing economic conditions.

If the Endowment Benchmark has not been achieved, the areas of underperformance are to be established. Appropriate corrective actions are to be taken, including:

Investment manager review
Benchmark review
Financial objective review

4.3.2 Endowment Benchmark

The Endowment Benchmark reflects the overall financial objectives of the Endowment Fund which are:

For the value of the capital (and hence the income) to increase by at least the value of the Consumer Price Index.

The Endowment Benchmark is therefore a total return benchmark of 4% + CPI.

The benchmark will be assessed over three year rolling time periods.

4.4 Investment Manager performance review

4.4.1 Process

Quarterly reports

Quarterly reports are to be provided for the periods ending 31^st March, 30^th June, 30^th September and 31^st December containing the following information:

A schedule of all holdings together with their values.
A schedule of all transactions carried out since the preceding report.
A summary of the asset allocation of the Fund.
Past performance of the investments and appropriate benchmarks over the preceding 3, 6, 12, 24 and 36 months.

Half yearly reviews

In the month following 31^st March and 30^th September each year, the investment manager performance will be assessed against the appropriate benchmark as described in section 4.4.2.

If the performance has not met the benchmarks at the half yearly review, the investment manager will be asked to explain the underperformance and confirm what actions have been taken to rectify the situation.

If the performance has not met the benchmarks at two consecutive half yearly reviews, in addition to a full explanation, the investment manager will be put on notice that further underperformance could result in a proportion of the funds being moved to an alternative investment manager.

If the performance has not met the benchmarks at three consecutive half yearly reviews, 25% of the relevant portfolio could be moved to an alternative investment manager.

If the performance has not met the benchmarks at four consecutive half yearly reviews, the remainder of the portfolio could be moved to an alternative investment manager.

Annual reviews

At least once each calendar year the investment manager will provide the Trustees with the additional following information:

The investment manager’s expectations for performance over the following twelve months with the practical implications for the Endowment Fund’s investments, including any recommendations to take advantage of any opportunities.
A full breakdown of all costs borne by the Fund over the previous year, including full disclosure of any ‘soft commission’ in compliance with the Myner’s recommendations.
A report of any material changes in policy, objectives, staffing or business conditions of the investment management firm.

At least annually, the investment manager should be prepared to attend a meeting with the Trustees to discuss the performance of the assets under management.