Managing a Charitable Foundation's Investment Portfolio

A charitable foundation with significant endowed assets is both a philanthropic vehicle and an investment challenge. The trustees must ensure that the portfolio grows to support the charity's long-term purposes, generates sufficient income for grant-making, and is managed consistently with the charity's ethical obligations — all while fulfilling their legal duties as trustees under UK charity law.

This guide addresses the framework for investing a UK charitable foundation's assets, the key decisions trustees must make, and the options available for investment management.

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The Legal Framework

The Charities Act 2011 (as amended) governs the investment powers of UK charities. Under Section 3 of the Trustee Act 2000 (which applies to charitable trusts), trustees have a general power of investment — they can invest in any asset class, provided they have regard to the standard investment criteria.

The standard investment criteria require trustees to:

• Invest for the purpose of the charity, with a view to maximising return (unless the charity's own purposes make that inappropriate).
• Diversify the investments appropriately.
• Take appropriate professional advice.
• Review the investments periodically.

The Charity Commission's investment guidance (Investing charity money: guidance for trustees, CC14, refreshed in 2023) elaborates on these duties and should be read by all trustees who oversee investment decisions.

The Trustee Act 2000 duties: trustees must:

• Act in good faith and in the best interests of the charity's present and future beneficiaries.
• Exercise the care and skill that is reasonable in the circumstances.
• Obtain and consider proper investment advice (unless it is unnecessary to do so, which is almost never the case for a significant endowment).
• Review investments at regular intervals.

Delegation: trustees may delegate investment management to a professional investment manager, provided they give that manager a written statement of policy (an Investment Policy Statement, or IPS) and review the delegation and the manager's performance regularly. Delegation does not remove the trustees' ultimate responsibility.

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The Investment Policy Statement (IPS)

Before engaging an investment manager, trustees should draft an IPS. This document governs how the charity's assets are to be managed and typically covers:

• Investment objectives: the primary purpose (capital preservation, capital growth, income generation, or a combination). For example: "The charity seeks to grow the endowment in real terms (above inflation) over a ten-year rolling period, while distributing 4% of assets annually for grant-making."
• Risk appetite: the trustees' tolerance for short-term volatility and the maximum acceptable drawdown.
• Ethical and ESG policy: which activities or sectors the charity will not invest in; any positive screening requirements.
• Asset class constraints: minimum and maximum allocations to equities, bonds, alternatives, cash, property.
• Liquidity requirements: the need to meet grant payments, operational expenses, and any other known cash outflows.
• Currency: whether overseas investments are permitted and whether hedging is required.
• Reporting requirements: what the investment manager must report, and how frequently.
• Review frequency: how often trustees will review the portfolio and the mandate.

A well-drafted IPS is the foundation of a sound investment programme. It also protects trustees from allegations of mismanagement by demonstrating that investment decisions were made within an agreed framework.

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ESG Investing and Ethical Screening for Charities

UK charities have specific ethical obligations that affect investment decisions. The law distinguishes between:

Mandatory avoidance: if a charity's investment in a particular activity would directly conflict with its charitable purposes — or would alienate donors or beneficiaries so significantly as to harm the charity — the trustees must avoid it. A cancer research charity that invests in tobacco companies has a clear conflict. A refugee support organisation that invests in arms manufacturers may face a similar challenge.

Permissible avoidance: trustees may also choose to exclude investments that do not directly conflict with the charity's purposes but are considered ethically inappropriate by its stakeholders. For example, a community development charity may exclude gambling companies, fossil fuel companies, or businesses with poor labour practices.

Mission-related investing: the Law Commission's 2014 report confirmed that trustees may make "programme-related investments" — investments made primarily to further the charity's purposes rather than to maximise financial return. A housing charity might invest in affordable housing developments at below-market rates, if this directly advances its purposes. This is a form of impact investing within the charity framework.

The tension: more restrictive ethical screens generally narrow the investment universe, potentially reducing expected returns. Trustees must balance their ethical duties with their duty to invest for the benefit of beneficiaries (who depend on the charity's grant-making). The Charity Commission's guidance recognises this tension and does not require trustees to sacrifice returns for ethical purity — but it requires them to make a considered, documented decision.

In practice: most specialist charity investment managers offer a range of ethical approaches, from basic exclusion screening to full ESG integration and impact reporting. The charity should define its approach clearly in the IPS.

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The Total Return Approach

Historically, many charity investment portfolios were structured to generate only income (dividends and interest), with the principle that capital was not to be spent. This approach created a significant distortion: charities were pressured to invest in high-yielding assets (bonds, income equity) even where lower-yielding growth assets offered better long-term returns.

The Charities (Total Return) Regulations 2013 (in force from 1 January 2014), made under the Charities Act 2011, allow endowed charities (those where the original capital cannot be spent) to adopt a total return approach — spending from both investment income and capital gains, treating the total return as available for distribution.

Under the total return approach, the trustee:

• Determines an annual "spending rate" (commonly 4–5% of assets on a smoothed average value).
• Invests without constraint on income vs growth — choosing the best-return portfolio regardless of yield.
• Transfers from capital to income account each year to support grant-making, using the approved spending rate.

This gives the charity genuine investment freedom. A total return mandate can hold more equities, more alternatives, and more growth assets — typically improving long-term performance over an income-constrained mandate.

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The Spending Policy

The spending rate — the proportion of assets distributed annually for grant-making — is one of the most important decisions a charitable foundation's trustees make.

The trade-off: a higher spending rate supports more grant-making now but depletes the endowment faster, potentially reducing future grant-making capacity. A lower spending rate builds the endowment but defers the benefit to future beneficiaries.

Sustainable spending rate: the spending rate is sustainable over the long term if it does not exceed the portfolio's expected real return (return after inflation). For a diversified portfolio targeting 5–6% nominal return with 3% inflation, a spending rate of 2–3% is genuinely sustainable; 5% may be sustainable if investment returns are good but risks gradual endowment erosion.

Smoothing mechanisms: most large foundations use a smoothed average of the portfolio's value (e.g. a three-year rolling average of year-end values) to calculate the distribution rather than the year-end value in any given year. This prevents the charity from being forced to cut grants dramatically in a year when markets fall.

The 5% benchmark: many foundations target approximately 5% distribution, reflecting a balance between current impact and long-term endowment preservation. The exact rate should be set in the IPS, reviewed periodically, and reconsidered in light of investment returns achieved.

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Choosing an Investment Manager

Most charitable foundations outsource investment management to a specialist. The key options are:

Specialist charity investment managers: firms such as Sarasin & Partners, CCLA Investment Management, Cazenove Capital Charities, and Rathbones Charities have dedicated charity teams, specific expertise in Charities Act compliance, ethical screening capability, and trustee reporting designed for charity governance. They are the natural first port of call for foundations of £1 million or more.

Pooled funds: smaller charities (endowments of £100,000–£500,000) may invest in charity-specific pooled funds (unit trusts structured for charities) rather than engaging a separate investment manager. CCLA's COIF Charities funds and Sarasin's charity funds are widely used. Pooled funds provide diversification and professional management at a lower cost.

Multi-family office: a charity that is closely linked to a family's wealth planning may use the family's multi-family office for investment management, potentially saving on fees and improving integration of the family's overall financial picture.

Direct portfolio management by trustees: for very small foundations, this may be unavoidable, but it significantly increases trustee responsibility and the risk of liability for imprudent investment. Seeking at least an annual review from an independent investment adviser is strongly recommended.

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Fees

Typical charity investment management fees:

Endowment Size	Annual Investment Management Fee
£100,000–£500,000	0.5–0.8% (pooled)
£500,000–£2 million	0.5–0.7% (segregated)
£2 million–£10 million	0.4–0.6%
£10 million+	0.25–0.4% (negotiated)

Underlying fund costs within a segregated portfolio are additional. Custody fees, transaction costs, and reporting costs may also apply. Trustees must understand the total cost of ownership (OCF equivalent) and assess whether the charge is justified by the investment outcomes and the specialist charity service.

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The Grant-Making Cycle and Investment Alignment

The foundation's investment strategy should be aligned with its grant-making cycle:

• Short-term grants (next 12 months): fund with cash or near-cash; do not invest grant commitments already made.
• Medium-term grants (1–5 years): appropriate to hold in lower-volatility assets.
• Endowment (long-term): the full investment portfolio, managed for total return.

Some foundations operate an annual grant round, with grants awarded in the autumn and paid in the following spring. Planning cash flow against the investment portfolio ensures grant commitments can always be met without forced sales at an inopportune time.

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Reporting, Governance, and the Annual Accounts

UK charities in England and Wales with annual income above £5,000 must generally register with the Charity Commission, and those with income above £25,000 must file annual accounts and an annual return. A statutory audit is required where gross income exceeds £1 million (this threshold is due to rise to £1.5 million for accounting periods ending on or after 30 September 2026); smaller charities may instead have an independent examination. The accounts must include:

• Statement of Financial Activities (SOFA).
• Balance Sheet.
• Notes including the investment policy, investment return, and major investment holdings.

Trustees should receive quarterly investment reports from their investment manager, showing performance against benchmark, asset allocation, a list of holdings, and any ESG incidents or exclusions relevant to the portfolio.

This guide provides general information for UK charitable foundation trustees. Charity law is complex and changes over time. Trustees should seek legal advice from a charity law solicitor and investment advice from an FCA-authorised adviser with charity expertise. The Charity Commission's guidance is available at gov.uk/government/organisations/charity-commission.

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How Global Investments can help

Global Investments advises the founders and trustees of charitable foundations on investment strategy, IPS drafting, investment manager selection, and the integration of charitable giving within the family's broader financial plan. Our independent status means we can assess investment managers objectively and recommend structures that serve the charity's purposes rather than our own commercial interests. Speak with our team if you are establishing a foundation, reviewing its investment arrangements, or considering how philanthropy fits into your estate plan.