The Electrical Industries Charity is benevolent charity managed by Trustees, whose purpose is to provide people in the electrical industries a hand-up in their time of need.
The financial objective of the Charity is to grow real value of the investment portfolio whilst generating a stable and sustainable return; to fund a shortfall of income and to ensure grant giving remains at 25% or higher of total income. The inflation measure most relevant to the Charity’s expenditure is the Retail Price Index.
The Charity has approximately £5m in a balanced investment portfolio with Investment Managers, UBS.
The Charity aims to distribute grants of between £400k and £500k per annum but this can vary from year to year depending on the number of financial grant applications and investment returns. The operating expenditure has remained relatively consistent over the last 3 years.
The Trustees of the Charity have delegated decision making on investment matters to the Finance Working Group (Committee) and appointed an Independent Investment Advisor to work with the Committee in undertaking quarterly reviews and biannual reviews with our investment manager.
The Charity relies on the investment return to fund shortfall in income.
Financial grants have largely been operating at 20% to 27% of income for the last 10 years. The Charity approach to risk is to place risk where it is best placed to be managed, therefore the appointment of the Independent Financial Advisor and retaining UBS to manage our investment with a clear mandate to obtain returns of 5% net per annum.
The Trustees’ are able to tolerate volatility of the capital value of the Charity, as long as the Charity is able to meet its commitments through either income or liquid capital assets.
Kubera Wealth have provided cashflow models showing the inclusion of leverage within the portfolio to increase the potential return without increasing the volatility of assets within the portfolio.
In brief, UBS will provide a loan facility secured against the investment portfolio at a rate of 1.8% over 3 month LIBOR * (circa 0.5%) and these funds will be invested to provide income and capital growth.
The portfolio managers will alter the style of the portfolio to ensure cover is in place for interest payments.
Here is an example of how it works:
£5,000,000 Original Portfolio at 5% growth = £250,000
£2,500,000 cash from loan at 5% growth = £125,000
£2,500,000 loan at 2.3% interest = £57,500
Net profit from leverage = £317,500 which is an increased net growth of 6.35% over the original 5%.
The invested assets can be invested widely and should be diversified by asset class, by manager and by security. Asset classes could include cash, bonds, equities, property, hedge funds, structured products, private equity, commodities and any other asset that is deemed suitable for the Charity.
The Finance Working Group supported by the Charity’s Independent Investment Advisor will have a role of reviewing UBS (the Investment Manager) portfolio but will not direct investment decision. Kubera are charged with agreeing a suitable asset allocation strategy with UBS, which is set so as to achieve the overall investment objective. Annually the Finance Working Group will advise UBS of cash-flow needs.
Additionally Kubera Wealth are to review the performance of UBS against both their own panelled peer group and also against industry benchmarks.
The Charity aims to distribute financial grants of between £400 to £500k per annum. This can be funded from both income and the investment.
The trustees wish to keep at least 25% of the assets in investments that can be realised within three months. To allow for volatility of capital values, the Trustees wish to maintain at least 1 years’ worth of budgeted grant making in liquid investments. A minimum of 4% of the total investment portfolio should be kept in cash or near cash investments at all times.
* London interbank offered rate, the basic rate of interest used in lending between banks on the London interbank market and also used as a reference for setting the interest rate on other loans.