Charities, A Briefing For Charitable Organisations, Spring 2010 - The Landscape Of Tomorrow

INVESTMENT OUTLOOK

The traumatic conditions of 2008 and early 2009 were followed by a welcome and dramatic rally. As a result, a pause for breath at the start of 2010 was not unexpected. This was seen in January but markets have rebounded again during March. Investors are now asking whether we are heading for greater volatility in a downward direction or whether last year's recovery is the start of a growth phase?

There is no doubt that there are more negatives than positives. Over the long term, equity prices should be driven by fundamentals – economic and corporate trends which ultimately determine shareholder returns. Clearly the coming UK general election and the debate over how to tackle the national deficits does not bode well in this respect for 2010, and probably for longer. Less fundamental, but equally important over the short term are issues such as investor confidence or attitude to risk, and cash flows – both domestically and from overseas investors. Behind all of this however, charity trustees will always need to ask themselves what do they need from their investments? This can of course change over time, but we sense that after the fall out in 2008 and volatility in 2009, some kind of stability would be welcome even if returns are boring.

Will 2010 be boring? Probably not, but hopefully one investment area will provide some stability – income. Many charities suffered sharp falls in investment income in 2008/2009 on top of declines in revenues from other sources. Much of this was due to the collapse in the banking sector, but it is difficult for income from this area to get much worse. Other companies have struggled, but if investment is biased towards better quality companies, then again the worst may now be over and investors are more confident to 'draw the line'. For investors looking for some degree of certainty, this should offer comfort.

While this is based on the reasonable assumption that company balance sheets are stronger, any further dramatic economic collapse may force further declines, albeit this is more likely to be at the end of 2010 or 2011. A significant factor will be currency fluctuation. With around 60% of the FTSE 100 profits coming from overseas sources, this has a potential impact on both profits and importantly, dividend payments. On balance, we expect Sterling to depreciate further against the US$, the most important of the overseas currencies and this should help boost dividends in 2010. However, it is a brave man who bets on currency movements and a prudent approach is probably wise.

The other main investment asset class which investors traditionally favour for income is fixed interest bonds. Although historically popular, both for the security of capital and the income that they provide, government bonds are now less attractive and the security is clearly under scrutiny, as has been recently highlighted by events in Greece. Higher income can be generated outside the government bond sector, but the risk profile will also rise.

Is the investment outlook a challenge? Perhaps not surprisingly the answer is usually always yes, but investors need to assess what their requirements are. If they can accept what could well be another year of volatility in capital values but with the prospect of more settled income streams, then perhaps 2010 has attraction. The alternative of leaving cash on deposit in the bank remains unappealing.

FOR THE PUBLIC BENEFIT?

In July last year, the Charity Commission published its public benefit assessment reports on 12 charities. It failed 4 of the charities, 3 of them on public benefit grounds. This sparked further controversy in the ongoing public benefit debate.

Some of the press coverage continues to imply that the Charities Act 2006 (the Act) made radical changes in charity law, introducing a new legal definition of charity and 'tough' requirements for charities to 'prove' that they 'provide' public benefit. This seems to be based on the commission's public benefit guidance.

The Act required the Charity Commission to issue guidance to promote awareness and understanding of the operation of the public benefit requirement. This is a statutorily defined term referring to the requirement that, to be a charitable purpose, a purpose must be 'for the public benefit'. In other words, a simple restatement of the law.

The only change that the Act made to the law of public benefit is that it is 'not to be presumed' that a particular purpose is 'for the public benefit'. This, arguably, affects charities established for the relief of poverty, or advancement of religion or education, which historically had the...