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Page 1: Guide to Investing Money for Community Organisations. · Investing idle funds can be a fantastic way to maximise cash flow. Investment, ... can earn from interest income is a dollar

Financial Literacy for Community Groups

Proudly supported by:

Guide to Investing Money for Community Organisations.

Page 2: Guide to Investing Money for Community Organisations. · Investing idle funds can be a fantastic way to maximise cash flow. Investment, ... can earn from interest income is a dollar
Page 3: Guide to Investing Money for Community Organisations. · Investing idle funds can be a fantastic way to maximise cash flow. Investment, ... can earn from interest income is a dollar

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Contents.Contents. 1

The Guide for Community series. 2

Introduction: Making every cent count. 3

A note on terms. 4

Understanding the basics. 5

Whatisinvesting&whyisitrelevantfornot-for-profitorganisations? 5

Whyinvest? 6

Choosing where to invest. 8

Whatareassetclasses? 8

Cash 9

Bonds(Australian&InternationalFixedIncome) 10

Property(Australian&International) 12

Shares(Australian&International) 12

Thechoiceisyours 14

Things to consider before you dive in. 15

Diversification 15

Assetallocation 15

Fees 17

Activevspassiveinvestment 17

Waystoinvest 18

Performancebenchmarks 18

Selectinganadviser 19

Puttingitalltogether 20

Investment sub-committees. 21

Responsibilities 21

InvestmentPolicyStatement(IPS) 21

Externaladvisers,consultantsandmanagers 21

Reviewandmonitoringprocedures 22

Termination 22

Sub-committeemembers 23

Investment Policy Statements. 24

PurposeoftheInvestmentPolicyStatement 24

Investmentobjectives 24

Assetallocation 24

Investmentdiversification 25

Constraints 25

Ethicalinvestment 25

Implementation 26

Performancebenchmarks 26

Sample Investment Policy Statements. 27

Smallorganisation:PQRInc. 27

Mediumorganisation:Variety,theChildren’sCharity 29

Largeorganisation:TheGoodFoundation 31

Glossary. 32

Community Banking Solutions for not-for-profit organisations. 34

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ThisguideisthethirdinaseriesdesignedtohelpbuildthefinancialcapacityofAustralia’s600,000communitygroupsandnot-for-profitorganisations,whichareabsolutelyvitalinthedevelopmentofathrivingandvibrantAustralia.

Togetherwithitscompanionvolumes,theGuide for Community Treasurers and Understanding Finances: A Guide for Community Board Members,thisguideispartofongoingworkbyOurCommunityandWestpactomakesurethisimportantsectorhasreadyaccesstotheinformationitneedstooperateeffectivelyinourcomplexandchangingfinancialenvironment.

Formoreinformationaboutthepartnershipvisitwww.ourcommunity.com.au/finance

Our Community.Morethan65%ofAustraliansbelongtooneormoreofthe600,000communitygroupsthatexistinthiscountry.OurCommunityassistscommunitygroupstomeetthechallengesthey facebyprovidingpracticaladvice,toolsand training.

Ourmajorofferingsinclude:

•www.ourcommunity.com.au–comprising16onlineKnowledgeCentresandpublishinghouse

•GiveNow.com.au–helpingindividualsandbusinessesgivemore,givesmarter,givebetter,Give Now!

•AustralianInstituteforCommunityPracticeandGovernance–practicalandaccessiblecertificated trainingdeliveredlocallythroughourtraininginstitute

•AustralianInstituteofGrantsManagement–theuniquesuiteofgrantsmanagementservices,includingthegroundbreakingonlinegrantsmanagementsystem,SmartyGrants

•AustralianInstituteforCorporateResponsibility–cuttingedgecorporateresponsibilityresourcesfor large,mediumandsmallbusinessandcommunityorganisations

Westpac Social Sector Banking.AtWestpac,we’vebeenworkingwithcommunityorganisationsofallsizesformanyyears—andwhetheritbelocalsportsclubs,schoolsornationalagedcarefacilities,we’velearnedthatthedemandsandopportunitiesofthenot-for-profitsectorarebothuniqueanddiverse.

Weoffermorethanjustbanking.Wearecommittedto:

•understandingourcommunitycustomers’uniqueday-to-dayfinancialworkingsandrequirements

•designingandinnovatingourproductsandservicestoalignwiththeneedsofthesocialsector

•providingspecialistbankersandfinancialadvisers, whoarespecificallytrainedtoservicethenot-for-profitsector

•connectingourcustomerswithfinancialeducation,training,resourcesandotherareasbeyondjustbankingthatwillhelpstrengthentheirorganisationandachievelong-termvisions.

Wewanttoprovidethecommunityandnot-for-profitsectorwiththemostbeneficialbankingpartnershipin Australia.

Formoreinformationvisitwww.westpac.com.au/socialsectorbanking

The Guide for Community series.

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Introduction: Making every cent count.Not-for-profit organisations exist for a number of reasons. Some want to improve the environment, some want to conserve a historical element of their community, some want to connect people with a common interest, and some want to help those most in need.

Althoughonthesurfacetheseorganisationscanappeartohavesimilaroperationstofor-profitbusinesses–theymayemploystaffatsimilarlevels,useproductsandservicesjustasbusinessesdo,andaresubjecttomanyofthesamelawsandregulationsthatbusinessesaresubjectto–theyareremarkablydifferent.

Whilefor-profitorganisationsexisttoturnaprofit,not-for-profitsworktocontribute somethingtosociety.Thatmeanstheyhavedifferentpurposes,operate underdifferentpressures,havedifferentculturesandserveadifferentgroupofstakeholders.

Butthatdoesn’tmeanthatnot-for-profitscan’t(orshouldn’t)generatesurplusfunds–quitethecontrary.Allorganisationshavetoraiseincomeiftheyaretobeabletofundtheiractivitiesinthecommunity–afterall,theyalsoneedtopaystaff,rentoffices,providemail-outsornewsletters,andpayphoneandelectricitybills.

Anot-for-profitorganisation’ssocialmissionmakesitallthemoreimportanttosqueezeeveryounceofvalueoutofeverydollarraised.Theyneedtomakesureanysparecashisputtoworkashardaspossibleinawaymostlikelytomaximisethefundstheyhave.

Investingidlefundscanbeafantasticwaytomaximisecashflow.Investment,however,isaconceptmanynot-for-profitorganisationsshyawayfrom,andtherearethreeverygoodreasonsforthis:(1)becausefeworganisationsthinktheyhaveenoughmoneyinthebanktobotherthinkingaboutinvestments;(2)becausewhentheydohavemoney,mostgroupswanttospendit;and(3)becauseallinvestments,bytheirnature,involvesomeelementofrisk.

That’snottosaythatnot-for-profitsshouldshyawayfrominvestment.Infact,theoppositeistrue.

ThisGuideaimstohelpyouunderstandwhenandhowyourorganisationmightconsiderpursuinginvestmentsandwhatyouroptionsmightbe–whatthedifferenttypesofinvestmentsare,whatrisksareinvolvedineach,andhowyoucanuseyournewfoundknowledgetoincreaseyournot-for-profit’sfunds.

SpecificallyithasbeenwrittenforBoardandseniorstaffmembersofnot-for-profitorganisationstohelpyouunderstandtheoptions;investmentmanagersandinvestmentsub-committeemembersshouldhaveorseekmoreindepthknowledge.

“Understandingthedosanddon’tsofaninvestmentstrategyisessentialforanynot-for-profitorganisation,especiallywhenitcouldmeanfindingextrafundstosupportyourcauseoutsideofyourdonors.Byrecognisingtherolethatinvestmentshaveinyournot-for-profitorganisation,youwillbemoreinformedwhenmakingfinancialdecisions.”

Julienne Price, Head of Westpac Social Sector Banking.

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The not-for-profit sector operates in all Australian states and has to cope with a number of different legal formats. The result is that there are a number of terms used for things that essentially mean much the same thing. To make life easier, in this Guide we’ve used one set of names.

Whenwesay ‘Board’ wemean ‘Board’or

‘Council’or

‘CommitteeofManagement’

Whenwesay ‘not-for-profit sector’ wemean ‘socialsector’or

‘nonprofitsector’or

‘communitysector’or

‘thirdsector’or

‘voluntarysector’

Whenwesay ‘not-for-profit organisation’ wemean ‘IncorporatedAssociation’or

‘CompanyLimitedbyGuarantee’or

‘Cooperative’

Whenwesay ‘Board member’ wemean ‘Boardmember’or

‘Committeemember’or

‘Trustee’or

‘Director’

Whenwesay ‘Chief Executive Officer (CEO)’

wemean ‘CEO’or

‘Director’or

‘Manager’or

‘ExecutiveOfficer’

Whenwesay ‘clients’ wemean ‘clients’or

‘customers’or

‘users’or

‘consumers’or

‘members’

Howeverthere’salsoahandyglossaryattheendofthisGuideifyouneedmoretechnicalexplanations.

A note on terms.

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What is investing and why is it relevant for not-for-profit organisations?

Not-for-profitorganisationsinvesttheirmoneyforseveralreasons,orforacombinationofthesereasons.

1. To keep it safe and protected Ifyoudon’tneedallyourmoneyrightnow,butknowyou’llneeditlater,youwant

toputitsomewherethatwillnotonlykeeptheprincipalsafebutwillpreserveitsvalue.Youalsowanttoensureyourmoneykeepstrackwithinflationbygettingbackalittlemorethanyouputin.

2. To generate an income Ifyourorganisationisspendingitsmoneyondoinggood,everydollarthatyou

canearnfrominterestincomeisadollaryoudon’thavetorattlethetinfor.

3. To increase it

Ifyoudon’tneedyourmoneyrightnow,andarepreparedtodowithoutituntillateron,youcanlookforaninvestmentthatwillgrowtomorethanyouputin.

Mostnot-for-profitstendtoconcentratetheireffortsonkeepingmoneysafe.Goodcausesneedtobeaddressedtoday,ifnotsooner,somostgroupswillwanttoputeverycenttheyhaveintotheworkthattheydo.

However,manynot-for-profitshavesignificantamountsofmoneytoinvestwhen:

• They receive a grant

Afundergenerallywritesachequeforthewholeamount,andthenot-for-profitorganisationthenspendsthemoneydownovertime.Ifyougetagranttohireastaffmemberforayear,forexample,itwillbe50weeksintotheyearbeforeyoumakethelastpaymentfromthatfund–50weekswhenthatmoneycouldbeearningincome.

• They want to build or develop

Whenanorganisationisrunningacapitalappealtobuildanewhalloralibraryorheadquarters,itworkstheotherway–themoneybuildsupovertimetowardsthelevelyouneed,andthengoesoutinalump.

• They have a float or buffer

Organisationsthathavealotgoingonliketohaveacoupleofmonths’worthofreserve–somethingtosmoothoutcashflow,somethingtocarrythemoversuddengapsinthefundingstream.Theseamounts,too,canbeusedtosqueezeoutmoreincome.

• They have a corpus of funds

Someorganisationshaveahistoricalcorpusoffundsontheirassetbasethatcanbeinvested.Thesefundsareoftengeneratedthroughbequestsandotherlargedonationsandhelptoensuretheorganisationhaslongevitythroughcontinualre-investmentofthefundsyearonyear.

Circumstanceswillvary,ofcourse–somenot-for-profitshaveverylargeendowments,enoughtocoveragoodpartoftheirexpenses,andothernot-for-profitsexisttodistributemoneytoothersthroughgrantssohaveverylargereserves–butforsomeorganisationsaninvestmentwillbelimitedandcomparativelyshort-term.It’simportanthowever,tounderstandallyouroptionssothatiftheopportunityarisestoputyourfundstowork,youareabletomakethemostsensibledecisionforyourorganisationnowandforthefuture.

PartofbeinginformedisensuringyourBoardisfinanciallyaware.AfinanciallyawareBoardwilllookatavarietyofinvestmenttypes,orasset classes,includingsecurecashinvestments(e.g.savingsaccountsandtermdeposits),property,sharesorbonds.There’salsotheoptionofinvestingviamanaged fundswhichallowyoutoinvestyourmoneyinavarietyofassetclassesbyhavingaprofessionalfundmanager

Understanding the basics.

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poolyourmoneywiththoseofotherindividuals,businessesororganisationsandmakedecisionsdailyonhowyourfundsarebestplacedtomaximisereturns.

Not-for-profitandcommunityorganisationsare,generallyspeaking,morecautiousinvestorsthantraditionalprofit-generatingbusinesses.Andsotheyshouldbe.Boardmembersneedtoweighuptherisksofinvestmentsgoingwrong,erodingratherthanbuildingonfundswhichwouldotherwisehavebeenemployedtofurtheracause,andpotentiallyseriouslydamagingfunderanddonortrust.

Asanot-for-profit,youneedtoensureyoucompletelyunderstandthepossiblerisksandreturnsofeachassetclassbeforeyoudecidetoinvestinthem.

Why investWhilstinvestinghasthepotentialtoprovidegoodreturnsforyourorganisation,investingingeneralcanbeacomplicatedaffair.Evenaninvestorwithmanyyearsexperiencerisksmakingthewrongdecisionandlosingmoney.That’sbecausetheinvestmentmarketcanbeextremelyvolatile–especiallywhenprofitmaximisationisthepriority.

Makingsoundinvestmentdecisionsbecomesevenmoreimportantfornot-for-profitorganisationsbecauseeverycentcounts.Butwithalittlebitofknowledge,someriskminimisationstrategies,andarealisticlong-terminvestmentplan,thepotentialfordevelopingahealthyprofitcanbecomeareality.

Cash investmentsMostnot-for-profitorganisationsarefamiliarwithhigh-interestsavingsaccountsand termdeposits.Theyarethemostpopulartypesofinvestmentswithnot-for-profitorganisations.

Botharebasic,cashtypeinvestments,whichprovidearelativelylowreturnforlow,orno,risk.

Termdepositsandhigh-interestsavingsaccountsprovideareturnbasedontheconceptofcompound interest,wherebyyouearninterestoninterestinordertomultiplythefundsavailableinyouraccount.

For example:

Let’sassumeyourgrouphad$1,000cashinasavingsaccountearning6%ayear.Your$1,000growsto$1,060afteroneyear,and$1,123.60aftertwo.Theextra$3.60comesfromcompoundinterest–interestontheinterest.Andalthoughitmayseemasmallamountinthiscase,ifyouthinkaboutlargerinvestmentamounts,andlongerinvestmentterms,andevenchangesininvestmentrates,theconceptofcompoundinterestbecomesmoreimpactful.Asmallchangeintheinterestrate,inparticular,canprovideasignificantdifferenceinreturnsovertime.

Table 1providesinformationonhowmoneygrowsovertime,giventheannualrateofcompoundinginterest.

Table 1: Compound Interest

2500

2000

1500

1000

500

0

Interest Earned

2nd year

3rd year

4th year

5th year

6th year

7th year

8th year

9th year

10th year

Total Funds

Did you know?Ifyourorganisationinvested$1,000incashattracting5.5%pa,itwouldtakeabout13yearstodouble.

HadyoudecidedtoinvestinAustralianshares,yourorganisationcouldhavepotentiallyearned9.1%paonyourinitialinvestmentanddoubledyourmoneyinapproximately5years.

* Based on annualised returns of the UBS Bank Bill index over 13 years (5.5% pa) and the annualised returns of the ASX 200 (including dividend) over 13 years (9.1% pa). The ASX 200 is an index that tracks the performance of the 200 largest publicly listed companies on the Australian Stock Exchange.

Understanding the basics.

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Makesureyouhavetheinvestmentskillsandknowledgeyouneedonyour Board.

Tip Surveying your optionsCashinvestmentssuchastermdepositsandsavingsaccounts,however,arenotyouronlyoption.Youraimistomaximisethereturnsonanyinvestmentyoumake.

Ofcourse,thereisnofreelunchwhenitcomestoinvesting.Higherreturnsareusuallyassociatedwithhigherrisk,soyourBoardwillneedtodecidehowmuchrisktheorganisationiswillingtoputupwithinordertohavethepotentialofhighergains.

Another,ratherlessdramaticconsideration,isliquidity–howreadilyyourinvestmentcanbeconvertedintocashwithoutcompromisingthevalueoftheinvestment.Asanexample,cashisconsideredmoreliquidthanpropertybecauseyoucanusuallygetyourhandsonyourcashquicklybutitmaytakeseveralmonthstosellapropertyatfairvalue.

Everyorganisationhasdifferentrisktolerances,returnobjectives,andliquidityneeds.Asanot-for-profitorganisation,youarenodifferent.Theorganisation’sinvestmentpathwillneedtobesetdownbyyourmanagementteamandtheBoard.

IftheBoardhaslittleunderstandingaboutinvesting,thentheorganisationislikelytosuffer.Understandingwhatinvestmentsareavailableandtheuniquecharacteristicsofeachwillhelpyoutoachieveyourimmediatefundingneedsandmaximisethereturnsonyourinvestments.

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Where you decide to allocate your organisation’s funds is important. Each investment class possesses its own unique set of risks and returns, so the key to a solid long-term and successful investment strategy is selecting the right type and mix of investments.

Did you know?Academicstudieshaveshownthat90%ofaninvestor’sreturnsaredeterminedbyhowyoudecidetodivideupyourinvestmentdollars–i.e.where(cashversusbondsversuspropertyversusshares)youchoosetoplaceeachpercentageofyourtotalinvestedamount.

WheninvestmentguruWarrenBuffettwasaskedwhatthesecrettohisinvestment successhadbeenovertheyears,hesaiditwasstickingtohis“circle of competence”.

Ofcourse,veryfewpeoplehavethesameinsightandknowledgeasWarrenBuffet,butcertainlybroadeningyourBoard’s“circleofcompetence”whenitcomesto investingisadiligentapproachtodecidingwhattypesofinvestmentsaremost suitable.

What are asset classes?Assetclassesareessentiallydifferentcategoriesoffinancialsecurities–ortypes of investments.Theyincludecash,shares,bonds,andproperty.Wecanfurthersubdividetheseintointernational,domestic,directinvestment,andindirect investment.

Thereturnsexpectedfromeachassetclassdependontheirriskcharacteristics.By‘risk’wemeanthetendencyfortheactualinvestmentreturntodifferfromtheexpectedinvestmentreturn.Naturally,peoplewouldonlyinvestinariskierassetiftheexpectedreturnswerehigher.

Thegraphbelowhighlightswhereeachassetclasssitsontherisk/returnspectrumrelativetotheothers.Cashinvestments,asyoucansee,holdverylittlerisk,butofferarelativelylowrateofreturn.Thesharemarket,ontheotherhand,canoffersomegreatprofit-makingopportunities,buttherisksaremuchhigher.

Risk vs Return

Risk

Expe

cted

Ret

urn

InternationalShares

AustralianShares

InternationalProperty

AustralianProperty

InternationalFixed Income

Australian FixedIncome

Cash

Understandingtheserisksallowsustoexaminethedifferentcharacteristicsofeachinvestmentclass.Nextwegothroughtheoptionsonebyone.

Choosing where to invest.

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Cash

Low risk Low expected returnCashinvestmentsareconsideredamongthesafestinvestmentclass.Thevarietyofoptionsavailabletoinvestorswhenseekingtoinvestincashincludetermdeposits,savingsaccounts,cashmanagementtrusts,andmanagedfundsthatinvestintheshort-termmoneymarkets.

Termdeposits,asdescribedabove,arebasicsavingsaccountswhereaninterestrateisguaranteednottochangeforanominatedtermbasedonafixedamountoffunds.Thismeansyouwillknowexactlywhatyourinvestmentwillbeworthattheendofthetermbeforeyouevenbegin.Fornot-for-profitsorganisations,thereareupsidesanddownsidestotermdeposits.

Whilsttermdepositswillgiveyousuretyininvestmentoutcomeandwillallowyoutoplaninadvancetouseanyincomegenerated,theytendtohavelowerinterestratesthanvariablesavingsaccounts.Theyalsolockyourmoneyinforaprescribedperiodoftime–youwillbechargedifyouwanttowithdrawfundsearlyordepositextrafundsintotheaccount.

Savingsaccountsareoftenseenasamoreliquidalternativetotermdepositsastheyallowyoutomovemoneyinandoutwithouttheneedto‘lockmoneyin’.Sometimestheyhaveaslightlyhigherinterestratethantermdepositswithashorterterm,particularlywhennowithdrawalsaremadeinamonthandfundsareonlyaccessedonline,howevertheyarevulnerabletofallinginterestrates.ThatmeansthatiftheReserveBankofAustralialowersinterestratesyouwillfindthatyourearnedinterestwillprobablyfall,whereaswithatermdeposityourinterestwouldhaveremainedstableuntilmaturity.

Thekeytochoosingbetweenatermdepositandasavingsaccountislookingat(a)whetheryourorganisationrequiresafixedreturnand(b)whethertheamountyouaregoingtoinvestissetornot.Ifyoudorequireafixedreturnwithouttheneedtoinvestmore,atermdepositisyourbestoption.However,ifyouareflexibleandcanriskthefixedreturninordertopotentiallymakemoreoffofahigherinterestrate,and/oryouwanttheabilitytoaccessyourmoneyregularly,asavingsaccountisprobablybestforyou.

Thereareothercashoptionsaswell.CashManagementTrustsandManagedFundsareon-callinvestmentfundswhichpoolyourmoneywithotherstofacilitatetheinvestmentofyourorganisation’scashintogovernmentguaranteedandbackedsecurities.Thesetypesofinvestmentsusuallyyieldcomparablereturnstoothercashinvestmentsbutlikesavingsaccounts,cannotguaranteeinterestreturns.

Historically,cashinvestmentsprovidethelowestreturnovertime,whencomparedwithotherinvestmenttypes.Thisis,ofcourse,offsetbycashbeingtheleastvolatileassetclass,withveryhighliquidityandeasyaccessibility.

ReturnsarebasedontheofficialcashratepublishedbytheReserveBankofAustralia.ThisrateisadjustedperiodicallytoinfluencetherateofeconomicgrowthinAustraliaandtocontrolinflation.

Cashinvestmentsreturned6.8%paonaverageoverthelast20yearstoDecember 2010.

Understanding credit ratingsCreditratings,determinedbyagenciessuchasMoody’s,Standard&Poor’sandFitch,provideaguideastohowstrongthecapital,liquidityandfundingpositionsofaparticularfinancialinstitutionare.AAratedfinancialinstitutions(suchasWestpac)aredeemedtobemorefinanciallysecureandarelessriskywhencomparedtofinancialinstitutionsthatareAratedorbelow.

What does this mean for you?WestpacwillofferyourorganisationinterestratescomparablewithotherfinancialinstitutionsthathaveanAAratingorabove.FinancialinstitutionsratedAandbelowmayofferyourgrouphigherinterest,butremembertoweighuptheincreasedriskthatthisinvestmentmayattract.

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Bonds (Australian & International fixed income)

Low risk Low expected returnWhenacompanyorgovernmententitywantstoraisefundstoexpandorfinancenewprojectstheysometimesusebonds.Thesearealsoknownasfixed-interestorfixed-incomesecurities.

Bondsareeffectively‘IOUs’inwhichaninvestoragreestoloanmoneytotheissuerinexchangeforapre-determinedinterestratereturndeliveredonapre-setdateinthefuture,knownasthematuritydate.Therecommendedinvestmenthorizonisbetween3to5years.

Thistypeofinvestmentcaneitherbeissuedbygovernmentsorcorporations.Suchinvestmentstypicallyprovideahigherrateofreturnthancashbecausetheyhavelongermaturitydates,arelessliquidthancash,aresubjecttoafluctuatingmarketprice,andarehigherrisk.

Bondsissuedbydifferentcorporationsorgovernmententitiesdifferinreturns.Thisisbecauseeachissuerhasdifferingcredit‘riskcharacteristics’,bywhichwemeantheprobabilityofdefaulting,i.e.beingunabletopayitsdebtandobligationsastheyfalldue.

InvestorsdemandhigherreturnsfromweakercorporationsthanbondsissuedbytheCommonwealthofAustraliabecauseCommonwealthbondsareconsideredtohavelittleriskofdefault.

However,evenbondsissuedbytheCommonwealthGovernmentarenotrisk-freeunlessheldtomaturity.Ifabondwastobesoldbeforethematuritydateitmightbeworthmoreorless,dependingonthemarketpriceatthetime.

Generally,ifyousellabondbeforeitsmaturitydateandtheinterestratehasfallen,thebondprovidesagreaterreturn.Conversely,ifyousellabondbeforeitsmaturitydateandtheinterestratehasrisen,thebondwillbeworthless.Thelongerthematurityofthebond,thegreaterthemovementinvalue.

Bondscanperformbetteratdifferenttimesoftheeconomiccycle,sotheycanhelpyoudiversifyyourportfolio.Bondsaregenerallyregardedasalower-riskassetclassinvestmentthansharesorproperty.

Therearemanydifferenttypesofbonds,includingasset-backedbonds,governmentbonds,inflation-linkedbondsandcorporatebonds.Buttypically,not-for-profitorganisationsrestrictinvestmentinbondstothosethatare‘investmentgrade’and above.

WhenconsideringinternationalbondfundsandAustralianbondfunds,thereisanadditionaldimensionofriskthatneedstobeconsidered.Asthereturnsfromaninternationalbondfundaretakenoutinforeigncurrencies,thereisanelementofexchangerateriskthatwillimpactonthereturnoninvestment.Therefore,ifthecurrencyofthecountryyoutookthebondoutfromfallsinvalueagainsttheAustraliandollar,youwillbevulnerabletofluctuatingvalueswhenconvertedbackintoAustraliandollars.

How do you know which bond to choose?Ifyoudecidetoinvestsomeorallofyourorganisation’sfundsinbonds,youwillneedtoresearchthetypeofbondsthatwillsuityourorganisation’sobjectives.

Someoftheworkhasbeendoneforyoubycreditratingagencies,suchasMoody’s,Standard&Poor’sandFitch.Theseagenciesoftenratethedifferenttypesofbondstoassistinvestorsindeterminingthecreditriskinvolved.Table 2showsthedifferentratingscategoriesasdeterminedbycreditratingagencies.

Choosing where to invest.

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Table 2: Credit ratings for bonds

Description Moody’s Standard & Poor’s Fitch

Highest QualityAaa AAA AAA

Aa1 AA+ AA+

High Quality

Aa2 AA AA

Aa3 AA- AA-

A1 A+ A+

Upper Medium Grade

A2 A A

A3 A- A-

Baa1 BBB+ BBB+

Medium GradeBaa2 BBB BBB

Baa3 BBB- BBB-

Speculative Grade

Ba1andbelow BB+andbelow BB+andbelow

Rating differences explainedTypically,thedifferenceinreturnsbetweenAAAandBBBratedbondshasbeen1%,withthelower-gradebondsyieldinghigherreturns,thoughthisnumberhaswidenedduringtimesofeconomicdownturn.Intermsofthepotentialrange,in1932theAmericanbondmarketsrecordedadifferenceof5.65%onaveragebetweenAAAandBBBratedbonds.ThelowestspreadonrecordinUSbondmarketsoccurredin1966,witha0.32%difference.

Australianbondshaveprovidedanaveragereturnof9.2%paandInternationalbondshavereturned9.6%paonaverageoverthe20yearsleadingtoDecember2010.

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Property (Australian & International)

Moderate risk Moderate expected returnPropertyinvestmentsencompassawholerangeofsectors,includingresidential,commercial,retail,hotelsandindustrial.Theseinvestmentsincludebothlandandanyfacilitiesonit;forexample,officebuildings,shoppingcentres,hotelsandresorts,farmsandindustrialcomplexes.

Investorsareabletogainexposuretopropertythroughdirect property investments, unlisted property trusts,andlisted property trusts.

Buyingaresidentialorcommercialpropertytorentoutisawayofinvesting directlyinpropertyandearningaregularincome,thoughthiscanbecapitalintensiveandthereisariskthatyoumayhaveperiodswithoutatenant.

Inanunlisted property trust,aninvestorcanpurchaseunitsinatrustthatpurchasespropertiesonbehalfofinvestors.Thisusuallyallowsinvestorstogainexposuretoabroadrangeofinvestmentswithoutrestrictiveminimuminvestmentamounts.

AnAustralianlisted property trustisaninvestmentthatislistedontheAustralianStockExchangeandprovidesexposuretoaportfolioofdirectpropertyinvestments.Thesearemoreliquidthanunlistedpropertytrusts,butcanbemorevolatile.Intheshorttomediumterm,thevalueoflistedpropertytruststendstofluctuatewiththemovementinthesharemarket.

Bothtypesoftrusts(listedandunlisted)areabletoborrowmoneyaspartofthetruststructuretopurchaseproperties.Thedistributionsandreturnstoinvestorsaremadeafterborrowingcostshavebeendeducted.Atthesametime,certainborrowingcostsanddepreciationcanbeusedtoprovidetax-deferredincometoinvestorsandallowforinterestratedeductionstobeclaimed.Naturally,thelevelofdebtusedinthetrustaffectstheriskinessoftheinvestment.

Propertysecuritiesprimarilyearnincomefromrentandthecapitalappreciationofthelandandproperty.Thisisconsideredalong-terminvestment,withhigherriskthanfixedincomebutlowerthanshares.Theinvestmenttimeframeforpropertyistypically5+years.

Australianlistedpropertyhasprovidedanaveragereturnof9.8%p.a.forthe20yearsleadingtoJune2008.

Shares (Australian & International)

High risk High expected returnShares,alsoknownasequities,representapartownershipofacompany.YoucaninvestininternationalandAustralianshares.

Thereturnsavailablefromsharescomebywayofdividendsandcapital gains.

Dividendsarepaymentsmadebycompaniestotheirshareholders,andarenormallypaidtwiceayear.Remember,though,thatcompaniesactuallyhavenoobligationtopayadividend,andmayinsteaddecidetoreinvesttheirprofits.

Incertaincases,thesedividendshavefranking creditsattached,whichareeffectivelytheequivalentofataxrefundprovidedbytheAustralianTaxOffice(ATO)toshareholdersfortheincometaxanAustraliancompanyhasalreadypaid.Notalldividendshavefrankingcreditsattached.

Notethatmanynot-for-profitorganisationsareexemptfromincometaxsothefrankedcomponentofthedividendwillbefullyrefundable.

Choosing where to invest.

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Table 3showsanexampleofthisfrankingcreditsystem,knownasdividend imputation.

Table 3: Taxation of dividends

Company pre-tax income $100

Corporate Taxes (30%) $30

After-tax income $70

Assuming 100% payout of profits

Dividends $70

Investor tax rate 0%

Franking credit (for corporate payment) $30

Tax due from Investor $0

Total after-tax income for investor $100

Capital gainsoccurwhenthepriceofashareorassetrisesabovethepurchaseprice.Thesharepriceisinfluencedbymanyfactors.Theseinclude,butarenotlimitedto,thingslikeexpectationsofthefutureprofitabilityofthecompany,theeconomicoutlook,investorsentiment(definedasthetendency for the market to move up or down over a set period of time),inflationratesandinterestrates.

Sharepricesconstantlyfluctuate–sometimessharply–andtheeconomywillhaveitsupsanddown.Overtime,however,theprofitabilityofAustraliancompanieshasincreased,withAustraliansharesreturning9.9%p.a.andinternationalsharesreturning6.5%p.a.onaverageforthe20yearsleadingtoDecember2010.

Sharesareconsideredagrowthassetandlong-terminvestment.Therecommendedinvestmenthorizonis7+yearsinordertobalanceouttherisksassociatedwithinvestingintheverydynamicsharemarket.

Table 4liststhehistoricalreturnsfromsharesfrombothdomesticandinternational markets.

Table 4: Average compounded returns

Country Return

Australia 9.9%

Canada 6.3%

Germany 7.0%

Japan -6.5%

Switzerland 6.6%

United Kingdom 4.6%

United States 6.6%

From 1990-2010

Understanding taxWhilstwehavetouchedlightlyonissuesregardingtaxandinvestmentfornot-for-profitorganisations,taxlawisoutsidethescopeofinformationcoveredinthisguide.Ifyouwishtofindoutmoreabouttaxandhowitimpactsonyourorganisation,visittheAustralianTaxOfficewebsiteathttp://www.ato.gov.au/nonprofit/

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The choice is yoursWhichevertypeofinvestment,ormixofinvestments,youchoosetherewillalwaysbeyearswhereperformanceisgoodandotherswhereperformanceis poor.

Byselectingtherightmixofinvestments(andbymaintainingyourstrategyoveralongertimeframe)youcanminimisetheimpactoftheyearsofpoorerperformance.

Table 5revealsasnapshotoftheperformanceofeachdifferentassetclassoverthepast15years,indicatingwhichassetperformedbestineachindividualyear.Thesefiguresfurtheremphasisethebenefitofhavingagoodmixofassetclassesinanyinvestmentstrategyyoudecideupon.

Table 5: Short-term asset class performance

1-yearrollingreturnsto30June2009(%) Bestperformingassetclassfortheyear

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

Australian cash 5.48 6.99 6.21 5.80 5.56 5.11 4.91 4.77 6.36 5.24 5.09 5.41 7.14 7.89 6.21 5.08

Australian bonds 10.82 4.29 3.70 6.74 4.80 4.17 10.09 2.35 11.82 1.79 6.65 15.68 12.56 12.80 2.37 6.00

Australian property -42.27 -24.16 28.62 18.48 19.97 13.94 13.84 17.38 13.03 2.91 4.26 28.76 19.95 4.71 1.82 17.38

Australian shares -18.56 -7.21 22.03 30.22 25.40 23.83 -11.93 12.42 3.48 14.25 10.86 17.51 13.62 20.92 -2.33 23.13

International bonds 9.96 8.01 6.38 4.85 6.82 7.66 13.38 5.73 10.83 1.66 8.43 12.55 10.01 14.58 5.55 5.83

International shares -16.24 -14.56 1.47 27.96 8.80 13.74 -33.38 -12.67 -7.05 27.06 18.40 56.60 9.13 12.51 4.56 14.05

Source: UBS Bank Bill 0+ Years, S&P/ASX 200 Accumulation Index, MSCI World ex-Australia (net dividends) Standard in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Lehman Brothers Global Aggregate Hedged in AUD. You need to distinguish between operating and capital expenditure.

Choosing where to invest.

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There are several key principles and risks that need to be considered before any investment strategy is undertaken. This section provides an outline of these to help you make the best decisions on behalf of your organisation.

Things to consider before you dive in.DiversificationDifferenttypesofinvestmentstendtofollowdifferenttrends,sohavingallyourassetsinoneclassexposesyoutogreaterfluctuationsinvalueasthemarketrisesandfalls.

Diversificationmeansspreadingyourriskacrossarangeofinvestmenttypes.Thisallowsyourorganisationtotakeonlessoverallriskthanifyouinvestedinoneinvestmenttypealone.

Inshort,adiversifiedinvestmentstrategywillhelpyoutomanageriskwithoutsacrificingreturns.

Buthowdoesitallwork?

Diversificationcanbewithinanassetclassand/oramongdifferentassetclasses.Forinstance,youcanbuysharesfromAustralianaswellasoverseascompanies,orfromdifferenttypesofcompanieswithinAustralia,oryoucouldinvestinavarietyofshares,aswellasproperty,bonds,andcash.

Anorganisationthatspreadsitsinvestmentfundsacrossanumberofdifferentinvestmenttypeswillhavelessriskofsufferingabigdropinthevalueoftheirinvestmentatonceasit’slesslikelythatallinvestmenttypeswillalldropatonce.

Asset allocationHistoryshowsusthatabout90%ofthereturnoninvestmentisdeterminedbyasset allocation–whereandhowyouchoosetosplitinvestmentamountsintodifferentinvestmentcategories(e.g.30%cash,70%Australianshares).However,assetallocationsareinturndeterminedbyyourorganisation’scomfortwithriskandyourdesireforprofit.Itfollowsthatyourriskandreturnobjectivesarewhatwilldeterminetheappropriateassetallocationforyourorganisation.

Asastartingpoint,Tables 6 and 7containsomesuggestionsofpossibleassetallocationweightingsbasedondifferentlevelsofrisk(conservative,balanced,growth).TheyhavebeentakenfromVanguardInvestments,FidelityInvestmentsandT.RowePrice,whichareleadinginvestmentfundcompanies.

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Things to consider before you dive in.

Table 6: Asset allocation suggestions

Vanguard Cash / Short-Term Bonds Stocks

Conservative 40% 30% 30%

Balanced 20% 30% 50%

Growth 5% 25% 70%

High Growth 0% 10% 90%

Fidelity Cash / Short-Term Bonds Stocks

Short-Term 100% 0% 0%

Conservative 30% 50% 20%

Balanced 10% 40% 50%

Growth 5% 25% 70%

Aggressive Growth 0% 15% 85%

Most Aggressive 0% 0% 100%

Table 7: T. Rowe Price Matrix

Time Horizon

3-5Years 6-10Years 11+Years

Higher

20%cash

30%bonds

40%stocks

10%cash

30%bonds

60%stocks

100%stocks

Risk Tolerance

Moderate

30%cash

50%bonds

20%stocks

20%cash

40%bonds

40%stocks

20%bonds

80%stocks

Lower 100%cash

30%cash

50%bonds

20%stocks

10%cash

30%bonds

60%stocks

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FeesFeeshaveanimportanteffectonyourultimateinvestmentreturn.Themoreyoupayinfees,thelessyourprofitwillbeattheendofyourinvestmentterm.However,youwillneedtoconsidertheaddedadviceandsupportthatafee-for-servicemodelcanprovideyou.

Therearemanytypesoffees,butsomeoftheminclude:

●● Entryorestablishmentfees–payablewhenyoufirstopenanaccount●● Contributionfee–payablewhenyoumakesubsequentinvestmentsintoyour account

●● Withdrawalfee–payablewhenyoumakewithdrawalsfromyouraccount●● Exitorterminationfee–payablewhenyouterminateyouraccount●● Ongoingfees–payableeachyearyouareinvestedinthefund;typicallycoversadministrationcostsofthefund

●● Switchingfees–payablewhenyouswitchyouraccounttoanotherfundwithinthesamefirm

●● Advisertrailingcommission–whenyourfinancialadviserrefersyoutoaninvestmentopportunity,theytypicallyarepaideitheranupfrontreferralfeeorongoingfee.

Mostinvestmentshavesomesortoffeeattachedtothem,andasyouwouldexpect, feesareoftenreflectiveoftheamountofworkrequiredbyanexternalinvestmentprovider.

Ofcourse,yourorganisationmightbecomfortabletakingmoreofanactiveroleinmanagingyourowninvestments,thuspotentiallyminimisingyourfees,butmostgroupswillchoosetopaysomeonewithmoreinvestmentexpertisetodothatforyou.Inanycase,youcanexpecttopaysomefeesforyourinvestments.Makesureyouhaveaclearpictureofallthefeesyourorganisationwillbeliabletopaybeforeyoumakeanycommitments.

Active vs passive investmentInvestmentfundsaredividedintotwocategories–actively managed fundsandpassively managed funds.Eachstylehasitsownadvantagesanddisadvantages.

Actively managed fundsdependontheskillanduniqueinsightsoftheinvestmentmanagerinachievingsuperiorratesofreturnoninvestment.Activeinvestmentshavethepotentialtoperformabovemarketbenchmarksandachievehigherratesofreturn,thoughthat’snotguaranteed–academicstudieshaveshownthatonthewhole,slightlyhalfofactivelymanagedfundshaveperformedbetterthantheoverallmarketwhenyouexcludefees.However,whenyouincludecommissioncosts,loadfees,andmanagementcosts,approximatelytwo-thirdsofactivelymanagedfundsunderperformedthemarket.

Passively managed funds,ontheotherhand,typicallyarelowcostandtracktheperformanceofanindex,e.g.theASX300.Passiveinvestingallowsinvestorstogainexposuretoanassetclasswithouttheneedtodecideonthequalityoftheinvestmentmanager.However,usingthisstrategywillmeanthereisnopotentialforgettinganybetterreturnsthanthemarketbenchmarks.

We’vealreadydiscussedhowfeesplayacrucialroleinyourultimateinvestmentreturn,soregardlessofyourchoice,youneedtomakesureyouarereceivingvalueformoneythroughthequalityoftheinvestmentmanageryouchoose,andthelevelofserviceyoureceiveinrelationtotheleveloffeestheycharge.

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Ways to investDependingonthetypeofinvestment/syourorganisationprefersandtheamountoffundsyouhaveavailabletoinvest,thereareavarietyofoptionstochoosefrom.Togiveyouanoverallpicture,we’velistedtheseoptionsbelowandhaveprovidedashortdescriptionabouthoweachoneworks.

●● Direct investment–thisinvolvesdirectlypurchasingstocks,investingcashinasavingsaccount,orstoringfundsinatermdeposit.Topurchasestocksandotherpubliclylistedsecurities,youtypicallyopenatradingaccountwithabrokerorthroughoneoftheonlinebrokingservicesavailable.TheAustralianStockExchangewebsite(www.asx.com.au)providesalistofbrokersandthedifferentlevelsofservicetheyeachoffer.Savingaccountsandtermdepositaccountscanbeopenedatbanksandotherfinancialinstitutions.

●● Managed Funds or Index Funds–thesecanbefoundinfinancialpublicationsliketheAustralianFinancialRevieworratingserviceslikeMorningstar(www.morningstar.com.au).Eachfundtypicallyhasaminimuminvestmentamount,rangingfrom$5000upwards.

●● Master Trusts and Wrap Platforms–financialinstitutionsandmajormoneymanagerstypicallyhavealistofinvestmentsavailableonamastertrustorwrapplatform.Theseallowinvestorstodiversifyacrossmanydifferentassetclassesthattheymaynormallynothaveaccesstobecauseofavailabilityofminimuminvestmentthresholds.

●● Exchange Traded Funds–analternativetomanagedfundsareexchangetradedfundsorETFs.ThesearelistedontheAustralianStockExchangeandallowinvestorsaccesstointernationalsharesandcanreplicatetheperformanceoftheAustraliansharemarket.

●● Investment Manager–iftheamountofmoneyyourorganisationhastoinvestissufficientlylarge(typically$1million-plus),manylargemoneymanagersofferdedicatedinvestmentmanagerswhoprovideassetallocationadvice,portfolioconstructionservicesandinvestmentmanagementservices.

●● Financial Advisor–financialadvisorstypicallyhavealistofpreferredinvestmentoptionsavailablethattheycanprovidetoinvestors.TheAustralianSecurities&InvestmentsCommissionwebsite(www.asic.gov.au)listssomeusefultipsonlocatingafinancialadvisor.

Performance benchmarksWhenassessinginvestmentperformance,itiscommonpracticeforinvestorstobenchmarkthemselvesagainstanindex.Suchindexesactasausefulreferencepointtohelpyoudetermineifyourinvestmentstrategyisperformingwell.

Table 8listssomecommonlyusedbenchmarksforavarietyofinvestmentclasses.

Things to consider before you dive in.

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Table 8: Benchmarks

Asset Category Market Index Name

Australian Equity General S&P/ASX200Index

International Equity General MSCIWorldExAustraliaIndex

Australian Fixed Interest UBSWACompositeBondIndex

International Fixed Interest JPMorganGlobalBondIndex

Cash UBSWABankBillIndex

Listed PropertyS&P/ASX200PropertyTrustsAccumulationIndex

Direct Property MercerDirectPropertyIndex

Selecting an adviserManyinvestorsengageinvestmentadviserstocreateaninvestmentstrategy,toexecutethestrategyandforongoingsupport.

Ifyourorganisationchoosesthisroute,youshouldensurethatyouarecomfortablewiththeexperienceandjudgmentoftheadviserthatyouchoose.

Belowisalistofquestionsyoumaywishtoaskwhenscreeninganinvestment adviser:

●● How many years of financial experience do you have?Ideally,yourinvestmentadvisorshouldhaveaminimumoffiveyearsexperience.Themoreyourorganisationplanstoinvest,themoreexperienceyoushoulddemandofanadvisor.Asinanyfield,themoreexperienceanadvisorhas,thebettertheiradviceislikelytobe.

●● What is your educational background? Youradvisorshouldbetrainedappropriatelytoissuethefinancialproductsyou

require.Ensureyoucheckpotentialadvisors’credentialscarefullyinordertomakesureyouaregettingadviceyourorganisationcanrelyupon.

●● How are you compensated for your services? Therightanswertothisquestionisthroughanasset-based,fixed,orhourlyfee,

notcommissions.Youshouldnotselectadvisorswhoarecompensatedwithcommissionsunlessyouhavenoalternative.

●● Do you understand the not-for-profit sector? Whiletheknowledgeandprofessionalismofpotentialadvisersshouldbeyour

organisation’skeyconcern,it’shelpfulalsoiftheadviseryouchoosehassomeknowledgeofthenot-for-profitsector.Itcanhelptoshapetheiradviceiftheyhaveanunderstandingofthedifferentimperativesthatyourorganisation,asanot-for-profit,operatesunder.

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Someadditionalquestionsyoumightwishtoaskofpotentialinvestmentadvisers:

●● Whatisyourinvestmentphilosophy?●● Howcanyouhelpusachieveourgoals?●● Howwillyoutrackandreportourprogress?●● Whatinvestingapproachdoyoubelieveismostsuccessful,andwhatevidencecanyoushowmethatyouhaveachievedthatkindofsuccessforyourclients?

●● Whatdoyoudowhenaninvestmentperformspoorlyforanentireyear?

Putting it all togetherUnderstandingthedifferentriskandreturncharacteristicsoftypesofinvestmentsandhowtheymightcombinetocreateabalancedinvestmentportfolioisacriticalfirststepforanyorganisationwithmoneytoinvest.

Dependingonyourobjectivesandcircumstances,anaggressive,moderate,orconservativeassetallocationmaybeappropriate.

Yourultimatechoiceofinvestmentshouldnotbesolelybasedonpastreturnsastheyarenotaguaranteedindicatoroffuturereturns.However,pastreturnsareagoodtooltohelpyouunderstandhowaparticulartypeofinvestmentcanworkandwhattoexpectwithpricemovementsandreturns.

Whenmakingyourinvestmentchoices,thereareanumberofconsiderationsyouneedtotakeintoaccount,including:

●● Investmenttimehorizon;●● Desiredlevelofreturns;and●● Acceptablelevelsofrisk.

Diversificationisakeyinvestmentconcept.Itisprudenttohaveseveraldifferenttypesofinvestments(orasset classes)inyourorganisation’sportfoliosothatyouspreadyourrisk.

Asuitablyqualifiedfinancialplannerorinvestmentadvisercanhelpyoutoselectarangeofinvestmentswhichwillsuityourorganisationbest.

Finally,youshouldalsoconsultyouraccountantabouttaximpactsonyourinvestmentstrategy.Ultimately,havingyourfinancialadviser,youraccountantandyourbankerworkingtogethertocreatethebestinvestmentoptionsforyourorganisationisaverygoodoutcome.

Things to consider before you dive in.

“Individualdecisionscanbebadlythoughtthrough,andyetbesuccessful,orexceedinglywellthoughtthrough,butbeunsuccessful,becausetherecognisedpossibilityoffailureinfactoccurs.Butovertime,morethoughtfuldecision-makingwillleadtobetteroverallresults,andmorethoughtfuldecision-makingcanbeencouragedbyevaluatingdecisionsonhowwelltheyweremaderatherthanonoutcome.”

Robert Rubin, former US Secretary of Treasury.

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In an uncertain world, good process more often than not leads to good outcomes, though this is by no means guaranteed – the best laid plans can go awry. When it comes to investments, each organisation must determine its own preference for risk and returns.

Investment sub-committees.Anynot-for-profitconsideringinvestingmoneyshouldfirstestablishaframeworktoguideitsreviewoftheoptionsanddecision-makingprocesses.Youneedtobesurethatyouhaveclearlyarticulatedpoliciesandstrategiesthatarespecifictoyourorganisation’sownuniqueneedsandcircumstances.

ExamplesofinvestmentplanningpoliciesareprovidedattheendofthisGuide,butyoushouldusethisasastartingpointonly.Yourorganisation’spolicyshouldofcoursebetailoredtoyourorganisation’sowncircumstances.

UltimateresponsibilityforinvestmentsrestswiththeBoard.However,whenthesizeofyourorganisation,orthesizeofyourinvestments,reachacertainlevel,itisadvisabletoestablishaninvestmentsub-committeetoadvisetheBoard.Alternatively,someorganisationsincorporatethefunctionsofaninvestmentsub-committeeintothefinanceandriskmanagementsub-committee.

ResponsibilitiesWhetheraformalinvestmentsub-committeeexistsoranalternativestructureisused(orindeediftheBoardretainsthesefunctions),theareasofresponsibilityremainthesame.Broadly,theseinclude:

●● Establishtheinvestmentobjectives,constraintsandguidelinesthatreflectthefinancialgoalsoftheorganisation.

●● RecommendaninvestmentpolicyforapprovalbytheBoard.●● Determinetherequirement,selectionandusageofexternalinvestmentprofessionalstoguideandadviseonstrategy.

●● FormulateanappropriateassetallocationstrategywiththeBoard.●● Implementinvestmentstrategiesconsistentwithinvestmentpolicyandassetallocationstrategy.

●● Conductreviewsandmonitorinvestmentresultsagainstappropriatelyestablished benchmarks.

●● Approveanyandallsignificantinvestmentactions.●● Monitorcashbalancesforconsistencywithinvestmentstrategyandliquidity needs.

Investment Policy StatementAnInvestmentPolicyStatement(IPS)isacrucialdocumentformulatedbytheinvestmentsub-committeethatbridgestheunderstandingbetweenwhatisapprovedbytheBoardandhowtheinvestmentmanagerexecutesthestrategy.Thisiscoveredinmoredepthinthenextsection,andsamplestatementshavebeenincludedinthelastsectionofthisGuide.

External advisers, consultants and managersDependingontheskillsetoftheinvestmentsub-committee,itmaybeprudenttoengageanexternalinvestmentconsultant,assetallocatororfinancialadviser/plannerwhocanassistwiththefollowingfunctions:

●● Helpingtodetermineorganisationallevelofriskanddesiredoutcome.●● Developmentandreviewofinvestmentpolicies.●● Reportingoninvestmentperformance.●● AdvisingonassetallocationtoachieveobjectivesoftheIPS.●● MakingrecommendationsontheselectionofinvestmentmanagerstoimplementtheIPS.

●● RecommendingpotentialinvestmentsthatachievetheIPS’objectives.

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Whetheraninvestmentmanagerisappointedinternallyoranexternalprofessionalisengagedbytheinvestmentsub-committee,theresponsibilitiesinclude:

●● Purchasing,selling,andholdingsecuritiesinlinewiththeIPSguidelines.●● Regularinvestmentperformancereporting.●● Communicatingwiththeinvestmentsub-committeeonchangesthatmayimpactachievingtheIPS’objectives.

●● ComplyingwiththeIPS.●● Reportinganychangesinpersonnelorstylethatmayimpactfutureperformance.●● RebalancingtheportfoliotocomplywithassetallocationguidelinesstipulatedintheIPS.

Whendecidingonaninvestmentmanager(whetherinternalorexternal;individualorafirm),thereareafewkeycriteriatoconsider.Theseinclude:

●● Minimumtrackrecordofperformance(suggestedtimeframeof5+years).Themanager’sperformancewillneedtobecomparedwithanappropriatebenchmark,aftertakingintoconsiderationthestrategies,risks,andassetclassesinvolved.

●● Competitivenessoffees.●● AdherencetotheInvestmentPolicyStatement.●● Investmentmanagerprofileandtheirtenureattheinvestmentmanagementfirm.●● Historyofassetsundermanagement.●● Yourorganisation’srapportwiththemanager.●● Investmentstyleofthemanager.●● Ethicalandpublicrelationsconsiderations–doestheindividual/firmhavetheright reputation?

Review and monitoring proceduresAninvestmentsub-committeetypicallymeetsquarterlytodiscusschangesandcarryoutitsduties,butmaymeetmoreorlessfrequentlydependingonthecomplexityofthetasksinvolved.

Certaineventsthatwouldtriggerareviewmayinclude:

●● Significantchangesincashflow–e.g.donations,disbursementsorcapital investments.

●● Changesinperformanceoftheportfolio.●● Changesinliquidityrequirementsandcashreserves.●● ChangesinspendingpoliciesassetdownbytheBoard.

AreviewoftheIPSshouldbeconductedannually.

Whenassessinginvestmentperformance,thesub-committeeshouldcomparetheresultswithanappropriatebenchmarkandcompliancewithIPSguidelines.

Thefeesandexpensesyourorganisationispayingshouldalsobereviewedatleastannuallytoensurecompetitivenessandvalueformoney.

TerminationTherearecertaintimeswhentheinvestmentsub-committeemayconsiderterminatinganinvestmentmanagerorliquidating(selling)aninvestment.Thesemay include:

●● Consistenttrendofunderperformancerelativetoappropriatebenchmarksandpeergroups(suggestedtimeframeforassessmentis3-5years).

●● ViolationsofIPSguidelines.

Investment sub-committees.

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●● Lossofkeypersonnelorchangeinownershipstructure.●● Significantchangeinassetsundermanagementovera12-monthperiod.●● Changeinyourorganisation’sinvestmentstrategyorstyle.

Ofcourse,theseareonlyguidelinesandcanbeusedtoinformyourownorganisation’sdecision-makingprocess.

Sub-committee membersTheoptimumsizeofaninvestmentsub-committee,presumingthesizeofyourinvestmentwarrantssuchasub-committee,istypicallyconsideredtobethree.The essentialcriteriaforallmembersincludeaninterestintherole,businessacumen,andastrongaffinitywithandcommitmenttothevaluesandmissionofyour organisation.

Potentialcandidatesshouldalsopossess:

●● Knowledgeabouttheorganisation’sprograms,financialrequirementsandlong-termobjectives.

●● Communicationanddecision-makingskills.●● Goodjudgment.●● Integrity.●● Priorfinancialmanagement,investment,and/orplanningexperience.

Areastopotentiallysourcecandidatesinclude:

●● Trustedadvisers.●● Benefactorswithafinancialbackground.●● Largedonors.●● Professionalassociations.●● InternalstaffandBoardmemberswiththeappropriateskills,apassionfortheorganisation’sobjectivesandaninterestintherole.

“Unlessavarietyofopinionsarelaidbeforeus,wehavenoopportunityofselection,butareboundofnecessitytoadopttheparticularviewwhichmayhavebeenbroughtforward.”

Herodotus, 5th Century BC, Greek historian

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The Investment Policy Statement (IPS) is a roadmap that guides the investment process. It details an organisation’s investment objectives, risk tolerance and constraints. Without identifying these factors, it is difficult to determine whether a particular investment or strategy is suitable or not.

WhilstanIPSdoesnotguaranteeinvestmentsuccess,itdoesprovidedisciplinearoundtheinvestmentprocessandreducesthepossibilityofmakinghastyandinappropriatedecisions.ItalsohelpstoensurethatyourinvestmentmanagerdoesnotmoveyourorganisationoutsidetheparameterscarefullysetbytheBoard.

Dependingonthecomplexitiesandsizeofyourinvestmentprogram,yourIPScanbesimpleordetailed.Table 9outlinesthesectionswhichshouldbeincluded,andyouwillfindafurtherdescriptionofeachinthesectionbelow.AdditionalhelpmaybefoundbyusingthesampledocumentsincludedattheendofthisGuide.

Table 9: Section of IPS

Purpose of the Investment Policy Statement

Investment objectives

Asset allocation

Investment diversification

Constraints

Ethical investment

Implementation

Performance benchmarks

Purpose of the Investment Policy StatementTheopeningsectionofyourIPS,thePurpose,shouldarticulateyourorganisation’sendgoalforyourinvestmentstrategy.Thisendgoalcouldincludeoneoranumberofthings,e.g.:

●● Tocreateaconsistentstreamofcashflowtofundfutureprograms.●● Toenhanceshort-termincomegeneratedbysurplusfunds.●● Tomaximisereturnswhilstminimisingrisk.

Investment objectivesTheInvestmentobjectivesoutlineyourorganisation’sreturnexpectations–whatleveloffinancialreturnyouhopetoreceiveforyourinvestment–andtargets.Indetermininganappropriatetargetrateofreturn,theorganisation’stimehorizonandrisktolerancewillneedtobeconsidered.

Asset allocationTheAssetallocationdecisionisanimportantone.Itisthisdecision,andnottheselectionofspecificstocks,bonds,properties,etc.,thatwillmostlikelydeterminetheperformanceofyourinvestmentportfolioovertime.

InthissectionofyourIPS,minimumandmaximumassetallocationpercentagesinbonds,stocks,cash,andpropertycanbestated.

Investment Policy Statements.

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Investment diversificationDiversificationisoneofthekeystoreducingrisk.ThissectionofyourIPSshouldoutlineyourorganisation’sdiversificationaims(e.g.“In no case shall more than 15 per cent of the total portfolio be invested in shares in of any one particular company”).Yourstatementmayspecifydiversificationaimsbothamongassetclassesandwithin.

ConstraintsManyoftheconstraintstoinvestingmaybeuniquetoyoursector,organisationorindustry.Theycanbeintheformofliquidityrequirements(howquicklyyouneedtobeabletoturnyourinvestmentsintocash),legalandregulatoryissuesparticulartoyourtypeoforganisation,timehorizons(howlongyoucanaffordtokeepyourmoneytiedup),andtheindividualneedsandpreferencesofyourorganisationanditsstakeholders–funders,donors,clientsandsupporters.

Liquidityisdeterminedbythelevelofcashneededbytheorganisationtosupportday-to-dayoperationsandactasabuffertoabsorbunforeseenexpenses.

Fromalegal and regulatoryperspective,theremaybespecificinvestmentsthatyourorganisationisprohibitedfromconsidering.

Yourtime horizonforinvestmentswilldependonyourinvestmentstrategyandwhenyouexpectmajorexpensestooccur.

Finally,yourorganisationmayhaveunique needs and preferencesthatleadyoutoacertaininvestmentstyle.Forexample,manynot-for-profitorganisationssupportsociallyresponsibleinvesting.Thismeansthattheorganisationisprohibitedfrominvestingincertainindustries(e.g.tobacco,weaponmanufacturersetc.).Thenextsectiondealswiththisissueinfurtherdetail.

Ethical investmentNot-for-profitorganisationshaveaparticularresponsibilitytothecommunity,aswellastotheirstakeholders(funders,donors,clientsandsupporters).Youneedtoensurethatthemoneyyougenerateasincomeisputtouseinawaythatwillprovidethebestpossible“valueformoney”,orsocialreturn.

Thiswillnotonlyimpactonyourorganisation’sdecisionsonwhenandhowtoinvest,butonthetypesofthingsyouinvestin.Firstly,youneedtoensurethatyourmoneyisinvestedresponsibly,anddoesnotsupportbusinessesdoingworkthatraisesethicalconcerns:acancerresearchfundwouldprobablybeill-advisedtobuysharesinacigarettecompany,forexample.Youmayalsowishtouseyourorganisation’sinvestmenttogeneratepositivecommunityimpacts.

Therearethreestrategiestokeepinmindwhenoutliningwithwhomandinwhatyourorganisationwillinvest:

1. Positive screening

Thisstrategyinvolvesreviewingcompaniesinwhichyouinvesttoensuretheyarebusinesseswhichsellpositiveproducts(e.g.energycompaniessellingsolarpanels),oraredemonstratingbest-in-industryapproachestodesign,manufacture,productionanddistributionofgoodsorservices.Youmayalsowanttoinvestthematically.Forexample,ifyouareanenvironmentalgroup(orevenifyou’renot),youmaywanttoinvestincompanieswithalowcarbonfootprint.

2. Negative Screening

Thereverseofpositivescreening,negativescreeningoravoidancestrategiesseeorganisationsreviewingcompaniestheywouldinvestwithtoensuretheydonotbreachpredeterminedsocial,environmentalorethical standards.

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3. Engagement

Investinginacompanymaygiveyouthepower,asastakeholder,tocampaignfordifferentbusinesspracticeswithinthatcompany.Asashareholder,yourorganisationwillbeabletoattendannualshareholdermeetings,andmayholdmoreswayinundertakingactivecommunication withthecompany’sleadershipteamtocampaignforchange.

Onewayofassessingtheappropriatenessofacertainbusinessistolookattheircorporateresponsibilitypractices.ManyAustralianandinternationalbanksarelistedonratingsandawardsschemeswhichrecogniseethicalorsustainablebusinesspractices,includingbutnotlimitedtoEthisphere’sMostEthicalCompaniesList,theGlobal100MostSustainableCompaniesList,MoneyMagazine’sClimateLeadershipAwards,theDowJonesSustainabilityIndex,theFTSE4GoodIndex,andtheAustralianSustainabilityAwardsforCorporateGovernance,andtheStJamesEthicCentre’sCorporateResponsibilityIndex.

Anotheroptionistoinvestyourorganisation’smoneyinasociallyresponsibleorethicalinvestmentfundthatwillscreenthecompaniesforyou.

It’sagoodideafornot-for-profitstoincludeasectiononEthical InvestmentintheirIPS,takingintoaccountyourorganisation’sattitudetothefactorsdescribedabove.

ImplementationThissectionofyourIPSshouldhelpyouandyourorganisationgoaboutpursuingitsinvestmentstrategy.Thisincludesdeterminingwhetheraninvestmentmanageroradvisorwillbeused,howoftentheIPSwillbereviewed,andhowoftentheinvestmentmanager’sperformancewillbeassessed.

Performance benchmarksAnappropriateperformancebenchmarkshouldbeestablishedtohelpassesshowwelleachofyourinvestmentsareworkingoutovertime.Thiscanthenformthebasisofyourinvestmentreviewprocedure.

Investment Policy Statements.

Case Study: Ethical InvestmentThe Trawalla FoundationTheTrawallaFoundationisaMelbourne-basedfamilyfoundation thatinvestsinsocialenterprisesandotheropportunitiesfocusingonthearts,ideas,innovationandscholarship.

TheFoundationhassetdownamediumrisklevelforitsinvestmentstrategy,withaportfoliocomprising cash,property,Australian andinternationalequitiesanddirectinvestments.

BothnegativeandpositivescreeningstrategieshavebeenappliedtotheFoundation’sinvestments:

•Positivescreen:

–Representationofwomenontheboard,asperASXrequirementsfrom1July2010

•Generalnegativescreens:tobacco,armaments,alcohol,gambling,animaltesting.Specifically(butnotlimitedto):

–CrownCasino

–Tabcorp

–Woolworths

•Furtherconsiderations:

–Ethicalandsustainablelivingpractices,e.g.strategyseekstoavoidfactoryfarminginitiatives

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IntroductionTheBoardofPQRisresponsibleforensuringthattheorganisationoperateswithinaresponsible,sustainablefinancialframeworkandthattheorganisationhasadequateresourcestocarryoutitswork.PQR’sInvestmentPlanformsanimportantpartoffulfillingthisresponsibility.

PurposeThispolicyisdesignedto:

●● DirecttheuseofinvestmentfundsofPQR;and●● DeterminePQR’sfuturefinancialplanningstrategiestoensuretheorganisationisabletomaintainitsoperatingbudgetandcreategrowth.

PolicyTheBoardofPQRisresponsibleformaintainingandextendingtheassetsoftheorganisation,toprovideforitslong-termfinancialviability.InitsstewardshipofPQR’sfinancialassets,theBoardhasadoptedthepolicytoensurethatanyassetsnotrequiredforthecurrentoperatingbudgetwillbeinvestedinaccordancewithPQR’sInvestmentPlan.

ThepurposeofPQR’sInvestmentPlanistomanagethecashassetsnotrequiredforcurrentoperatingexpensessoastomaximisetheearningsofsuchassets,whileretainingsecurityandminimisingrisks.AllinterestandotherearningsfromsuchinvestmentsaredepositedintoPQR’soperatingaccountandthusbecomepartoftheannualoperatingbudget.

TheInvestmentPlanisdesignedtoensurethat:

●● PQR’sfundsareutilisedtoachieveabalancedoperatingbudget.●● PQRcreatescapitalgrowthandgeneratesincome.●● Therewillbeaccesstocashtocovercurrentliabilities.●● PQRwillhaveaccesstocashforestablishingnewprojects.●● PQRwillhaveaccesstocashforunforeseenexpenses.

Responsibility TheCEOandFinanceManager/Treasurer,inconsultationwiththeInvestmentSub-committee,areresponsibleforrecommendinganInvestmentPlanportfolioforconsiderationbytheBoardinthecontextoftheannualBusinessPlan.

Sample Investment Policy Statements. Small organisation: PQR Inc.This example is drawn from Our Community’s online Policy Bank (www.ourcommunity.com.au/policybank). It may be best suited for a small organisation and may be compared and used in the development of your own organisational policies and statements. Identifiers have been altered.

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Guidelines●● CapitalfundsthatPQRaccumulateswillbeinvestedininterest-bearingassetsandtheinterestgeneratedbytheseinvestmentswillbeusedtomeettheoperatingcostsoftheorganisation.

●● Unexpendedannualbudgetfundsattheendofafinancialyeararetobeallocatedfortheglobaluseoftheorganisation.

●● PrioritiessetintheBusinessPlanaretobeadheredto.●● TheprogressofinvestmentfundsistobeconsideredattheendofthefinancialyearintheannualreviewoftheInvestmentPlan.

●● Investmentsaretobemadewithlowtomediumriskventures;thatis,investmentsthatprovideforsecurityofcapitaloverthemediumtolongterm.

●● PQRwillonlyinvestwithreputable,established,provenfinancialinstitutions.●● 100percentofanyshareportfoliowillbeinvestedwithethicalinvestments.

Procedure●● TheInvestmentSub-committeewillinvestigateinvestmentoptionsandmakerecommendationstotheBoard,intheformofanInvestmentPlan,aspartoftheannualBusinessPlan.

●● PQRwillretainanindependentinvestmentconsultanttoprovideadviceaboutinvestmentopportunitiesandmaintainaportfolioofinvestments.

●● PQR’sExecutiveDirectorandFinanceManager/TreasurerwillmeetannuallywiththeinvestmentconsultanttodiscusstheperformanceoftheinvestmentportfolioandreporttotheFinanceCommittee,whichwillinturnreporttotheBoard.

●● TheFinanceManager/Treasurerwillreceiveinformationaboutandkeeptrackoftheprogressofallinvestments,andreportontheprogressoftheinvestmentsasrequiredtotheExecutiveDirector,InvestmentSub-committee,andtheBoard.

●● TheInvestmentPlanwillbereviewedevery12monthsaspartofthestrategicplanningfortheBusinessPlan.

Small organisation: PQR Inc.

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IntroductionVariety,theChildren’sCharityiscommittedtoasustainable,responsiblefinancialframeworkandmaintainingadequateresourcestocarryoutVariety’scorepurposeofhelpingAustralianchildren.Thisstatementofinvestmentreflectstheinvestmentpolicyobjectivesandconstraints.

PurposeThepurposeofthispolicyisto:

●● Defineandassignresponsibilitiesofallinvolvedparties.●● Establishaclearunderstandingforallinvolvedpartiesoftheinvestmentgoalsand objectives.

●● Offerguidanceandlimitations.●● Establishabasisforevaluationofresults.●● ManageassetsaccordingtoprudentstandardsandwithinVariety’sconstitutionandapplicablelaws.

●● Establishrelevantinvestmenthorizons.

Ingeneral,thepurposeofthispolicyistoprovideaframeworkofinvestmentstrategy.Itisintendedtobeflexibleenoughtobepractical.

Principle aim of investmentsWithinagreedriskparameters,theprincipleaimofVariety’sinvestmentstoismaximiseincomeandpreservecapitalforthecorepurposeofhelpingAustralianchildrenwhoaresick,disadvantagedorhavespecialneeds.

General investment principles●● InvestmentswillbemadesolelyintheinterestsofVariety,theChildren’sCharity.●● Investmentswillbemadewithcare,skillanddiligence.●● Cashistobeemployedproductivelyatalltimesbyinvestmentinshort-termdepositstoprovidesafety,liquidityandreturn.

●● Prioritiesinthebusinessplanareadheredto.●● Investmentswillbeethical.

Investment management policy●● RiskAversion–Thefinancecommitteerecognisesthatsomeriskispresentinalltypesofinvestmentsanditisnecessarytoproducelong-terminvestmentresults.Thecommitteeandanyinvestmentmanagerwillmakeallreasonableeffortstocontrolriskandremainwithintheinvestmentstyleandobjectivesbrief.

●● PreservationofCapital–Thefinancecommitteewillmakeeveryefforttoinvestinastyleandproductsthatpreservecapital.

●● Liquidity–Varietyrequirestheabilitytodepositandwithdrawfundsonacontinuousbasis.Thecommitteewillseektomaximisereturnsonshort-terminvestmentswhilemaintainingliquidity.

●● InvestmentDiscipline–Thecommitteewilladheretotheinvestmentpolicyatall times.

●● Long-TermInvestment–Whenpossible,thecommitteewillseektomaximisereturnsthroughmediumandlong-terminvestments.Thefinancecommitteewilldeterminetheamount,eitherasapercentageoffundsavailableorafixedamount.

This example may be best suited for a medium-sized organisation and may be compared and used in the development of your own organisational policies and statements.

Medium Organisation: Variety, the Children’s Charity.

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Investment objectivesForVarietytomeetitscorepurposeofhelpingchildrenwhoaresick,disadvantagedorhavespecialneeds,theinvestmentobjectivewillemphasisamixofcapitalgrowthandincome.

Investment committeeThefinancecommitteewillprovideoversightfortheinvestmentofanyavailablefunds,establishingtheparametersoutlinedinthispolicyforthetimingofinvestments,theamounttobeallocatedandthenatureoftheinvestment.

Timelines●● Short-termfundswillbedefinedasthoserequiredforoperationswithinareserveperiodofsixmonths.

●● Medium-termfundswillbedefinedasthoserequiredforoperationsbetween6and12months.

●● Long-termfundswillbedefinedasthoserequiredforoperationsbeyond12 months.

Variety’sproceduresrequiregrantstobefundedinatimelymanner.Duediligenceandbudgetingmustapplytoestablishingalong-terminvestmenttopreventanydelayindeliveryofVariety’scorepurpose.

Tax legislationVarietyisregisteredcharitywithincometaxexemption.Assuch,incomefrominvestmentsdonotattractincometaxandallformsofinvestmentshouldbeevaluatedonthegrossreturnwherenoincometaxispayable.

Investmentsinshareswherefrankeddividendsarepaidshouldbeevaluatedgrossofthefrankeddividend,asthefrankedamountwillberefundedtoVariety.

Guidelines for investment classesPermittedassetclassesare:

●● CashandCashequivalents.●● Property.

Permittedinvestmenttypesare:

●● DepositswithanybankregisteredundertheCommonwealthBankingActof1959.●● DepositswithofficialdealersintheshorttermmoneymarketinAustralia.●● Donatedorcapitalraisingproperty.

Potentialinvestmentoptions:

●● Australianfixedinterest,limitedtoS&P/ASX100listedcompaniesanddeposit-takinginstitutionswithintheS&P/ASX200index.

●● Interestinamanagedinvestmentscheme.

Prohibitedassetclassesandinvestmenttypes

●● Futurescontracts.●● Putandcalloptions.●● Warrants.

Review and benchmarkingThefinancecommitteewillreviewandbenchmarktheperformanceofinvestmentsbycomparingresultstocommercialbills.

Medium organisation: Variety, the Children’s Charity.

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This example may be best suited for a large organisation and may be compared and used in the development of your own organisational policies and statements. Identifiers have been altered.

IntroductionTheGoodFoundationprovidesgrantstocommunityorganisationsacrossAustralia.

TheFoundationhasseveralmilliondollarsundermanagement(thecorpus),theincomefromwhichfundsitsgrantsprogram.

Asset allocationTheFoundationhasappointedadedicatedinvestmentmanager,whooverseesastrategicassetallocationcomprisingamixtureof:

●● Cash.●● Fixedinterest.●● Listedproperty.●● Australianshares.●● Internationalshares.

AnInvestmentCommittee,whichmeetsandreportstotheBoardquarterly,setsthedirectionandoverseestheinvestmentmanager’swork.

Investment policy aimsAllofthisisanchoredbyapolicywhichcomprisesthreekeyaims:

1. Topreservethecorpus;

2. Tomaximiseincome;and

3. ToachievegrowthabovetheConsumerPriceIndex.

GuidelinesTheBoardacknowledgesthatpreservingthecorpus,maximisingincomeandachievinggrowtharelinkedbutalsomutuallyexclusive;thusabalancedapproachis required.

AmongtheotherguidelinessetfortheGoodFoundation’sinvestmentstrategyare that:

●● TheFoundationhassomeriskappetite.TheBoardwilltoleratesomevolatility.●● UltimatelytheBoardwouldliketopreservethecorpus,howeveritwillallowsomeofthecorpustobeusedifextremecircumstances(e.g.theglobalfinancialcrisis)meanthatgrantmakingisnototherwisepossible.

●● Theinvestmentmanagermaymovetheassetallocationby10%.Anygreatermovementthan10%canonlybedoneinconsultationwiththeBoard.

Review and benchmarkingFundperformanceisreportedonquarterlyandmeasuredagainstablendedbenchmarkreflectingtheassetallocationacrossvariousassetclasses.

Large organisation: The Good Foundation.

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Asset Allocation Howmoneyinvestedisdistributedamongvarioustypesofinvestments,suchasstocks,bondsand cash.

Asset Classes Categoriesofassetsthatarefundamentallydifferentinstructure.Examplesofdifferentclassesofassetsincludestocks,bonds,cashandproperty.

Capital Gains Acapitalgainisaprofitthatresultsfrominvestmentsintoacapitalasset,suchasstocks,bondsorproperty,whichexceedsthepurchaseprice.

Compound Interest Interestthatiscalculatedbothontheprincipalsuminvestmentandtheaccruedinterest.

Diversification Spreadingyourinvestmentsoverarangeofassetclasses,oroverarangeofinvestmentswithineachassetclass,tominimisethepossiblerisksassociatedwitheachtypeofinvestment.

Dividends Paymentsmadebycompaniestoshareholders,traditionallymadetwiceayear,whicharepartoftheprofitmadebythatcompany.

Dividend Imputation Acorporatetaxsystem,inwhichsome,orall,ofthetaxpaidbyacompanymaybeattributedtotheshareholdersbywayofataxcredit.

Equities Anotherwordforsharesorstocks.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.

Franking Credit Incometaxcreditsthatacorporationmaychoosetopassontoshareholdersasarepaymentfortax paid.

Investment Policy Statement

Adocumentoutliningtheinvestmentpoliciesofanyorganisation.

Investor Sentiment Thetendencyforthemarkettomoveupordownoverasetperiodoftime.

Liquidity Howreadilyyourinvestmentcanbeturnedintocashwithoutcompromisingthevalueoftheinvestment.

Listed Property Trust Agroupofinvestorspoolingfundstoinvestdirectlyorindirectlyinpropertywhichislistedonthestock exchange.

Managed Funds Managedfundsrelyontheexpertiseofthemutualfundmanagertoresearchandselectthestocksorbondsthatmakeupthefund’sportfolio.

pa Perannum,peryear.

Portfolio Acollectionofinvestmentsallownedbythesameindividualororganisation.

Return Thepercentagechangeinvalueoftheinvestmentoveragivenperiodoftime,includingbothcapitalappreciationanddividendsorincome.

Risk Thetendencyfortheactualinvestmentreturntodifferfromtheexpectedinvestmentreturn.

Shares Anotherwordforequitiesorstocks.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.

Glossary.

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Stocks Anotherwordforequities.Asecurityrepresentingownershiprightsandentitlementtoashareintheprofitsofacompany.

Unlisted Property Trust

Agroupofinvestorspoolingfundstoinvestdirectlyorindirectlyinpropertywhichisnotlistedonthestockexchange.

Volatility Measureofinstabilityinreturnoninvestment.

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Westpac Social Sector Banking has developed a unique suite of products specifically for not-for-profit and community organisations. We also have a dedicated team of not-for-profit specialist bankers who can ensure that Westpac and your organisation create the most beneficial banking partnership for your needs.

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Notes.

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Notes.

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Things you should know: Some of this information is provided by a third party. While such material is published with necessary permission, Westpac accepts no responsibility for its accuracy or completeness. This Guide contains general advice only and is current at the date of publication. Persons should seek their own professional advice whenever making investment decisions.

© 2011 Westpac Banking Corporation ABN 33 007 457 141. CBI200 (05/11) 227772