Charities face up to risks of banking on cash deposits

Barings' collapse has persuaded foundations to review investment policies, says Suzanne Bidlake

WHEN Barings Bank went belly-up in spectacular fashion last month, £12m of annual income to the Baring Foundation went with it, and millions held in cash and investments by other charities hung in the balance.

In the last week, three merchant banks of similar size and range of activities to Barings - Schroder, Robert Fleming and Lazard Brothers - have announced they are reviewing their policy, typical among fund managers, of placing clients' cash deposits with the parent banks.

"But we're not the only ones," says Tom Cross-Brown, chief executive of Lazard Investors. "Lawyers all over the City are working overtime to see how to best to ring-fence clients' money without putting it in funds."

The Barings dbcle has sent the charity sector into a tail-spin. "People have been frightened to death," says Ruth Cottrell, director of charity services at the Charities Aid Foundation. "Barings looked a safe bet, based on its IBCA rating. But as highly qualified people in the City are saying, it was a one-off - until it happens again. Everyone is reviewing their situation."

Barnardo's, the children's charity has had a vivid reminder of the dangers, as Tessa Baring of the banking family is a trustee. But as the fourth biggest investor among fund-raisers, it has a clear-cut policy to put any cash into a large clearing bank or to spread it around. It has £5m with Barclays. Reserves of £80m are managed by Schroder and Mercury Asset Management, with never more than 1 per cent placed in a single company.

A top-heavy holding in one company, the British Leyland Motor Corporation, caused the Nuffield Foundation to lose 90 per cent of its asset value back in 1975, when British Leyland slid into the knacker's yard and an embarrassing state rescue. Mindful of this experience, Sir Roger Gibbs, son of Nuffield's former chairman and himself chairman of trustees at Wellcome Trust, has been gradually selling shares in the Wellcome drugs company since 1986. This culminated in the sale of its remaining 39.5 per cent stake to Glaxo this month.

But investing charity money - a total of £15bn in Britain - is a tricky business, not just because of the moral burden to do the "right" thing.

Their financial management differs starkly in size and standards of professionalism, with those in the middle the most vulnerable. They are the ones with significant funds to invest, but not the resources to seek expert advice. Charities are bound under the Trustee Act of 1961 to get the best return on their money but often face the dilemma of needing easy and swift access to cash.

The CAF has received a flurry of calls from charities about its investment schemes, which market themselves on a "less risk" platform. It runs a cash deposit fund, for example, where risk is diversified across other banks.

"We spread our net deliberately wide, with 1 per cent (£12m) of the overall fund the maximum placed anywhere," says Ms Cottrell. "Our eggs are never all in the one basket."

At the same time, the 500-strong Charity Finance Directors Group has just set up a standards board that will produce guidelines on - among other things - managing cash. It first met two weeks ago.

Ian Theodoreson, a member of the board and also Barnardo's director of finance and corporate services, is scathing of those who try to manage their own funds. "If it works, they might win a small percentage gain. But if it goes wrong, the damage could be awesome."

Exposure to risk generally arises in three ways for charities: through cash deposits held by fund managers and awaiting re-investment in stocks and shares; through straight investment in cash deposits with one bank; and through big shareholdings in one company.

Alleyn's College, whose £40m is in funds managed by Barings, was caught out trying to realise £3m for distribution at the time of the bank's crash. Its trustees now plan to "look at" its position. But John Wylie, general manager, stresses that Barings has brought it good returns.

As for cash deposits, "there are millions and probably billions of charity money held in this way," says Ms Cottrell.

Some charities have already reacted to the heightened recognition of risk following the Barings collapse. The British Heart Foundation's council of trustees has withdrawn authority from its investment committee to put money on deposit with merchant banks. None was on deposit, but a spokeswoman says: "We wanted the extra protection." The investment committee, made up of "volunteers, but experts," otherwise makes its own decisions on where to put the charity's money.

One problem for charity finance directors can be isolation. To combat this, some have called on their contacts and those of well-connected co- directors or trustees, many of whom can be found in Who's Who. Some are former merchant bank employees, and while such appointments may be above board, they could leave those individuals open to a conflict of interest.

The Charities Act 1992 has done much to change that, however. The role of Official Custodian at the Charity Commission was abolished, flooding the market with charity funds looking for a place to invest. Not slow to react, merchant banks sharpened up their marketing to charities with advertising and sponsorship. The Charity Commission's advice is to review investments every three to five years, with banks competing in "beauty parades".

The commission recommends that the 95 per cent of charities with less than £5m put their money into common investment vehicles - pooled funds that spread the risk. Those with more were given authority by the commission for the first time last year to delegate responsibility to fund managers. Many charities had already been using fund managers but, under the Trustees Act of 1925, had been doing so without authority.

Start your day with The Independent, sign up for daily news emails
News
The guide, since withdrawn, used illustrations and text to help people understand the court process (Getty)
newsMinistry of Justice gets law 'terribly wrong' in its guide to courts
News
Bobbi Kristina Brown with her mother Whitney Houston in 2011
people
News
Starting the day with a three-egg omelette could make people more charitable, according to new research
scienceFeed someone a big omelette, and they may give twice as much, thanks to a compound in the eggs
News
Top Gun actor Val Kilmer lost his small claims court battle in Van Nuys with the landlord of his Malibu mansion to get back his deposit after wallpapering over the kitchen cabinets
people
PROMOTED VIDEO
News
The actress Geraldine McEwan was perhaps best known for playing Agatha Christie's detective, Miss Marple (Rex)
peopleShe won a Bafta in 1991 for her role in Oranges Are Not The Only Fruit
News
newsPatrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
News
Robert Fraser, aka Groovy Bob
peopleA new show honours Robert Fraser, one of the era's forgotten players
Life and Style
Torsten Sherwood's Noook is a simple construction toy for creating mini-architecture
tech
Sport
David Silva celebrates with Sergio Aguero after equalising against Chelsea
footballChelsea 1 Manchester City 1
News
i100
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links