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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.