Charities stand accused of frittering away millions on the stock market

A drop in donations and the collapse of share prices has led to the closure of vital projects and staff cuts at high-profile organisations

The RSPCA will announce today that its crippling stock market losses are forcing it to halt all construction work, a decision that will hit vital projects from Merthyr to Durham.

The decision, which comes as a bitter blow to thousands of staff, demonstrates the depth of the charity's exposure to the vagaries of share price movements.

Some observers of the charity sector are sceptical about the way the RSPCA has invested its money of late. A new £16m headquarters in Horsham, Sussex, has been almost as contentious as the decision to spend £40,000 pursuing an inquiry last year into the activities of David Mawson, a vegetarian chef and member of its council. The cost of the failed attempt to suspend him from the council is reported to have included £3,560 to track his e-mails.

But thousands of trustees are in the same position. After legislation in 2000 allowed trustees more scope to invest in shares, many other charities increased their exposure to the stock market just as values slumped. In addition, the bear market has caused a slide in charitable donations, compounding the agony.

The RSPCA's decision to tighten the purse strings is typical. After a spectacular £20m stock market loss in 2001, the Guide Dogs for the Blind Association announced in August that it would be closing 13 residential centres, where people are taught to live and work with their dogs, and use hotel facilities instead.

The grass roots response demonstrated the emotional impact that such decisions can have in the charity sector. The Guide Dogs Association's Kent representative told the charity's chief executive to "put on a blindfold for 48 hours and go into a hotel environment, then a residential centre" and see how she felt.

The Children's Society found itself taking the same painful decision in November last year. The charity cut £6.4m from its projects in England and Wales and closed down all 13 of its Welsh schemes following financial problems partly caused by the FTSE 100's meteoric fall from 6,930 in December 1999 to 3,777 in July this year, its lowest level for six years. From the Church of England's well-publicised £401m losses to the quiet demise of the Centre for Policy on Ageing, a 55-year-old charity which will close in May 2003 because of investment losses, the effects of the stockmarket crash are ripping through Britain's charities.

As the figures in today'sIndependentreveal (see Falling Incomes, above) other prominent charities are struggling. But analysts say there are considerably more cutbacks to come.

Close Wealth Management (CWM), which manages investments for 60 charities, claims poor stockmarket returns slashed 10 per cent off the estimated £30bn held by the UK's 161,000 charities in 2001. The fund manager also warned yesterday that the financial viability of two-thirds of charities with long-term capital investments are now under threat.

The cause of all the trouble has been the rapid shift from the bull markets of the 1990s, when many charities first invested in equities, were richly rewarded and developed expectations that blinded them to the warning signs of the bear market to come.

"The sun always shone on their investments," said Clive Paine, CWM's charity development manager. "Charities rarely looked at their investment portfolios with a critical eye. If you put £1m in, in 1992, and it was worth £7m at the end of the decade you probably never even asked the investment director what he was doing."

By the time the wheels finally came off the stock market three years ago and charities experienced consecutive years of investment losses, another problem which had been bubbling under the surface suddenly emerged: a 10-year decline in the number of companies and individuals making donations. The trend was exacerbated by the advent of the National Lottery eight years ago and Chancellor Gordon Brown's decision to undermine a valuable tax break by scrapping the advance corporation tax credit on dividends paid to charity funds.

Amid the stockmarket mayhem, there has also been a deterioration of the crucial income from legacies left by people in their wills. "The state of the market undermines the confidence of the giver," said Charity Commissioner David Taylor yesterday. "If they have seen 20 per cent knocked off their own portfolio they may think more about giving to their own family."

Charities have also been suffering a reduction in dividend income as well as their paper losses. They have started needing their capital assets just as they began seriously shrinking. Some of CWM's client – which include some of Britain's best known charities – have been dipping into reserves at a rate of £100,000 a quarter.

Should trustees who find themselves with new donations to invest, steer clear of the stockmarket altogether and put their cash in the bank instead? No, says the National Council for Voluntary Organisations, the voluntary sector umbrella group. "The problem is that there are strict guidelines on how a charity's money might be spent – it can only go on what the charity was designed for," said a spokesman. "But there are also strict guidelines on making the most out of investments. They must also maximise the money they get. To avoid the market altogether because it is not performing at the moment is unreasonable."

With that kind of straitjacket, there seems no easy way out of the mire besides taking the pain, reining in spending, investing more cautiously and finding other revenue streams.

Scope, the charity for people with cerebral palsy, which has experienced paper losses of about £3m, is one of many organisations now keeping a closer eye on investments. The charity's executive council and management board regularly reviews its portfolio to ensure it remains financially viable, according to chief executive Richard Brewster. The charity is also focusing on attracting funds for specific projects rather than relying on discretionary money. In other words, they won't spend beyond their means.

But there's harder work up ahead for the RSPCA, which has a fight on its hands to keep the morale of its staff from plummeting. As well as the construction project fall-out, about 60 jobs will go with the closure of three of its 10 regional headquarters and the pay of every staff member is to be frozen.

RSPCA DOGS' HOME PROJECT POSTPONED

The announcement two years ago that the RSPCA was to build a £3m home for abandoned pets in Chester-le-Street, Co Durham, was greeted with delight. A major facility in Gateshead had closed in the 1990s and dogs' homes were swamped by the 3,500 animals collected each year.

But it will be confirmed today that the project is being postponed, even though the RSPCA has already bought a 100-acre farm and a neighbouring former college to accommodate the home.

The charity says it has other spending priorities, and also blames the plunging value of its stock market investments, which has forced it to find savings of £12m. The decision has prompted a member of the RSPCA's ruling council, Angela Walder, to resign.

A local RSPCA worker said: "It's a tragedy for the animals ... The RSPCA spent tens of thousands of pounds getting planning permission and fighting a planning inquiry and now they're not going to build it."

FALLING INCOMES

Guide Dogs for the Blind Association
Plans to close all 13 of its residential centres, where people are taught to live and work with their dogs, after a £20m fall in the value of its investment in 2001. It will hire hotel wings or university halls instead.

Marie Curie
The charity, which pays for nurses, hospices and research, lost £3m on the stock market in 2000 and £1m in 2001, and the value of its investments continued to fall this year. A spokeswoman said: "We are just within our reserves limit."

Barnardo's
Lost £6.8m on the stock market in the year to March 2001 and expects losses of £1.3m in the year to March 2002. It has reduced its exposure to UK stocks and says it is in the fortunate position of not having to draw down.

Royal National Lifeboat Institution
Lost £36.2m, 10 per cent of its balance sheet, on the markets in 2001, cutting its wealth to £503.5m, and is reducing its exposure to UK equities. It declines to say how many months' expenditure it has in reserve but insists that services will not be cut.

British Red Cross
Lost £3.3m on investments in 2001 caused by "difficult market conditions". Its free available reserves were £28.7m, a long way below its target reserves.

Church of England
The Church Commissioners, who oversee finances, lost £401m on investment assets last year. This year is proving even worse and the Church has had to cut costs and sell assets.