Risk is part of the investment process and there are a number of risks that trustees should take into account – these are explained in more detail below. Before making any investment decisions, trustees should consider what is the appropriate level of risk that they want to, or are able to, accept. As part of their duty of care, the trustees must be satisfied that the overall level of risk they are taking is right for their charity and its beneficiaries.
Setting investment objectives is not about avoiding risk, but about recognising and managing it. If a risk materialises and results in a loss to the charity, the trustees will be better protected if they have properly discharged their duties and identified and considered the management of the risk. A loss might mean a low return on an investment or the loss of some, or all, of the amount invested, but it can also be about loss of reputation, perhaps through investing in an unpopular or discredited company. As with any loss or setback, the trustees should review the circumstances of the loss, their risk appetite and how they identify and manage risk generally. They should also take the opportunity to learn from their experiences in order to benefit the charity in the future.
Funds invested for the short and medium term should be relatively risk free as charities will want to avoid sudden drops in capital values which could reduce their available funding. A drop in capital value for funds invested for the longer term is less critical because such investments can be held until their value has recovered.
Although it might be difficult for trustees to justify an investment policy that involves the charity taking on a high level of overall risk, it may be appropriate to include certain high risk investments within the overall portfolio.