What is an investment strategy
It is becoming increasingly important for churches to have an awareness of how to manage investments. Churches may receive investments from bequests and legacies, government grants, building funds or may have excess funds that need to be invested. The first step in managing investments is to develop an appropriate investment strategy.
What is an investment strategy?
An investment strategy is a set of rules and procedures used to make investment decisions. This is a formal document that should be communicated to and approved by the leadership of the church. A number of factors need to be considered in the development of this strategy:
- Types of investments;
- Goals of the investment;
- Criteria for evaluating performance;
- Tolerance for changes in the value of investment;
- Consideration of any security;
- Denominational requirements; and
- Responsible, sustainable, environmental and ethical considerations.
Types of investments
The church should decide whether investment holdings should be mainly cash-based e.g. term deposits, or whether other investments such as shares, property or managed funds might be appropriate. If a mix of these are selected, the percentage of the investment in each category should be defined.
Goals of the investment
The church needs to determine the goals for the investment. The church may require regular amounts to be received from the investment in the form of dividends or interest, or may want to increase the value of the investment itself as much as possible without receiving money in the short term.
Criteria for evaluating performance
Investment strategies usually have targets to monitor performance. Examples could include maintaining yield 1% above the current cash interest rate or 1.5% growth above CPI per annum.
In setting a realistic benchmark, regard should be made for an appropriate balance between high and low risk investments.
Tolerance for changes in the value of the investment
Where the church has decided that investments are being held for the long term, the church may be prepared to tolerate changes in the value as long as the investment increases in the long term. Each church needs to determine its own risk profile. If funds have been set apart for a particular use, such as a building program, investments that are less susceptible to changes in value such as cash investments will be more appropriate.
Consideration of security
Some mortgage investment products are provided to end users who may provide security for the loans they take. In order to protect the church’s assets, a regular review of the security arrangements is recommended.
There may be specific denominational guidelines on how funds can be invested. You should consult your denomination authority for any guidelines.
Authorisation and review
Funds invested are often a significant amount of the church’s assets. It is important that there are appropriate internal controls in place around the investment. Access to the funds should require dual passwords or signatories.
Regular review of investments should be undertaken to consider the performance and security of the investment and to ensure the investments remain appropriate for the needs of the church.
Non-interest bearing accounts
These accounts should be used only for meeting the day to day needs of the church. Interest bearing accounts at a competitive rate should be the minimum requirement for any surplus cash funds.
Refund of imputation credits
Endorsed income tax entities and deductible gift recipients (DGRs) are entitled to claim a refund of any imputation credits included in any franked dividend income they receive. The application to obtain the refund can be obtained by contacting the Australian Taxation Office.