There are 43 common investment funds (CIFs) on the market, and in September this year a total of £6.8bn was invested in them by the charities in England and Wales. The investments are also due to be opened up to organisations in Scotland and Northern Ireland this year.

Like other forms of pooled investment, such as unit trusts and open ended investment companies (OEICs), the manager of a CIF invests in a range of different equities and other asset classes, depending on the type of fund. In spreading investments CIFs aim to provide diversification and so spread out the risks involved in the stock market and other forms of investment. The investor buys units in the fund, and those units rise and fall in price in line with the performance of the fund and its underlying investments.

But there are several major differences between CIFs and other commercial forms of collective investment. For one thing, CIFs are eligible for registration as charities in their own right. As such, they enjoy all the tax benefits that come with charitable status – benefits that are in turn passed on to the investing charity.

Furthermore, CIFs are regulated by the Charity Commission and not authorised by the Financial Services Authority (FSA), which watches over unit trusts and OEICs. Furthermore, an independent advisory board, comprising representatives from a variety of backgrounds including the charity sector, is also enlisted to keep an eye on the management and governance of the fund.

As David Bailey, head of charities at Aberdeen Asset Management says: “The advisory board is made up of the great and the good. They are unpaid and they are acting for the stakeholders.”

Many charities feel this gives them an extra layer of reassurance. Clearly, any investment linked to the markets can rise or fall in value, regardless of the appointment of an advisory body. But its presence means there is one more level of pressure on managers to behave correctly and with the best interests of investors at heart.

Similarly, many organisations feel more comfortable investing their funds with a charity rather than with a commercial organisation. “CIFs still have an appeal, particularly with small to medium charities, because they like being invested with like-minded organisations,” says Nick Rickard, client solutions manager running the charities area at PSolve.

And then there is the matter of administration. Because CIFs qualify for charitable status, the tax benefits, such as exemption from income tax, stamp duty and capital gains tax, are already taken into account. Any dividends are paid gross. The investing charity need do nothing to reclaim tax. “Everything is done for you,” says Bailey. “And you should get a good service.”

In many cases, CIFs will have a low point of entry – CCLA for example has a minimum initial investment of £1,000 – making them especially appealing to smaller charities.

In terms of performance, CIFs and unit trusts should be on an equal footing. After all, says Bailey: “You are buying a house performance.” If you looked at two passively-managed FTSE100 tracker funds, one in a CIF and one a unit trust, for example, the two should follow exactly the same pattern on a graph, rising and falling with the fortunes of the index. If they don’t, there is something wrong.

“There should be no difference between the performance of the CIF or the unit trust,” agrees Ron Green, senior manager of the Charities Aid Foundation’s Charity Financial Services. “But the CIF should get better returns because of its lower charges and tax benefits.”

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Charges on CIFs are relatively low. According to Nick Davis, client relationship manager at the investment firm CCLA, which only looks after the not-for-profit sector, there is no front end load, annual management fees are 0.3% and the bid offer spread, effectively the charge for buying and selling, is 0.5%.

A standard unit trust or OEIC, on the other hand, will charge anything up to 7.5% as an up front fee, and annual management charges can cost as much as 2.5%, although the majority of annual fees hover around 1.0% to 1.5%. According to the FSA, a typical unit trust will have a bid offer spread of between 5.0% and 6.0%.

However, PSolve’s Rickard says fees on unit trusts and OEICs can be brought down by pooling investors’ money in a multi-manager scheme. “We have a multi-manager portfolio where we are able to pool all our investors’ assets together and drive the costs down,” he explains. The result, he says, is that overall costs can come in lower than the 0.25% to 0.35% that you might pay for a passive UK equity CIF.

A CIF should be just as well positioned to give investors a healthily diversified spread of investments across its chosen asset class and sector as another pooled investment. The number of holdings need not be any smaller than those in a unit trust of the same size.

And similarly, the calibre of manager should be no different. “A big fund manager will have a range of funds. For pensions, it will have a life wrapper around it, there will be one with a CIF wrapper, and then there will be a standard investment fund.”

So if performance should be the same if not better, fund managers are every bit as qualified, charges are lower and you can start with just a small amount if you need to, why would a charity want to look away from CIFs for their pooled investment needs?

One drawback is the lack of choice. The 43 CIFs on the market are positively swamped by the hundreds of unit trusts and OEICs to choose from, investing in just about every asset class around. With CIFS, though, the types of asset available are limited and some areas are underrepresented or just not present at all.

CIFs usually invest in equities, and there is a limited choice of property funds available – there is only one hedge fund CIF currently, and there are no private equity CIFs at all. “The industry has been very slow at responding to that demand,” says Bailey. Consequently, charities wishing to move into the sectors underrepresented in CIFs will invariably have to look further to other unit trusts and OEICs where choice is abundant. “There are only so many you can choose from in terms of diversification and choice,” says Green. “There is more to choose from in unit trusts.”

Investors in CIFs can also reclaim 10% dividend tax credit, which is not the case for normal unit trusts. But according to Rickard, some of the tax advantages of CIFs can be outweighed by the performance of some of the unit trusts covering sectors that CIFs do not. While the stamp duty exemption on property can mean huge savings through CIFs, a saving of 4% on properties costing more than £500,000, the stamp duty investors save on UK listed equities amounts to much less at 0.5%.

“CIFs still have an appeal for UK equities and property because of stamp duty, but that is becoming less and less of an issue,” says Rickard. “If you get an actively managed
retail fund that consistently over-performs, that 0.5% can be quite insignificant.”

While CIFs retain their appeal, especially for small to medium charities, the benefits they offer are becoming less relevant, argues Rickard. “Charity trustees are using other asset classes. They are moving away from the funds they would have chosen five to 10 years ago.” Charities increasingly have a target return they need to reach, and they do not limit themselves to CIFs in order to get there, says Rickard.

Clearly, investment needs vary widely between charities, and while some will achieve their aims investing purely in CIFs, others will want to invest in unit trusts either instead of or as well. In a sector that favours a ‘run by charities for charities’ approach, it is not surprising that common investment funds are the investment of choice for many organisations. But, as Rickard points out, for charity investment: “There is no one size fits all package.”

Ethical CIFs

Certain CIFs are set up to appeal specifically to charities with socially responsible investment requirements. Some investment houses, such as CCLA, operate with a firm SRI overlay, avoiding stocks which invest in gambling, tobacco and arms and engaging actively with companies to improve corporate governance.

However, the sector has come in for criticism recently for not doing enough. Ethical Investment Research Services (EIRIS) recently published a report that showed only around 16 per cent of the money invested in CIFs had been channelled through ethical screening.

Two-thirds of funds did screen out tobacco stocks, but far less applied screening to rid the fund of investment in the most commonly avoided areas such as armaments, alcohol, gambling and pornography.

Peter Webster, executive director of EIRIS, says: “I hope that this new research will encourage more charities to consider the responsible investment approach of CIFs and, if they are not satisfied with what is currently on offer, to talk to their fund managers about their SRI needs.”

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