Investment

The common good

Common investment funds offer a wide range of tax-efficient investment choices for charitable investors. Ruth Murphy provides the background to CIFs and reviews the possible strategies open to independent schools

The concept of the common investment fund (CIF) was defined by the Charities Act 1961 (and 1992), as a means of providing charitable investors with a method of pooling their investments alongside other organisations, and of providing a diversified portfolio appropriate to the charity’s objective.

Since they are authorised by the Charity Commission, CIFs are themselves registered charities and have many of the tax advantages afforded to them. They differ from unit trusts and other publicly available funds in several ways (not least because the costs tend to be lower) and have some mutual characteristics, with a key element being the ability of investors of any size to access a larger diversified fund.

Simple strategy
CIFs provide charities with a straightforward investment opportunity for their charitable funds. They have grown in number, particularly over the last decade, to offer investors choice, including those in the charitable education sector, in investment approaches.

The principal features of a CIF are outlined below:

• the charitable status of the funds and of their investors allow the funds to pay dividends gross of tax. Charities consequently avoid the burden of having to reclaim tax;

• by virtue of the tax-exempt status of CIFs, the underlying fund is exempt from stamp duty, which is payable on unit trusts. Charity investors are exempt also from capital gains tax on the increase in the value of their funds;

• as CIFs are available only to charities, they are designed with charity investors and their specialist objectives in mind, such as attitude to risk;

• although the annual management charges for investment vary (and price should be a consideration with other factors, such as past performance and the specialist nature of the investment and service offered), CIFs in general have lower fees than equivalent unit trusts and other types of pooled funds; and

• the key benefit of investing in a CIF is the diversification they offer to charities of all sizes, in a cost-effective and easily accessible manner.

Although designed to enable smaller charity investors to access stock markets, increasingly large sums are being invested in CIFs. In real terms, the size at which a charity feels it prudent to have its own portfolio has increased over the years. Provided that there is a CIF that has the investment objective that accommodates your specific constraints, then it may be worth consideration.

Growing choices
Over the last decade, an increasing number of CIFs have been launched, providing charitable investors with more choice. There are now 44 funds that offer investment in UK and overseas equities, fixed interest, property, alternative assets or a blend of a number of asset classes. There are also a few cash CIFs.

Administrative convenience remains a key attraction of CIFs. It is important that charities can streamline their administration. For those with few (or no) employed staff to look after investments, the simplicity of CIFs frees up trustees and governors to spend the majority of their time on their charitable purposes and good governance.

Charity options
Some schools have charitable status and others have part of their assets constituted as charitable funds. For those with a range of endowment, bursary and appeal funds, the individual amounts may warrant a pooled investment and a CIF could therefore be worth considering.

Furthermore, a manager of your chosen fund could be instructed to set up different accounts with discrete holdings of the CIF, which allows separate accounting for each underlying fund. This streamlines school administration and accounting.

A CIF may offer your school a sensible and practical way of investing funds, of any size, in a tax-efficient manner. The range of CIFs available means an investor has a wide choice in selecting funds best suited to the requirements of the school and of its specific funds.

Ruth Murphy is director of charities business development for Newton Investment Management. Ruth can be contacted on ruth_murphy@newton.co.uk

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