This charity was set up by a very wealthy Victorian industrialist in 1896 who made a
fortune from lace-making and hosiery in the East Midlands area. It is dedicated to
giving charitable financial support to widows and orphans living within a specific
geographical area located around the City of Nottingham. It is run by a group of elected
trustees and has investments and cash approaching £4.5million.
The Trustees donate the Charity’s income to deserving cases who are invited to apply
following referral by social services and charitable organisations. These applications are
then assessed by a panel, and in qualifying cases, financial assistance is offered to help
with living costs, particularly in relation to education.
The Charity has approached you, as an independent financial advisor, to see if
you can advise and assist them going forward.
Specifically and in confidence, the Trustees have asked for their investment portfolio to
be reviewed and redesigned as they have concerns about its present structure. They
feel that it should be more balanced; less exposed to investment risks and are seeking
your advice in this respect.
In addition to the securities shown in the table, the Charity owned, until recently, a small
portfolio of commercial retail units. These have now been sold and the proceeds
(£960,000) are being held in a bank money market account, on one month’s notice of
withdrawal. This cash balance is also available for new investment.
As there is an adequate cash balance in the Charity’s current account to cover everyday
expenditure, you are reliably informed that there is no requirement for the Trustees to
retain any further money in cash as an “emergency reserve”.
The chairman of the Trustees has also mentioned that, following the appointment
of some new members, there has been some heated debate about the progress of
the funds under their control. He says that the following views have been
expressed at a recent meeting:
“The current investment prices and values are out of date by at least six months. Also
they look very unbalanced. Look at all those damned bank shares. We’ve lost a fortune
thanks to those bankers”.
“Financial advisors are just a bunch of rogues and charlatans and are only in it for the
commission they make by churning investments around. The one thing that they cannot
control is risk and, as a charity, security is clearly important to us.”
“The stock market is just a casino and is no place for a well respected charity such as
ours. You might as well stick all the money on the National Lottery”.
“Our share investments seem to be concentrated in similar companies and not very well
spread about. A friend of mine, who does a bit of investing in the stock market, tells me
this can potentially be very dangerous, and quite risky, if anything goes wrong.”
Details of the Charity’s investments are shown in the following table. The Chairman of
the Trustees apologises for the fact that the prices are a little out of date, they were last
valued about six months ago. So the first request, from the Chairman is for you to
calculate exactly what the total value of the investments is at the time of your
review. The Trustee’s chairman has also expressed the following concerns to

  • the possible exposure to risk that is inherent in such a relatively large portfolio of
    investments spread across various asset classes.
  • the relatively high management fees which are payable for the Investment Trust
    shares. They are not happy about this. Some of the new trustees have even proposed
    that they should become more active in investment decisions themselves and not be
    reliant on professional advice with all the associated costs.
  • a more transparent investment policy whereby it is clear exactly what shares are in the
    portfolio. The Investment Trusts appear to be very shadowy enterprises and the charity
    has over £1.2m invested in them.
  • to ensure their investments can be justified from an ethical point of view. The
    chairman has indicated to you that this is a very important consideration from the
    perspective of the Charity.
  • to address their fears about the level of inflation in the future and how they could
    mitigate any possible rises in the level of inflation. They have fears that both interest
    rates and inflation may rise during 2019.
    The chairman and the treasurer of the Trustees have requested that you review
    the existing portfolio by updating the valuations and commenting on the range of
    investments held, initially, in terms of asset allocation and risk. And then to
    recommend, with reasons:
  • how you would respond to the concerns of the Chairman, given above, and the views
    of the five new Trustee members.
  • the changes you would make to their current portfolio in terms of asset allocation and
    diversification with your reasons in terms of investment theory and risk management.
  • the construction of a new balanced investment portfolio for the Charity including your
    recommendations for the investment of the additional £960,000 currently held in cash.
    Therefore; in summary, you are to write a 3,000 word report which:
    1) Updates the investment totals and reviews the suitability of the present
    investment portfolio, with an analysis of the main risks.
    2) Discuss briefly the theory behind portfolio planning and risk management.
    You should also make reference to the relevance of the Trustee Act and the
    responsibilities of Trustees in this type of situation. *See note below.
    3) Make recommendations for appropriate changes to create a new
    investment portfolio by applying relevant risk and return measures and
    showing how they have been used to evaluate the assets.

The new portfolio should meet the needs of the Charity and should include
the investment of the additional cash holding. In creating the new portfolio
you should address the concerns expressed by the Trustees.

Sample Solution