Source: University of Otago
New Zealand community trusts are $127.9 million worse off because of poor performance on investment strategies, and a University of Otago academic is calling for a review into their financial operations.
Dr Helen Roberts
Dr Helen Roberts, of the Department of Accountancy and Finance, examined the investment performance of 11 of the country’s 12* community trust funds from April 2017 to March 2020.
In a report she outlines how active investment decisions have been outsourced to independent fund managers, and deviation from a passive benchmark strategy has proven very costly.
The 11 trusts cost local communities $127.9 million in value over the last three years, with underperformance attributable to poor investment management strategies.
“Community trusts are responsible for overseeing the investment and distribution of funds for communities. Given that community trusts have a fixed pool of money, upon which local charities are heavily dependent, investment under-performance of the magnitude described is of serious concern.
“Their local community, the ultimate owner of these funds, bore the negative consequences of this loss.”
Dr Roberts says community trusts rely almost exclusively on investment returns and their welfare contributions are directly related to investment returns.
“They can allocate their initial capital base and inflows from donations to an investment portfolio where the maximisation of investment returns increases the financial resources available for social contribution.”
The study examined how well the trusts managed their fund investments relative to a passive benchmark – Simplicity fund manager, which is also a charity – to determine how the return on the funds invested by the trusts compared to the performance of the not-for-profit Simplicity funds.
“Investment decisions both internally by trustees, and active strategies proposed by external advisors and consultants, limited capital increases. Not one community trust outperformed a passive Simplicity investment strategy over the three-year sample period.
“The trustees are ultimately responsible for investment performance and, while hiring consultants to advise is clearly a prudent thing to do, the overall advice provided by consultants seems to have been poor in achieving investment returns above a real world, available passive alternative,” Dr Roberts says.
She believes Associate Minister of Finance Dr Megan Woods, whose portfolio responsibility includes community trusts, should be concerned about their performance and argues the study findings support an investigation into community trust investment decision making to ensure underperformance doesn’t continue.
Dr Roberts also argues for more attention to be paid to financial experience when appointing trustees and believes community trusts should adhere to Managed Investment Scheme reporting standards, which are mandatory for other public pools of investment funds, such as Kiwisaver and Unit Trusts.
* The sample comprises regional New Zealand Community Trust organisations, where 11 of the 12 are included in the overall analysis with the exception of the TSB Community Trust. While TSB serve the same philanthropic purpose in providing grants to the local community, their ownership structure and investment approach are significantly different. They are a major shareholder in TSB Group Limited who operate as a holding company managing the trust’s investments. Therefore, revenue is in the form of “dividends” and they do not incur any investment expenses. Because their portfolio does not include “investable assets” TSB Community Trust has been excluded from the analysis.
The Relative Underperformance of Community Trust Investments in New ZealandDr Helen Roberts
For more information, contact:
Dr Helen Roberts (Please note: Dr Roberts is unavailable between 9am and noon on Thursday)Department of Accountancy and FinanceOtago Business SchoolUniversity of OtagoTel +64 3 479 8072Email firstname.lastname@example.org
Ellie RowleyCommunications AdviserUniversity of OtagoMob +64 21 278 8200Email email@example.com