At the launch seminar for CFA Singapore’s Code of Conduct for Investment Committees, charities leader Gerard Ee (left) and union leader Lim Boon Heng (right) addressed over 200 leaders from non-profit organizations. The panel discussion was facilitated by the Chairperson of the Society’s Asset Management Committee, Ms Lim Li Ying, CFA (centre).CFA Singapore's Asset Management Committee recently produced a set of guidelines on best investment practices for persons outside the financial industry with fiduciary duties over funds. These people include board members of charities and trade unions and other non-profit organizations.
GERARD EE: Most investment policies recommend reserves of 5 years. In the ideal situation, a charity with an annual expenditure of $1 million should have reserves of at least $5 million. The reality is: Many charities would be happy if they have a reserve of S$500,000 that they can roll over in fixed deposits.
In the past, I’ve seen a lack of financial savvy in charities when interest rates were going up. Some charities with funds in fixed deposits didn’t realize that if they closed the account and set up a new fixed deposit account, they would in fact have gotten better interest rates.
Now, it has become very liberal. Previously, charities were only allowed to put money in the 4 local banks. Now, they are allowed in deposit with any bank, as well as invest in equities and other risky assets. However, the trustees have to bear ultimate responsibility.
Q: How do we balance the responsibility between the board, the trustees and the investment committee?
LIM BOON HENG: The board has overall responsibility over the voluntary welfare organization. However, if you appoint an investment committee, then this committee has responsibility over the funds. The important thing is to have clarity over what the board does and what is entrusted to the investment committee. Spelling out what the investment committee can do versus what must be approved by the board can make the working relationship a lot smoother.
Mr Lim Boon Heng (Chairman of NTUC Enterprise and former cabinet minister) and Mr Gerard Ee (Chairman of Singapore Institute of Management’s Governing Council and former President of the National Council of Social Service) spoke as expert panelists along with 9 investment management professionals at CFA Singapore's launch of the Code for Investment Committees.
The following discussion by Mr Ee and Mr Lim is republished, with permission, from the current issue of The CFA Singapore Quarterly which was produced by NextInsight.
The following discussion by Mr Ee and Mr Lim is republished, with permission, from the current issue of The CFA Singapore Quarterly which was produced by NextInsight.
GERARD EE: Most investment policies recommend reserves of 5 years. In the ideal situation, a charity with an annual expenditure of $1 million should have reserves of at least $5 million. The reality is: Many charities would be happy if they have a reserve of S$500,000 that they can roll over in fixed deposits.
In the past, I’ve seen a lack of financial savvy in charities when interest rates were going up. Some charities with funds in fixed deposits didn’t realize that if they closed the account and set up a new fixed deposit account, they would in fact have gotten better interest rates.
Now, it has become very liberal. Previously, charities were only allowed to put money in the 4 local banks. Now, they are allowed in deposit with any bank, as well as invest in equities and other risky assets. However, the trustees have to bear ultimate responsibility.
Q: How do we balance the responsibility between the board, the trustees and the investment committee?
LIM BOON HENG: The board has overall responsibility over the voluntary welfare organization. However, if you appoint an investment committee, then this committee has responsibility over the funds. The important thing is to have clarity over what the board does and what is entrusted to the investment committee. Spelling out what the investment committee can do versus what must be approved by the board can make the working relationship a lot smoother.
Mr Lim Boon Heng is the Chairman of NTUC Enterprise, Chairman of Temasek Holdings, and Deputy Chairman of the Singapore Labour Foundation.He is also the Special Advisor to the Chairman of the People’s Association. Mr Lim has been, and continues to be, an untiring champion of the labour movement. He previously served as Secretary-General of the NTUC from 1993 to 2006, and held several Cabinet positions in the Singapore Government from 1993 to 2011.
Mr Lim is an active advocate of cooperatives to help lower the costs of living for workers and the public alike. He actively nurtured these social enterprises and initiated the formation of the holding co-operative, NTUC Enterprise, to provide for better governance and ensure consistency of purpose for the various NTUC co-operatives to serve the needs of workers and the general public.
Q: Is spelling out the scope of responsibilities something that can be done in one session?
LBH: There has to be an on-going regular review of what is entrusted to the investment committee.
LBH: There has to be an on-going regular review of what is entrusted to the investment committee.
Q: What is the importance of cash flow projection?
GE: I work with a lot of charities that are very small. I really hope the charities will get their financial reporting up to date. Their accrual accounting is done only at year-end. So, during the year, they don’t have a clue about their expense levels. If you don’t have updated financial accounts, it is not possible to have accurate cash flow projections. How is it then possible to decide what investment policy is feasible?
Many charities mistakenly believe that the balance of monies in their current account is what they have. After incurring some marketing expenses, they are shocked that in the following month, it has dropped by 40%.
Only with a cash flow projection will charities be able to know how much money they can set aside for what period of time. Only then will the investment committee be able to plan for monies that can be set aside for a period of time, be it six months, 2 years or 5 years. This can be as simple as putting the monies in fixed deposits.
GE: I work with a lot of charities that are very small. I really hope the charities will get their financial reporting up to date. Their accrual accounting is done only at year-end. So, during the year, they don’t have a clue about their expense levels. If you don’t have updated financial accounts, it is not possible to have accurate cash flow projections. How is it then possible to decide what investment policy is feasible?
Many charities mistakenly believe that the balance of monies in their current account is what they have. After incurring some marketing expenses, they are shocked that in the following month, it has dropped by 40%.
Only with a cash flow projection will charities be able to know how much money they can set aside for what period of time. Only then will the investment committee be able to plan for monies that can be set aside for a period of time, be it six months, 2 years or 5 years. This can be as simple as putting the monies in fixed deposits.
Cash flow projection is really the starting point for better-managed funds. Also, consolidating funds has a slight advantage in returns. For example, the interest rate that a bank pays is higher for a larger fixed deposit amount.
LBH: If our charities can do their financial planning on a sounder and more professional basis, they will become more effective voluntary welfare organizations (VWOs). Unfortunately, this is lacking in many small VWOs.
Typically, a VWO is set up. Then, it is accorded ‘Institute of Public Character’ status by the Charity Council under the Ministry of Culture, Community and Youth. Then, it raises funds. Very often, a VWO is set up because somebody is passionate about doing something good for society. So, there is a lot of passion by the founder or the group of founders. Then, they get into their activities. At the beginning, because of their enthusiasm and the contacts they can draw on, they raise their money and get backing grant from the appropriate authorities. And the VWO begins to operate.
But after a while, sustaining the operations becomes hard work. Then, the task of fund raising to sustain the operations gets more and more difficult. The VWO finds itself having to play a bigger role to raise funds. Time is then diverted from providing the welfare service to helping to raise funds.
What kind of disciplined framework is there to ensure the service is run efficiently? When the VWO needs more money, its management goes to the board and says, “We need more money. We need to raise more funds.”
But there is no discipline imposed for the management to be more efficient. I thought this was a weakness in this particular system we have in Singapore. So, when I was Chairman of NTUC Eldercare, I decided to set up an elder care trust. Any donations that we received went directly to this trust.
Typically, a VWO is set up. Then, it is accorded ‘Institute of Public Character’ status by the Charity Council under the Ministry of Culture, Community and Youth. Then, it raises funds. Very often, a VWO is set up because somebody is passionate about doing something good for society. So, there is a lot of passion by the founder or the group of founders. Then, they get into their activities. At the beginning, because of their enthusiasm and the contacts they can draw on, they raise their money and get backing grant from the appropriate authorities. And the VWO begins to operate.
But after a while, sustaining the operations becomes hard work. Then, the task of fund raising to sustain the operations gets more and more difficult. The VWO finds itself having to play a bigger role to raise funds. Time is then diverted from providing the welfare service to helping to raise funds.
What kind of disciplined framework is there to ensure the service is run efficiently? When the VWO needs more money, its management goes to the board and says, “We need more money. We need to raise more funds.”
But there is no discipline imposed for the management to be more efficient. I thought this was a weakness in this particular system we have in Singapore. So, when I was Chairman of NTUC Eldercare, I decided to set up an elder care trust. Any donations that we received went directly to this trust.
I am Chairman of NTUC Eldercare, and we appointed a separate team of trustees. The management had its yearly budget and had to justify to the board why it needed this amount of money, and what funding it would require from the elder care trust. After obtaining clearance from the board, it had to separately obtain clearance from the trustees to justify why it should get the amount of money it was asking for in a year. So, it was a two-check system.
I highlight this example to explain why it is important for VWOs to be properly structured. A proper structure allows professional planning and that is how it can be run efficiently. Otherwise, there will be wastage of public funds.
Q: It is not always easy for charitable organizations to raise money and every dollar raised is valuable. How you spend it is also important. Do nonprofit organizations have established investment policies or direction for improving management?
GE: There are legacy issues to this. Many charities were started by groups of people with a passion for social welfare. Unfortunately, many of them did not give much thought to management structure. They merely tried to keep expenses as low as possible.
The board approached those whom they personally knew to help them manage the welfare organization, or whomever they could influence into working for the VWO. A high level of trust is given to the board and management, but with lesser professionalism.
One common problem is that persons authorized to approve expenditures are volunteers and usually too busy because of other work. Even though 3 sets of signatures may be required for some proposed expenditure, as long as one authorized person gives his go-ahead, the other two will usually agree and avoid spending too much time examining the matter.
GE: There are legacy issues to this. Many charities were started by groups of people with a passion for social welfare. Unfortunately, many of them did not give much thought to management structure. They merely tried to keep expenses as low as possible.
The board approached those whom they personally knew to help them manage the welfare organization, or whomever they could influence into working for the VWO. A high level of trust is given to the board and management, but with lesser professionalism.
One common problem is that persons authorized to approve expenditures are volunteers and usually too busy because of other work. Even though 3 sets of signatures may be required for some proposed expenditure, as long as one authorized person gives his go-ahead, the other two will usually agree and avoid spending too much time examining the matter.
You get a situation where all 3 signatures are obtained but no one actually checked the proposal. It is a mantra that we need to make the social service sector more professional.
That’s where corporate governance comes in, and where board members need to be rotated. So far, we have been so passionate about delivering the service on the front end that we have neglected the back end operations that the organization’s survival depends on.
RISK TOLERANCE
Q: What do most boards understand by risk tolerance? How do they quantify performance?
Ms Lim Li Ying, CFA, is the chief investment officer of Singapore Labor Foundation.
LBH: At one stage of my life when I had to deal with some investments, former finance minister Richard Hu told me: “Don’t try to be too clever. If you make money, nobody thanks you. If you lose money, you get all the blame.”
In Singapore, whether you are the town council, a grassroots organization under the People’s Association, or even our VWOs, if your investments lose money, you are in for a lot of public flak. If you ask me, the risk tolerance is almost zero as far as the public is concerned.
But we need public education about investment risk and returns, because if you want to maximize returns, you have to take some risk. But not everybody should take risk. Town councils have sizable funds, and a certain level of risk taking is needed because you want this money to work so that residents pay less in maintenance and service charges.
Ms Lim Li Ying, CFA, is the chief investment officer of Singapore Labor Foundation.LBH: At one stage of my life when I had to deal with some investments, former finance minister Richard Hu told me: “Don’t try to be too clever. If you make money, nobody thanks you. If you lose money, you get all the blame.”
In Singapore, whether you are the town council, a grassroots organization under the People’s Association, or even our VWOs, if your investments lose money, you are in for a lot of public flak. If you ask me, the risk tolerance is almost zero as far as the public is concerned.
But we need public education about investment risk and returns, because if you want to maximize returns, you have to take some risk. But not everybody should take risk. Town councils have sizable funds, and a certain level of risk taking is needed because you want this money to work so that residents pay less in maintenance and service charges.
When we reach the acceptable level of understanding by stakeholders, then we can afford to take risk and define what that risk tolerance should be. If we don’t have that level of understanding, to play safe, you put that money in fixed deposits or you tell the fund manager to put it in capital guaranteed assets. That means very low returns.
GE: The starting point of charities is: The money you receive is from donors. Donors give you the money to be used in a specific way, for a certain purpose and not to be accumulated. So the accumulation is temporary, because it is not yet time to spend the money. And usually, the accumulation is for a very short term.
Thus, a charity’s focus is not capital accumulation but capital preservation to respect the wishes of the donor. If the charity is blessed with a surplus that grows, and you have money that you don’t need to touch for one to three years, then you are in a position to take more risk.
If one has a very short-term fund management horizon, capital preservation is fundamental because if there is a loss, you won’t have the money when the time comes to pay your bills.
At the peak of the National Kidney Foundation scandal, when the National Council of Social Services took over control of its monies, we were ultra-conservative. We did not only ask for a capital guarantee. We asked for a bank guarantee to be provided by third-party banks. So there was almost zero return on the NKF monies. This happened around 2008, so when the financial crisis happened, our balance sheet was perfect.
After things settled down, we decided we could afford to take some risk and decided to put 20% in equities to get better return. You have the luxury of taking risk when your reserves cross the threshold of one to two years’ needs. Otherwise, capital preservation is a must because you know you need the money within the next 12 months.
Q: You mentioned NKF decided to put 20% in equities. How did you come up with this figure?
GE: The investment committee sat down to discuss and came up with this figure before proposing it to the board. A 20% risk exposure is the shared appetite of the board and we decided we were able to take the heat up to this level. We don’t expect the 20% to go down to zero.
If the 20% were put into well-chosen equities, even if hit, the impact will not be that significant and we believe we can explain the loss in an appropriate manner.
At the end of the day, it is a shared responsibility that falls equally on the shoulders of every board member. It is not something decided by two or three people. The entire board must approve the proposal put up by the investment committee.
‘Risk tolerance’ as practitioners understand it, is the decrease in portfolio value that one can tolerate.
That is, the worst amount of loss that is tolerated in an adverse scenario. If you have a 20% equity exposure and in a bad market, that comes down by 50%, your fund is down by 10%. Is this risk measure what most charitable investment committees can tolerate?
GE: Very few non-profit organizations are in a position to be involved in that kind of detail in investment planning. Those who do have a fair amount of funds do go to consultants who advise them in terms of the returns of different funds and fund managers.
Transparency and risk appetite vary from party to party, depending on the board composition. Generally, I speculate that 20% in equity is the norm. I’ve heard of up to 30% but not more than that.
MANAGEMENT STRUCTURE
GE: Very few non-profit organizations are in a position to be involved in that kind of detail in investment planning. Those who do have a fair amount of funds do go to consultants who advise them in terms of the returns of different funds and fund managers.
Transparency and risk appetite vary from party to party, depending on the board composition. Generally, I speculate that 20% in equity is the norm. I’ve heard of up to 30% but not more than that.
MANAGEMENT STRUCTURE
Q: What are the different ways that a long-term fund like an endowment can structure or manage its portfolio?
LBH: You have to do your expenditure projections – what you need to spend over what period of time. Then, you decide on your investment timeframe, followed by the risk level you can take over this period of time to maximize returns.
This is something people with a long-term investment horizon like a university endowment fund can afford to do. We look at how diversified we want to be and what kind of asset classes we want to invest in. But at the same time, you also have to look at the cycles. You have spending needs. When you want to spend, the returns may not be as ideal as what you would want them to be. So, within your portfolio of funds, you must have set aside a bucket of money that you can draw down on when there is a downturn and you are not receiving returns that you’ve expected from your overall investments.
GE: Make sure that your financial reports have full explanation of what your investment policy is and why you do it. Be very transparent in all your disclosures. Be all the more transparent in a bad year.
This is something people with a long-term investment horizon like a university endowment fund can afford to do. We look at how diversified we want to be and what kind of asset classes we want to invest in. But at the same time, you also have to look at the cycles. You have spending needs. When you want to spend, the returns may not be as ideal as what you would want them to be. So, within your portfolio of funds, you must have set aside a bucket of money that you can draw down on when there is a downturn and you are not receiving returns that you’ve expected from your overall investments.
GE: Make sure that your financial reports have full explanation of what your investment policy is and why you do it. Be very transparent in all your disclosures. Be all the more transparent in a bad year.
For example, let the public know what stocks you have invested in and let them assess. Hiding will arouse even more suspicion and every little loss becomes magnified. Smaller non-profit organizations may want to use internal people for their investment committees. What kind of skill sets do you look for when appointing people to your investment committees?
LBH: We look for somebody who is knowledgeable in finance and investments. I understand that it is difficult to find people to volunteer for this who have no conflict of interest. Because financial advisors are in the business, it is difficult to appoint them to your investment committee unless they are happy to have their firm excluded from bidding for the business.
Mr Gerard Ee is Chairman of Singapore Institute of Management Board of Directors, Chairman of the Council for Third Age.
He has been active in the field of social service throughout his career as an accountant. He chairs the Public Transport Council and Eastern Health Alliance, and sits on various boards including the Financial Industry Disputes Resolution Centre, EDB Investments Pte Ltd and MOH Holdings Pte Ltd.
Mr Ee, a Fellow Certified Public Accountant (CPA) of Singapore, is currently a Member of the Singapore Accounting Standards Council and represents Singapore on the International Accounting Standards Advisory Council.
Mr Ee was formerly the President of the National Council of Social Services and President of the Automobile Association of Singapore.
He has chaired an extensive range of social service organisations and programmes, including juvenile rehabilitative centres, grassroots organisations, schools, and various programmes for the elderly and youth.
GE: The majority of non-profit organizations are small in nature with no ability to hire a fund manager. Most fund managers will not look at anything less than S$10 million with a time horizon of at least 3 to 5 years.
That rules out most of the small charities. So, if I were a small charity, I would look for someone with a CFA designation to join my investment committee.
Let’s say you have S$250,000 that you are sure you don’t need to touch for the next four years. There is a very safe bond that matures in 4 years with a 4.5% coupon when the prevailing interest rate is 1%. That may be the best option. But you still need someone to tell you which bond that is.
LBH: You don’t have to do it all yourself. You should be open to aggregation. You combine resources so that you appoint somebody to do this for you. The People’s Association offers this service of fund pooling to all its grassroots organizations. An investment committee will help to decide where the monies should be invested, with the understanding that there are 3 different asset managers.
But in order to do this, you must have a common objective of what the funds can do for you. This does not work if each pool of funds comes from people with a different investment objective.
There must be a shared investment philosophy, investment timeframe and understanding as to what returns can be expected. I think town councils will do well to aggregate their funds, even though they have a lot of money.
I don’t think the individual unions have the resources to set up their own investment committees. The sensible and safer way would be for the trade union to aggregate funds from various unions in order to get more decent returns.
For the very small non-profit organizations, our advice would be to avoid complicated investment strategies. I have encountered a few small unions who were constantly trying to make ends meet even from month to month.
They wisely appointed a number of advisors. These advisors advised them to use the small amount of money they had to buy a shop-house with an office premise above it. The shop space could be rented out for income and the office space could be used for the non-profit organization’s day-to-day operations.
LBH: We look for somebody who is knowledgeable in finance and investments. I understand that it is difficult to find people to volunteer for this who have no conflict of interest. Because financial advisors are in the business, it is difficult to appoint them to your investment committee unless they are happy to have their firm excluded from bidding for the business.
Mr Gerard Ee is Chairman of Singapore Institute of Management Board of Directors, Chairman of the Council for Third Age.He has been active in the field of social service throughout his career as an accountant. He chairs the Public Transport Council and Eastern Health Alliance, and sits on various boards including the Financial Industry Disputes Resolution Centre, EDB Investments Pte Ltd and MOH Holdings Pte Ltd.
Mr Ee, a Fellow Certified Public Accountant (CPA) of Singapore, is currently a Member of the Singapore Accounting Standards Council and represents Singapore on the International Accounting Standards Advisory Council.
Mr Ee was formerly the President of the National Council of Social Services and President of the Automobile Association of Singapore.
He has chaired an extensive range of social service organisations and programmes, including juvenile rehabilitative centres, grassroots organisations, schools, and various programmes for the elderly and youth.
GE: The majority of non-profit organizations are small in nature with no ability to hire a fund manager. Most fund managers will not look at anything less than S$10 million with a time horizon of at least 3 to 5 years.
That rules out most of the small charities. So, if I were a small charity, I would look for someone with a CFA designation to join my investment committee.
Let’s say you have S$250,000 that you are sure you don’t need to touch for the next four years. There is a very safe bond that matures in 4 years with a 4.5% coupon when the prevailing interest rate is 1%. That may be the best option. But you still need someone to tell you which bond that is.
LBH: You don’t have to do it all yourself. You should be open to aggregation. You combine resources so that you appoint somebody to do this for you. The People’s Association offers this service of fund pooling to all its grassroots organizations. An investment committee will help to decide where the monies should be invested, with the understanding that there are 3 different asset managers.
But in order to do this, you must have a common objective of what the funds can do for you. This does not work if each pool of funds comes from people with a different investment objective.
There must be a shared investment philosophy, investment timeframe and understanding as to what returns can be expected. I think town councils will do well to aggregate their funds, even though they have a lot of money.
I don’t think the individual unions have the resources to set up their own investment committees. The sensible and safer way would be for the trade union to aggregate funds from various unions in order to get more decent returns.
For the very small non-profit organizations, our advice would be to avoid complicated investment strategies. I have encountered a few small unions who were constantly trying to make ends meet even from month to month.
They wisely appointed a number of advisors. These advisors advised them to use the small amount of money they had to buy a shop-house with an office premise above it. The shop space could be rented out for income and the office space could be used for the non-profit organization’s day-to-day operations.
One of them rented out the shop space to a successful curry fish-head business. Over time, the capital invested appreciated. The three or four unions that did this became millionaire-units.
One should look for safe, steady, boring returns. Don’t try to beat the market. If you can match the market, you are doing well. People only hear of success cases when a fund manager has beaten the market. What they don’t realize is there are times when the fund manager under performs. If you try to beat the market, you inevitably will lose money.
GE: Sometimes, you hear advice on getting returns that exceed inflation, otherwise your money is eroded. But small charities don’t get to keep the money for more than one year, so there is really no need to worry about inflation erosion of funds. Inflation erosion should be managed for life savings that will be kept for the next 10 to 20 years. But if your reserves don’t exceed what you need for the next 5 years, don’t worry about these sophisticated terms that float around.
Understand your financial needs. Without a cash flow projection, it is not really possible to plan your investment.
LBH: “The Ministry of Culture, Community and Youth promotes the many helping hands approach to encourage people to come forward to help others in need. This policy is correct, but sometimes, I feel we have too many helping hands, and they are very weak hands.
If people doing similar services come together, they can form a stronger organization and be more effective in serving the people they want to serve. I know it is extremely difficult to get two parties to merge, because all kinds of personal preferences and thinking come in the way.
One way to promote collaboration and merger is by sponsoring conferences or workshops for people in the same sector to meet, discuss, and share problems and solutions. My wish for the voluntary welfare organizations sector is for stronger players to emerge.
If people doing similar services come together, they can form a stronger organization and be more effective in serving the people they want to serve. I know it is extremely difficult to get two parties to merge, because all kinds of personal preferences and thinking come in the way.
One way to promote collaboration and merger is by sponsoring conferences or workshops for people in the same sector to meet, discuss, and share problems and solutions. My wish for the voluntary welfare organizations sector is for stronger players to emerge.
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