Falling interest rates are stripping nearly $1 billion per year from the coffers of Australian charities as the investment returns available from cash and term deposits languish. The ultra-conservative approach to managing money traditionally favoured by charities is outdated in the current macro-economic environment and exposing the sector to an unprecedented level of risk.
New research conducted by Koda Capital, a boutique private wealth management firm focused on servicing non-profit clients, has found the Australian non-profit sector has seen a drop in investment income of more than $880 million per annum each year since 2011.
The research is based on the latest available Australian Bureau of Statistics data, to June 2013, when the cash rate was 75 basis points higher than it is today. The Reserve Bank of Australia's latest two 25 basis point interest rate cuts this year, and apparent inclination for at least one more cut in the year ahead, mean the problem is only getting worse.
"As rates continue to fall there is an urgent need for non-profits to reconsider how they invest. Inflation is the silent enemy and non-profits need to rethink their definition of risk," Koda Capital head of philanthropy and social capital David Knowles said.
Since 2011, Australia's official cash rate has dropped from 4.75 per cent to its current record low at 2 per cent. Meanwhile global interest rates plunged to new lows in the United States and Europe.
The low yield environment has made it increasingly difficult for all investors to generate returns from assets traditionally perceived as "low risk", such as bank deposits and bonds. This has pushed more capital into asset classes historically considered more risky, helping to fuel an almost 50 per cent rise in the local sharemarket since September 2011.
But while superannuation funds, insurance companies and professional fund managers have adjusted their asset allocation strategies in repsonse to record low interest rates, few charities have responded.
The dramatic decline in income from cash holdings is particularly challenging for non-profit organisations as they tend to have more of their capital stored this way than more sophisticated investors.
"Cash offers no opportunity to grow capital, in fact it erodes the purchasing power of capital over time," Mr Knowles said.
As at June 2013, the ABS data showed the Australian charity sector was holding $32 billion in cash and there is no evidence to suggest there has been any significant allocation away from cash in the intervening 18 months, Mr Knowles said.
"Lots of organisations got scared by what happended in the global financial crisis in 2007 and 2008 and moved the bulk of their investments to cash. Cash may have been king when interest rates were above 6 per cent but staying in cash now is dangerous".
Directors of charitable and non-profit institutions need to urgently review their organisation's investment strategies to ensure capital and income is preserved to fund future good works, Mr Knowles said.
"Due to a heavy reliance on volunteers, non-profit boards often don't have the same set of investment skills as commercial boards. A good starting point for any non-profit board in reviewing their strategy is to make sure they have clearly identified the purpose of the money they are custodians of and set some investment goals".
Mr Knowles said financial self-sufficiency is becoming increasingly critical for charities and non-profit institutions as access to government funding gets harder.
"Non-profits are increasingly reliant on government funds, yet the signs suggest Australian governments are pulling back or unable to meet demand".
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