The other week a client was discussing with us the need to update their fundraising strategy – it wasn’t generating enough income for the costs involved. 

Their thinking was that investment in a new fundraising strategy should come out of their investment portfolio, also being reviewed at the time. 

So, we set about looking at taking say £3 million out of their investments of £10 million and investing it into the fundraising strategy (a logical place to start since they’d been getting only just above zero real return for the last four years!)

The idea was that £3 million was to be invested to return £1 million over a period of 24 to 36 months.  Looks like a good deal - 11% return over three years, or say a real return of 8% - much better than the equity markets.  However, here’s the crunch…the risk was much higher than the equity markets, with nearly 80% potential that the investment would be lost, or that the time horizon would, as often happens, extend to five or even seven years. 

Our client hadn’t considered working their investment portfolio.  Had their portfolio been invested like that of other clients we’ve assisted it would have returned 9% per annum - an increase in real value of £4 million over the last four years.  Or four times the return of the proposed fundraising exercise!

Even if you take the most pessimistic reports on likely market returns over the next few years the return for a balanced portfolio should be in the region of 6% to 7%, which offers an acceptable combination of risk and diversification, rather than a very focused high risk strategy. 

So, how did we resolve it with our client?  A two-pronged strategy was agreed.  First they decided to restructure their investment portfolio to work harder, and second they opted to take a smaller portion out of the portfolio to invest in the fundraising strategy.  Hence a balanced approach to risk and return!

Their fundraising idea is similar that of private equity investment – great if it comes off, but not to be totally relied upon.  I just wonder how many more NGOs have missed this approach…to their cost?