Unless the stock market pulls up dramatically between now and the year end, most large charities are going to show a very large unrealised loss on investments in their next report. 

How is that going to be expressed in IG's calculations? It's not charitable expenditure, but it will appear as an outgoing resource on the balance sheet.

I suppose charities need to be thinking now about the wording they need to use to explain to their supporters that it's not sensible to treat it as if it was an administration cost.

I can foresee malicious people singling out charities they don't like and claiming that hardly any of their expenditure goes to the beneficiaries.

...I changed my mind!

In fact, the reason I changed my mind was because the new Commission Register showed me that, even though the Wellcome looked like it did a good job of explaining its investments, it actually didn't!

So, if I'd known then what I know now - which is all down to the sterling work of the wonderful people at the Commission - I'd never have reached that judgement. Anon2, I hope that clears things up!

Adam, Intelligent Giving

According to a leading charity commentator: 'The Wellcome Trust, the biggest charity in Britain with assets of £15.6 billion (yes, really), does a sterling job of explaining its investments, and its investment strategy, in painstaking detail. It even includes some graphs and easy-to-understand questions for non-accountants like us.

All charities with big investments should provide this sort of info. After all, much of the time it’s our money they are looking after. Charities should explain what they are doing with it.'

So that's alright then. And whose opinion was this? Our very own Adam Rothwell...

http://www.intelligentgiving.com/the_buzz/the_blog/the_tale_of_charities...

Hmm. There's an argument that the Commission have recognised the point you are making here, as on the page of the Wellcome Trust that you use, and indeed all other charities, you have to actively click a button to see what the investment gains add to the total available resources in a year - initially the information is provided without that.

You say:

"That makes Wellcome look much less charitable than at first glance"

Why? Is an organisation only charitable if it spends 100% or more of its total resources each year on its charitable work?

You then say:

"it only spent 23 per cent of the money available to it in 2006/7 on charitable work."

That's not really fair. If I buy a share for £1 and it goes up in value to £2, that additional £1 gain is only available to me to spend if I cash it in. The whole point of this organisation's investments is that they provide an ongoing capital base that maintains its relative value to generate income to carry out its day to day activities.

Year on year, which isn't a long term period to review, a charity might make paper losses on investments. In this case, if that happened it might have the effect of making the charity look as though it had spent more than 100% of available resources on charitable activities. Would that make it super charitable? If so, perhaps you feel that they should aim to make losses on investments year on year simply so they look really 'charitable'.

Wellcome holds its reserves as a diverse range of investments to generate income for ongoing scientific research. The paper value of those investments can change by large amounts in the short window that a set of accounts looks at.

The report explains why investments are held and what the charity does with the income.

What do you think they could add?

"But wouldn't it be possible for the Wellcome to sell off some of its investments without damaging its capital?"

Well, arguably the best choice they could have made was to sell  the lot and buy Kruger Rands last Autumn!

Frivolity aside Welcome is very unusual in that the charity exists as the major shareholder in Glaxo Welcome, the pharmaceutical company which was the original source of the charity's wealth. Their unrealised gains on investments are rather like the gains in value of my house - not real money unless I go and live in a tent.

Welcome are so big that I don't think there's any danger of them going out of business altogether, but it would be possible for them to create a situation where their cash flow was so disrupted that they had to cut funding to ongoing projects if they started treating increases in share value as income available to spend. 

Sorry, Ian C, but I think you're wrong. Charities ought to explain their accounts in a way which unqualified people can understand. I think it's a moral duty, which charities take on in return for the significant tax-breaks they receive. If they think they can't do this, they simply ought to try harder.

On SORP, by the way, I actually would claim to to know this document well. In fact, we're working closely with the Charity Commission as it maps out the path towards SORP 2009/2010, lobbying it to make changes in a variety of areas, and to ensure better compliance with its darker corners (particularly those which relate to trustee remuneration). But knowing SORP well is not the same as being able to understand complex investments in depth. Which is another reason why the Wellcome should try harder.

Adam, Intelligent Giving

Perhaps the lesson to be learned from this incident is that IG needs to recruit an experienced accountant who knows the ins and outs of the charity SORP and commercial accounts who can vet all comments on financial matters from a professional point of view. It might save Adam from slipping up on very basic accountancy banana skins. It needn't cost lots of money - I'm sure there are plenty of qualified accountants out there who might volunteer to help.

Modern accounts are complex, and the regulations about "what is classed where" are labyrinthine. Trying to express policies and practices simply is very difficult without taking yards of text. I think Wellcome have done a pretty good - but I admit is does require a nodding acquaintance with very basic financial jargon.

At the risk of repeating myself, Anon2, you've got completely the wrong idea! I have no opinion on whether Wellcome are following a prudent investment strategy. But I think their explanation of their investments is simply not comprehensible to a non-expert reader. Bearing in mind that their retained investment income looks quite high, I think they could do a better job explaining why that is the case. I do not think that retaining that quantity of cash is a bad thing in itself.

You also ask what I'd 'rather see' on Wellcome's website. Well, I'd like to see a Q&A section, with one of the questions being "Why does Wellcome retain so much of its investment gains?" and an answer in clear English. 

Do you understand what I'm trying to get at here?

Adam, Intelligent Giving

PS - Our Quality of Reporting criteria, since you mention it, have been approved by the Charity Commission as an objective means of assessing charities' transparency. The Commission has also approved the process we use to write charity profiles, and are also satisfied that it is objective.

Step one: Go to www.wellcome.ac.uk
Step two: Click on Investments tab clearly visible at the top of the screen.
Step three: Read concise and lucid explanation investment objectives and performance, with further information for those who want it available from the report & accounts prominently displayed alongside.

My point is that you have rushed to judgement, in public, on the basis of a mistake on your part, to the potential detriment of a charity that achieves significant tangible public benefit (unlike, say, IG). This doesn't give much confidence in your other analysis, or the QA process that goes into your reports. And you've picked a bad example; can you suggest what you would rather see in place of what they've already done?

Rachel: Thanks for the explanation; you obviously know much more about this than me! But wouldn't it be possible for the Wellcome to sell off some of its investments without damaging its capital? My suspicion (and it's no more than that - again, I'm no expert at this investment lark) would be that perhaps they could?

Anon2: You've missed my point. I agree with you that I'm not qualified to offer sophisticated judgements on charities' investment strategies. Because of that, nowhere have I criticized Wellcome for doing what it does. I've just asked it to explain itself in plain English. And, from a non-expert's point of view, I also find their expenditure policy perfectly baffling!

Adam, Intelligent Giving

Adam,

"Because in addition to the £320m it classified as ‘income’, the Wellcome also pocketed almost £2bn (yes, billion) in interest on its investments."

If I have read the accounts correctly, the £2bn you refer to above is investment gains and not interest at all. This isn't nit-picking: for an endowed charity such as the Wellcome, most of this is likely to be unrealised gains, and the charity therefore can't "pocket" them without selling all their investments. Which, since 94.5% of their income comes from these investments, really would be killing the goose which lays the golden eggs.

 With a September year end, this year's figures are likely to show a very different picture...

Their expenditure policy is below. It's quite concise and easy to understand, I think. It may not be so easy for someone who, for instance, does not understand the difference between interest earned and investment gains. If you think the increase in the value of, say, your house is 'money available to spend', then you really should think twice before commenting on financial matters, shouldn't you?

The expenditure policy is this:
For planning purposes the annual expenditure target is
set by reference to a three-year weighted average of the
value of the investment assets in order to smooth the
effect of short-term volatility in investment values. Future
investment values are projected forward using realistic
medium-term targets and are used to indicate expenditure
levels in the future.
Expenditure targets may be over- or under-spent in any
individual year in a controlled manner reflecting anticipated
demand from the larger long-term commitments. However,
the Board of Governors plans to match these targets
cumulatively over the medium term.

Martin, I agree with what you're saying - of course charities like the Wellcome need to keep hold of some of their investment gains. But the amount they're holding onto at present looks odd, and (I think) would benefit from a proper, easy-to-understand, prominent explanation. And it would be great if the new Register pushed the Wellcome into doing that.

Adam, Intelligent Giving

Have you wondered how the Wellcome Trust became so big?
Many charitable trusts don't pay out 100% of what they receive in a year. They can increase their funds, allow for a large upcoming project or simply cover possible problems (like a credit crunch).

Yet if they were overspending by hundreds of millions, would IG be then lambasting them for reducing future payments?

It's a great improvement and will also make it easier for trust fundraisers to get the info they need about spending patterns of trusts, as well as details of trustees, etc.

The naming and shaming of charities who are not meeting their financial reporting obligations is another real improvement.