15 Jul 2021

Community trusts decry report's claims of poor investments

6:57 pm on 15 July 2021

Community trusts have left $128 million on the table because of poor investment decisions, a report says, prompting calls for the government to look into their operations.

New Zealand dollars

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A research report by Otago University found that 11 of the country's 12 community trusts failed to outperform Simplicity's passive benchmark, over a three year period, from 2017 to 2020.

Trusts were $127.9m worse off as a consequence.

However, the trusts cast doubt on the report's methodology and findings.

Community Trusts are non-profit organisations holding assets, such as land or stakes in businesses, the returns from which they put to community groups and activities.

The 12 trusts own about $3.9 billion in assets.

"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," report author Otago University associate professor Helen Roberts said.

The report said returns had been limited by irrational investment decisions by trustees, and active strategies proposed by external advisors and consultants.

It said less than 20 percents of trustees had prior financial experience and many lacked the financial literacy to challenge opinions of financial advisors.

"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," Roberts said.

She said the responsibility for the mismanagement rested on the trustees, not the fund managers.

"The choice of that fund investment was ultimately that of the community trust."

She said the government should take a closer look into the governance of trusts to ensure the underperformance was not repeated, and the trusts ought to comply with common reporting standards to make objective analysis easier.

The report showed the Canterbury-based Rātā Foundation was $51.5m worse off as a result of investment decisions.

However, the Foundation pushed back against the report, "emphatically" rejecting the findings and alleging that Simplicity commissioned the report.

Foundation chief executive Leighton Evans said the assertion it had foregone $51.5m in investment value was fundamentally wrong.

"Our funds are responsibly, ethically, and prudently governed and managed."

"When you look at our mix of investments they balance risk, return, and a need to make over $20m in annual grants to support our local communities."

He said KiwiSaver funds did not need to make immediate payments, and comparison with Simplicity was inappropriate.

Evans said the combined community trusts had engaged an independent advisor, Ed Shuck of Fidato Advisory, to review the research.

He said Schuck found reviewing three years' performance was too short to make any meaningful conclusions, and that Simplicity had not existed long enough to be a meaningful benchmark to Rātā or any of the other Trusts.

Simplicity chief executive Sam Stubbs said an email from one of his staff had been sent to the Trusts which said the report was a result of a partnership between Simplicity and the University, but the trusts were wrong to claim that Simplicity had commissioned the report when all it had done was supply information and help the university compile data.

"I think what the community trusts have done is they're sort of desperate for something to deflect attention," he said.

He said a KiwiSaver fund was real-world example to compare community trusts performance against because they both invested public money for the long term.

Simplicity was an obvious choice as a benchmark because it was a non-profit and a charity and was of a similar size, he said.

He said three years was the minimum period for effective comparison but it was still acceptable.

List of the trusts that were assessed

  • Rātā Foundation (Canterbury)
  • Mid and South Canterbury Community Trust
  • Foundation North (Auckland)
  • Trust Waikato
  • Community Trust South
  • Wellington Community Trust
  • Eastern and Central Community Trust
  • Bay Trust (Tauranga)
  • Otago Community Trust
  • West Coast Communtiy Trust
  • Whanganui Community Trust