With a wide range of investment options available to charities, the selection of appropriate instruments must be guided by the charity’s risk appetite, investment horizon, liquidity requirements, capital preservation objectives, income needs, regulatory constraints, and treasury policy. While the relationship between risk and return is well understood by most finance and treasury professionals within the charitable sector, achieving acceptable returns while protecting charitable funds is often more complicated in practice than in theory. Although the generally conservative investment approach adopted by charities is both prudent and justified, there remains a notable breadth of choice within what is often perceived to be a highly constrained investable universe.
Charities may also use pooled funds, including multi-asset, equity and other higher-risk strategies, where this is appropriate and consistent with their objectives and governance. However, this article focuses on cash and fixed income instruments commonly used for liquidity management and capital preservation.
Certain trade-offs sit at the heart of the asset allocation decisions made by charities. Most notably, there is an inherent tension between yield or income and ease of access, liquidity, and security. Illiquidity typically commands a premium: committing charitable funds for longer periods can enhance income but increases the risk that cash will not be available when operational or funding needs arise. Similarly, higher yields may be achieved by accepting lower collateral quality or weaker counterparty credit strength, each of which materially increases the risk of capital loss. Interest rate risk also remains relevant, even where investments are intended to be held to maturity. Longer maturities expose charities to opportunity cost and economic price risk should rates rise, while shorter maturities heighten reinvestment risk by requiring cash to be redeployed more frequently, potentially at lower prevailing rates.
A practical and effective way of reconciling the competing forces described above is diversification. By avoiding over-reliance on any single investment instrument, counterparty, or maturity profile, treasury managers can mitigate risk and enhance risk-adjusted returns, while establishing a more predictable liquidity and cash flow profile that ensures the overall portfolio remains aligned with the charity’s operational requirements.
One way diversification commonly manifests is through a ‘maturity ladder’. The maturity ladder is founded on two observations: first, that while a portion of balances should be held in highly liquid accounts to meet both planned and unexpected cash outflows, it is neither necessary nor efficient for the entire balance to remain immediately accessible; and second, that under a normal yield curve and term premia environment, extending investment tenor is generally rewarded with higher returns. A laddered portfolio is constructed by investing across a range of maturities through the purchase of multiple Treasury bills or bonds, such as sovereign, supranational, covered, or similar high-quality instruments. As the short-dated rungs mature, the proceeds are reinvested into the long-term rungs, maintaining the structure of the ladder over time. This approach delivers several benefits. By extending the overall investment tenor, the portfolio can achieve a higher yield than a purely short-term strategy. It also provides a degree of protection against reinvestment risk: if interest rates rise, maturing funds can be redeployed at higher yields, while if rates fall, the remaining longer-dated investments continue to earn yields locked in at earlier, higher levels.
Expanding on the range of investment options available to charities, it is helpful to move along the yield curve and consider how different instruments are structured, the trade-offs they involve, and the roles they are intended to play. At the shortest end, charities most commonly hold cash in instant access or current accounts with major UK banks and building societies. While these are often perceived, and in many cases rightly so, as the safest and simplest option, they represent unsecured exposure to the bank above the recently increased FSCS protection limit of £120,000 per eligible person, per authorised firm (subject to depositor eligibility). Their primary advantage is immediate or near-immediate access, making them well suited to operational cash, payroll, grant payments and contingency balances.
Further along, notice accounts offer a modest uplift in yield in exchange for reduced flexibility, with access typically subject to notice periods ranging from 7 to 95 days. Sitting between traditional cash deposits and fixed income instruments, secured deposits provide a more robust structure. These arrangements resemble notice accounts but offer additional protection by securing the deposit against a pool of high-quality liquid assets or investment-grade corporate debt, providing recourse in the event of a credit event.
Money market funds are another attractive option for charities, offering diversified exposure to short-term debt issued by a range of high-quality counterparties, with same-day or next-day access under normal market conditions. While capital is not guaranteed, MMFs combine competitive yields with diversification benefits that make them a valuable liquidity management tool. Arlingclose currently advises on £7.5bn of money market fund investments, giving us strong insight into fund manager performance and share class pricing. Via our LiquidityEdge offering, Arlingclose can help your charity to enhance net returns through improved Money Market Fund and share class selection.
Charities can also invest via a maturity ladder of UK Treasury Bills. T-bills are short-dated instruments issued by HMT, with maturities of up to 12 months. Backed by the UK Government, they are effectively risk-free from a credit perspective and highly liquid, yet remain underused by charities, largely due to operational and administrative frictions rather than shortcomings in their risk-return profile. In 2025, Arlingclose advised on £1.5bn of Treasury Bill transactions as part of a comprehensive treasury strategy.
As investment maturities extend beyond the short term, instruments such as covered bonds and supranational bonds become viable options, typically offering a more attractive yield. However, longer-term portfolios are only appropriate where the charity has a genuine surplus of cash that is not required for day-to-day operations, has clearly identifiable strategic reserves, and has the governance and expertise needed to manage the additional risks that come with longer maturities. If these conditions are met, a longer-term maturity ladder using covered bonds and supranational bonds can be an effective way to enhance income while maintaining a conservative risk profile, particularly where cash reserves are stable and the investment horizon is clearly defined. By spreading maturities across several points on the curve, the charity can improve overall yield, reduce reinvestment risk, and maintain a predictable pattern of maturities that supports forward planning. Ultimately, the most effective charity treasury strategies are those that align investment maturities with clearly forecast cash needs, diversify exposures across instruments and counterparties, and enhance yield only where doing so does not compromise liquidity, governance, or the charity’s primary duty to protect capital. Arlingclose can support charities in developing and implementing this approach, from strengthening treasury policies and liquidity forecasting to advising on maturity ladder construction, instrument selection, and ongoing monitoring to ensure portfolios remain robust, compliant, and fit for purpose.
If you would like more information on these services, please contact Finn Watson by emailing fwatson@arlingclose.com.