Under current regulations, Private Ancillary Funds (PAFs) need to make payments of five per cent of their capital value to charitable causes each year, in order to maintain their tax free status. Our client, a PAF, had only invested funds in cash since its inception. With returns on cash rates now well below five per cent, distributions had been eating into capital. The Board understood it needed to change the investment mix, but was concerned over the risk involved and how to make a risk-aware decision.
We provided extensive modelling and asset consulting to help educate the Board around the different investment choices available and the likelihood of each investment outcome over different timeframes. We accounted for the tax free status of the PAF in our modelling to provide a realistic probability of outcomes, and we used proprietary software exclusively licensed to us here in Australia to back-test the portfolios and outcomes.
The process provided the Board with peace of mind, understanding and agreement on how to proceed with a different investment portfolio. The agreed investment mix is now one that is targeted to provide a minimum of five per cent return each year, as well as to restore the capital to its original value over time. This decision will ultimately help protect the sustainability of the PAF for the future.