Plaintiff v Defendant

to or for the benefit of any of the following objects purposes beneficiaries ...

12 The Colonial Foundation Trust has assets, valued as at 31 March 2007 at $198,310,000. With funds of this size, it is able to commit to large projects for significant periods. The Chairman of the Board of Trustees, David Stow Adam has deposed that the Trustee considers that that is one of the best ways to utilise so large a trust fund. He points out that such funding allows applicant organisations to undertake significant projects for the benefit of the community and enables proper planning, staffing and budgeting for those projects. He states that in his experience such long term funding attracts and retains appropriately qualified staff and encourages other philanthropic organisations to lend their support to projects. It also relieves the organisations from the burden of seeking ongoing funding from different sources. Combined, these factors maximise the prospects of success of any project that is funded.

13 Mr Adam also expresses concern on behalf of the Trustee, about committing to large projects over a number of years and not being able to provide funds in the event that net income in a particular year is reduced. He states that this concern has resulted in an investment strategy directed to minimising the risk of that occurring which focuses on income returns rather than a strategy which seeks to achieve both satisfactory income returns and capital growth to maintain the value of the Trust in real terms.

14 The Trustee received advice from an international consulting firm, Watson Wyatt (from which it receives regular investment advice) to the effect that it is likely to be able to achieve greater earnings over time if its investment strategy is changed towards one seeking both satisfactory income returns and capital growth. This led to the Trustee seeking an independent report from Mercers Investment Consultants (Mercers). Following an exchange of correspondence, including information relating to the Trust Fund, Mercers, through Mr Arnold, provided the Trustee with a report dated May 2007. He took as the real return objective a return, net of investment expenses, of at least five per cent per annum in excess of price inflation as measured by the Consumer Price Index over five year periods. He took as the downside risk objective that of investing so that the likelihood of achieving a negative return (net of investment expenses) over any twelve month period is less than once every four years and to limit the "poor outcome" nominal return over a one year period to a moderate level.

15 He has expressed the opinion that continuing with the present strategy will achieve the real return objective of the Trust Fund and its downside risk objectives and that therefore the current strategy is appropriate given the constraints imposed by cl.4.1.

16 He referred to the break-up of asset classes as at June 2006 as follows, a breakdown which reflects the current strategy.

17 He puts forward an alternative arrangement of asset classes should the investment strategy be one where capital could be used to fund commitments as well as income. The example he gives is as follows:

18 Without going into the detail of his analysis, his assessment is that with the change of strategy the probability of the alternative strategy achieving the real return objective increases slightly from 53 per cent to 57 per cent and the downside risk remains acceptable with the probability of a negative return in any one year of one in five.

19 It is to be hoped that the opinions of Mr Arnold are borne out in the future if the Trustee's power is changed to allow access to the capital of the Fund for payments. I think it would be unwise, however, to decide whether the proposed change should be made on the basis that it is probable that it will achieve greater capital growth than is presently achieved. The predicted improvement is slight and so much of the success of any investment policy depends on the choices made by those making the investment decisions and developments in the local and world economies at any given time. It is other matters that carry more weight.

20 I accept that it is highly desirable that a charitable trust such as the Colonial Foundation Trust be able to assist the community in the way identified by Mr Adam. At the present time, the Trust Deed limits the Trustee to funding such projects out of its income. It is put, and I accept, that this inevitably has distorted its investment strategy somewhat because the Trustees must give priority to maximising income returns and is not able to give appropriate recognition to the need to adequately secure capital growth.

21 I accept that the present somewhat income-skewed investment strategy carries with it the risk, that over the long term, it will not maximise earnings because the focus on income disadvantages capital growth and it is the capital growth that ultimately will secure the trust for the future.

22 These present limits in turn carry their own risks for the capital of the fund in that the Trustees are to a degree fettered in the decisions they may wish to make about investment decisions for capital growth. It is undesirable for the future of the trust fund that such constraints should continue.

23 Accordingly I am satisfied it would be expedient to enable the Trustees to distribute from the capital as well as income. I raised a concern with the plaintiff, however, as to whether the change originally sought which would empower the Trustee to distribute the whole of the capital was supported by the evidence. The plaintiff gave the matter further consideration and has changed the proposed amendment to limit the proposed power of the Trustee to distributing the whole or any part of the Net Realised Capital Gain. I am satisfied that that amendment is supported by the evidence and is expedient in the interests of the Trust.

For the foregoing reasons, the Trustee should be empowered to vary the Trust Deed in the manner sought.

[1] The Originating Motion sought orders varying the Deed, but counsel in the course of submissions indicated that the orders sought were as indicated above.

[2] Riddle v Riddle [1952] HCA 12; (1952) 85 CLR 202, 222.

[3] Re Bowmil Nominees Pty Ltd [2004] NSWSC 161 at para [16] pr Hamilton J; James N Kirby Foundation v Attorney-General (NSW) (2004) 276 at p280 per White J; Stein v Sybmore Holdings [2006] NSWSC 1004 at para [45] per Campbell J.

[4] Clause 12.2 contains out of date and irrelevant references to the Unconfirmed Period and clauses relevant to the objective of the promotion of Colonial which will also be removed.