The Investment Policy Statement

The investment policy statement (IPS) is an essential document for any institution or nonprofit organization with assets to manage. The IPS serves as an investment guidebook not only for the investment committee but also for general board members, staff and the investment advisor. Having all parties on the same page, working together toward supporting the mission of the organization, helps ensure greater success.

A properly written IPS also helps fulfill the fiduciary duty of trustees to develop a prudent process in managing assets. By stating formal guidelines or a process for investments, trustees are meeting the requirements of the law, specifically the requirements outlined in the Uniform Prudent Management of Institutional Funds Act.

Components

A comprehensive IPS does not need to be complicated and lengthy, but it should include the following sections:

1.      Stated mission and program goals

State in writing your organization’s mission and program goals to ensure the investment criteria will be tailored with those goals in mind.

2.      Priority of objectives

Prioritizing among multiple objectives can further enhance the ability to tailor the investment strategy. For example, an endowment may wish to support both current operations and create new programming, but it may put emphasis on the stability of the portfolio over taking risk to grow the portfolio and developing additional projects.

3.      Investment philosophy/strategy

It is important to lay out the overall philosophy of the board so the investment advisor can manage assets accordingly. If the board is risk-adverse, the investment advisor can construct a portfolio with an emphasis on reducing overall volatility.

4.      Asset allocation

How much of the organization’s assets should be invested in stocks, bonds and/or cash? Should alternative investments be included? What types of investments are prohibited? The board and investment committee not only determine what investment vehicles are suitable but also the appropriate mix of investments for its portfolio. A good investment advisor will also be a valuable resource in finding an optimal asset allocation while keeping in mind other factors such as spending rates and capital market assumptions.

In addition, rebalancing guidelines should be clearly stated. The committee should define tolerance ranges for asset allocation drift so both the committee and investment advisor can adhere to the strategy set forth in the IPS. Providing both the asset allocation and rebalancing parameters can help ensure that all parties can execute their responsibilities in a disciplined manner.

5.      Performance measures

Once asset allocations and guidelines are set, investment/finance committees must set up methods to measure the performance of the investment vehicles, money managers and the investment advisor. Typically, general stock and bond indices are used as benchmarks.

If underperformance or mismanagement of assets occurs, the board should have a process in place to quickly identify and resolve issues.

The organization can also use this section to list criteria for reporting — components, frequency and format.

6.      Definition of duties

The IPS should clearly define the responsibilities of the board, investment/finance committee and investment advisor when it comes to managing the portfolio. Who sets guidelines? Who is responsible for manager selection and monitoring?

7.      Spending policy

A well-designed spending policy balances the need to meet current operating and budget requirements while keeping in mind the preservation of the endowment for future generations. The organization’s overall mission and objectives should be considered when developing the spending policy and will help set asset allocation guidelines as well. For more about spending policies, please read Buckingham’s Endowment Spending Policies white paper.

Revisions and Maintenance

Once an IPS is created, it is best to revisit it annually for a number of reasons:

  • Existing personnel can again familiarize themselves with the goals and objectives of the investments.
  • New board members and staff can familiarize themselves with the IPS.
  • Revisions can be made should significant changes to the mission, objectives, market assumptions or assets occur.
  • All parties can confirm that the current IPS meets current fiduciary and legal requirements/guidelines.

Summary

Having a comprehensive IPS in place can have a number of benefits for all organizations managing any size portfolio. By having all objectives and priorities of the investment fund in one place, current and new members can be unified in their efforts to coordinate all investment activity in support of the long-term goals of the organization.

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