Do We Need To Have an Investment Policy Statement?

Does your organization need an investment policy statement? Our brief answer is an indisputable ‘yes.’

An investment policy statement defines the purpose, objectives, risk tolerance, investment strategy, governance, spending policy, and fund monitoring process.

board meeting to review investment statement

These are some goals to keep in mind for the funds a non-profit chooses to invest:

  • Protect the principal value of invested assets
  • Increase the value of invested assets taking inflation into account
  • Retain appropriate liquidity so that the non-profit can access cash when needed
  • Determine the purpose of the portfolio and allocate appropriately, for example, short-term investments versus endowments, i.e., perpetual portfolios
  • Invest in a manner that aligns with the mission, vision and values of the institution

The day-to-day management of investments typically falls to the portfolio manager. However, the board of directors of any non-profit has a fiduciary responsibility to oversee the organization’s assets—authorizing asset allocation and risk profiles based on regularly evaluated investment goals and performance.

We believe all these moving parts need to be organized in a well-structured policy statement.

6 Components of an Investment Policy Statement

The investment policy statement is a unique document that should include these key components customized to the needs of the organization.

 Investment manager showing client the performance reports on a laptop

Purpose and Scope

The first section of an investment policy statement summarizes the body of the document.

It broadly states the:

  • Scope and intended purpose of the document
  • General objectives of the non-profit organization
  • Fiduciary duty of the board of trustees and the investment committee

Delegation of Responsibilities

Investment programs have many moving parts and require clear and detailed guidelines on the roles and responsibilities of all the parties involved.

  • Board of TrusteesAppoint the investment committee, as well as establish their
  • Investment Committee— Develop the investment policy statement and implement the investment strategy by appointing and monitoring the investment managers
  • Investment Manager has the fiduciary duty of actively managing the portfolio and report investment performance to the committee

Objectives

The investment statement should set down the investment objectives based on the non-profit’s goals and constraints vis-à-vis the realities of the investment market. Elements mentioned in the objectives section include:

  • Objectives and time horizons of each asset pool
  • Long-term return targets that factor in inflation, fees, and annual spend
  • Risk tolerance
  • Time horizon of the investments which will affect the level of risk avoidance
  • Portfolio liquidity requisites
  • Constraints related to the mission of the organization
  • The investment philosophy of the non-profit which keeps decisions on track against short-term market fluctuations

Asset Allocation Strategy

Our goal behind asset allocation is to have a nimble portfolio that meets all the objectives.

The investment committee develops approved ranges for each target asset allocation to allow for strategic shifts in response to opportunities in the market in addition to natural shifts due purely to market behavior. These will depend on the risk tolerance of the non-profit.

Here’s an example of the parameters set within an investment policy statement

Asset ClassLower Limit Target Upper Limit
Equities30%50%%60%
Fixed Income 30%40%70%
Alternatives0%10%20%

Rebalancing and Spending Policy

We believe rebalancing the portfolio is key to keeping asset allocations on target. The rebalancing policy gives guidelines on:

  • How often the portfolio is reviewed and/or rebalanced
  • What the maximum variance is between target and actual allocation for each invested fund
  • The maximum period within which the account rebalancing should occur

The spending rate policy may provide a relatively predictable revenue stream to meet the goals of the non-profit while preserving and growing the value of assets. There are various ways that the spending rate can be determined. The spending rate is subject to periodic review to curb volatility.

Monitoring Procedures

We believe objectives and guidelines are only as good as their implementation. Therefore, it’s crucial for an IPS to include monitoring and review processes. The monitoring mechanism may set out the frequency of :

  • Asset role guideline reviews
  • Portfolio objectives, monitoring and reporting
  • Investment program overall assessment

Get Started on Your Investment Policy Statement

We at Stonecrop believe a well-defined investment policy statement is the blueprint for non-profit organizations to meet their objectives and minimize portfolio risk.

Stonecrop works with your board of trustees of your non-profit to create an investment committee. We then work with the committee to draft an IPS that fits the DNA of the organization and that will guide them in fulfilling their fiduciary responsibilities.

To embark on the road to investment success, get in touch with Stonecrop today.

  • AUTHOR

    Doug MacGray

  • DATE

    February 9, 2022

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