As a non-profit organization, if your organization has been fortunate enough to partition some of your assets into an endowment or investment account, it is imperative that you establish an Investment Policy Statement (IPS). Before we go into the details, lets define what an IPS is.
An IPS is a document that defines the long-term goals and investment guidelines for an organization’s investment portfolio.
The IPS is the framework that the organization creates to invest, grow, monitor and review their portfolio. It provides the investment manager with the ground rules and direction on how to invest and implement the funds in order to support the financial goals of the organization. The items that follow are essential areas that should be addressed when creating a properly crafted IPS.
Investment Objectives and Spending Policy
It is imperative to lay out the purpose of the funds as well as the risk tolerance for the investment. This will guide the investment manager on the selection of the funds based upon the risk propensity of the organization. Tax management should be indicated as the investment line-up could be modified to adjust to needs. Lastly, it is a good practice to list out the anticipated withdrawals for the investment. Most commonly, this is reflected as an annual percentage of the market value.
Asset Allocation, Equities and Fixed Income
The IPS should provide a range for the broad mix of assets to be used in the portfolio. Keep in mind, these accounts should be allocated in a way to grow for the long run. These accounts should be viewed as perpetuities. The allocation should provide a recommended or normal allocation based upon the risk tolerance of the organization. This target allocation will be what the investment manager will typically rebalance to and keep as their target. However, providing some latitude in the range will allow the investment manager room to make tactical moves based upon their opinion regarding the near-term prospects for the various asset classes.
The portfolio should be measured against each respective asset-class benchmark for each asset group that is contained within the long-term strategic allocation. Some commonly used benchmarks are the S&P 500 for large cap U.S. stocks, MSCI EAFE for large cap international stocks and the Barclays Aggregate Bond Index for bonds. Along with these asset category benchmarks, the IPS should also detail the custom benchmark for the investment manager to compare against. An example would 50% S&P 500, 10% MSCI EAFE and 40% Barclays Aggregate Bond Index, for a portfolio that is allocated 60% stocks and 40% bonds.
Roles and Responsibilities of the Organization’s Finance Committee
The IPS should spell out the specific roles and responsibilities of the organization’s investment committee. Common language may include the following:
- Evaluate investment for compliance with IPS
- Annually review costs associated with the management of the portfolio
- Regular evaluation of the organization’s investment manager performance
The IPS should spell out the specific roles and responsibilities of the organization’s investment manager. Common language may include the following:
- Investing portfolio within the parameters of the IPS
- Communication and portfolio monitoring guidelines
- Review frequency
Once the IPS is created, it is not a static document. It should be reviewed annually to make sure the elements it contains are still viable to the organization. As part of Fragasso’s institutional investment team, please feel free to contact me if you need assistance or have questions on your organization’s IPS.