We believe establishing an Investment Policy Statement is among the most important steps toward successful investing. A well-crafted Investment Policy Statement represents the union of an organization’s objectives and realistic expectations of the capital markets (i.e., return assumptions).
Ideally, an Investment Policy Statement will set forth all of the parameters of the investment management mandate and strives to provide:
- A framework for evaluating performance,
- Continuity in decision-making (organization-based, not member-based, as members change over time), and
- Protection against arbitrary decision-making.
A typical Investment Policy Statement contains the following sections:
- Statement of objectives the organization’s long term goals, objectives, time horizon and risk tolerance, as well as the organization’s Spending Policy.
- Asset class guidelines a list of the asset classes in which the assets of the organization’s endowment may be invested and relevant performance benchmarks and guidelines for rebalancing asset class allocations. Also, included are prohibited transactions such as short sales and the purchase of securities conflicting with the organization’s mission.
- Duties and responsibilities a list of responsibilities and activities assigned to the
Investment Committee, if applicable; the investment manager; and the custodian.
- Investment manager selection the criteria to be used for selecting an investment manager, such as minimum assets under management, risk-adjusted performance, investment process, investment style and fees, and the stability of the organization.
- Monitoring and reporting a description of the frequency of performance reviews and how they are to be conducted.
Investment Policy Statements are intended to be robust and reflect the long term goals and objectives of an organization. Nevertheless, organization’s needs do change over time; therefore, the organization should have a process in place to review periodically and modify, if necessary, the Investment Policy Statement to reflect the organization’s current circumstances.