Investment Policy & Strategy

The easiest place to solidify your investment process is with an investment policy statement (IPS). An IPS states in writing your foundation’s mission and goals, and how your investment policy and practices will help to achieve those goals. The basic purposes are:
  • To state in writing the board’s attitudes, expectations, objectives, and guidelines for investing
  • To set forth an asset allocation and diversification plan for the foundation’s assets;
  • To establish criteria to monitor, evaluate, and compare the performance results of any investment managers the board chooses to use; and
  • To encourage effective communication between the board and any investment advisors.
It's never too soon to create an investment policy for your foundation. If the founder is still active in the foundation, it may be a particularly opportune time to make the decisions that lay the groundwork for your IPS, particularly with regard to spending policy and time horizon.
 
Ideally, you will be able to develop the IPS during a relatively stable market period, but in a dynamic and rapidly changing economy, this may not always be possible. Remember that you will probably be tweaking and revamping your IPS for years to come, although your key strategy decisions probably will not change in the short term. 
 
The one exception to “the sooner the better" rule is if your foundation has not yet been fully funded. In this case, it may be difficult to develop an asset allocation policy that is appropriate for your long-term mission and needs. Even so, it's worthwhile to plot an interim strategy for investing foundation assets while you await final funding. 

Resources 

Benefits of Having an IPS

  • Unifies and coordinates all your investment activity in support of your foundation's mission and goals
  • Keeps your foundation focused on long-term investment goals
  • Helps the board fulfill its fiduciary responsibilities and manage investments prudently
  • Provides steady guidance through market ups and downs and changes in personnel, helping the board avoid over-managing and other types of human errors
  • Provides those who manage your money—either inside the foundation or outside—with clear guidance, in the form of a description of your investment philosophy, goals, and procedures
  • Increases the chances that your foundation will earn more money while protecting and preserving its principal to accomplish its mission
  • Provides your board with a tool for orienting and training new trustees
  • To establish written investment goals and procedures that the full board has signed onto, providing ongoing clarity and consistency for everyone involved. This reduces potential friction among board members around investment decisions
  • Frees up the board to focus on its governance and grantmaking roles by providing steady investment guidance through market ups and downs and changes in board and staff
 
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Board’s Involvement in the IPS Process 

A sound investment policy is rooted in the full board’s answers to strategic questions about your foundation. Read more >> 

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Typical IPS Content  

A good IPS is a plan. It should describe where the foundation comes from; the goals it is trying to reach; and the steps it will take to reach them. It should not speak with exact specificity about which stocks to buy or managers to hire, but neither should it speak only in the vaguest generalities. Read more >> 

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Ensuring the IPS Will Be a Useful Document

  • Review IPS examples from other foundations, but avoid force-fitting a plan to your own circumstances. Your foundation's IPS should be grounded in your own key strategy decisions.
  • Be realistic in your assumptions about expected returns and inflation when calculating your spending policy and required return.
  • Construct a diversified portfolio with balance among asset categories (e.g., stocks, bonds), as well as within asset categories (e.g., large cap, mid cap, small cap).
  • Develop a plan for regular rebalancing, and for reviewing your asset allocation choices each year. 
  • As you develop your IPS, take a step back from it from time to time to make sure it helps you achieve your foundation's mission and goals. 
  • Review the IPS annually, including the key strategy decisions on which it is built and make changes as needed. The board or investment committee should still meet quarterly to review the investments, however.

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Common Pitfalls in Developing and Using an IPS

  • Developing the IPS without input and consensus among all board members;
  • Using unclear language;
  • Setting unrealistic goals;
  • Setting overly restrictive or permissive guidelines;
  • Failing to provide for regular review and updating; and
  • Not communicating the completed IPS to all board members, consultants, and managers.

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