How To Create an Investment Policy Statement - Exponent Philanthropy
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How To Create an Investment Policy Statement

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Photo by Christina Morillo

An investment policy statement (IPS) is the starting point and bedrock of a foundation’s investment strategy. It constitutes a road map for how the foundation plans to achieve and support its stated mission and giving goals through its investment strategy.

A foundation’s IPS is a guiding force for the organization, so in the beginning, expect to spend a fair amount of time on it. Doing so will help ensure everyone in the organization—from staff to board to external investment advisory firms—have a solid understanding of the mission, objectives, and path for each party involved. Furthermore, you can use this document to give others an orientation or introduction to the foundation.

Common Investment Policy Statement Components

Here are some common IPS components, however only include the sections that apply to your foundation:

Foundation Background and Mission

This describes the foundation’s history and its charitable purpose. It addresses issues such as time horizon, capital inflows and outflows, and special assets.

Time Horizon

This documents your foundation’s time horizon for investments. Many foundations with long life spans (e.g., perpetuity) choose a time horizon in the 5- to 10-year range. That lets them set specific and measurable goals. Yet, it provides enough time to view interim fluctuations and volatility in markets with an appropriate long-term perspective.

Statement of Investment Objectives

Here you clearly define the investment portfolio’s goals and performance standards. These objectives can be singular or varied. For instance, common objectives are providing operational support to the organization’s mission, preserving capital, and minimizing risk of permanent loss of capital. Most institutions have multiple objectives that include statements, such as:

  • Preserve and enhance the real purchasing power of the portfolio in perpetuity;
  • Provide a relatively predictable stream of earnings in support of operations;
  • And attain long-term return objectives without the assumption of undue risk.

Alternatively, some institutions will establish a definitive return target, such as 8% nominal return (including inflation), which the institution believes encompasses its objectives.

Statement of Risk Tolerance

This recaps the collective attitude of the board toward risk. Consider whether your foundation has made or will make long-term commitments to funding specific projects or grantees. If so, large volatility in the foundation’s assets could disrupt these pledges.

Spending Policy

This summarizes the percentage of assets you plan to spend each year on grantmaking, and expenses related to fulfilling your mission and charitable purpose. Your spending policy should also include your required return, which is the sum of your spending policy rate; the inflation rate expected over your time horizon; and expected investment fees.

Asset Allocation Policy

This focal point of your IPS defines rough targets and a range of permissible limits for each of the major asset classes, as well as how you’ll diversify each investment type. With this information, you can develop—and should include—a modeled annual return, also called an expected return.

Asset Guidelines

These provide details about and guidance around your asset allocation policy by laying out the kinds of investments you choose to allow, favor, or prohibit. This includes your preferences for investments that align with the foundation’s mission, alternative investment limitations, and securities guidelines.

Roles and Responsibilities

While roles and responsibilities may seem clear at the start of an IPS, they can become murky with time if not clearly defined. Key participants may include trustees, investment committee members, staff, and external third parties, such as investment consultants, custodians, investment managers, and outsourced chief investment officers. One classic example is defining who is responsible for picking investment managers. Depending on the governance structure and organizational preference, this role may reside with a committee, custodian/trustee, foundation staff, or outside firm. Note: Delegating authority to outside professionals does not absolve you of your responsibilities as a fiduciary.

Guidelines for Monitoring and Evaluating Investments

These describe the controls in place to move and invest your foundation’s funds, guidelines for rebalancing the portfolio, and performance benchmarks.

  • Oversight and management responsibilities identifies who will oversee implementation of your investment policy, who will manage investments, and the main tasks involved.
  • Criteria for selecting investment consultants and managers document the most important criteria for selecting an investment manager or consultant.
  • Guidelines for monitoring and evaluating investment consultants and managers document how and how often you will review the performance of consultants and managers. They should apply to anyone hired, whether foundation staff (paid or unpaid) or an outside advisor. Specify grounds for termination of the relationship with outside advisors. Establish a written process for monitoring and evaluation to set clear expectations; encourage regular communication among the board, investment committee, and consultants and managers; and promote accountability.

Ensuring the IPS is Useful

Review IPS examples from other foundations but avoid force-fitting a plan to your own circumstances. You should ground your foundation’s IPS in its own key strategy decisions. Here are other considerations:

  • When calculating your spending policy and required return, be realistic in your assumptions about expected returns and inflation.
  • Construct a diversified portfolio with balance among asset categories (e.g., stocks, bonds) and 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 periodically to ensure it helps you achieve your foundation’s mission and goals.
  • Review the IPS annually, including the key strategy decisions on which it relies, and make changes as needed. The board or investment committee, however, still should meet quarterly to review the investments.
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Exponent Philanthropy thanks Alison E. Dupont for contributions to this article and Disciplina for assistance in updating this article.

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