Is my investment policy statement up to task? - Exponent Philanthropy

Is my investment policy statement up to task?

Having an investment policy statement is not enough. Clarity and consistency are essential to its value and efficacy.


One of the most common failings of an IPS is the use of ambiguous or undefined terms. As a result, statements that are meant to protect assets and guide the investment process may do more harm than good.

For example, the phrase “maximization of returns within acceptable levels of risk” is common when describing investment objectives. Unless this phrase is explained in other parts of the document, it can be interpreted in ways that could be detrimental to the portfolio and the foundation’s ability to sustain its mission.

The solution is to use a combination of well-defined statements for allowable asset classes, target asset allocation weighting, targeted rate of return, investment time horizon, and risk tolerance to set forth guidelines that leave no room for interpretation. The undeniable value is better risk management.


Lack of consistency in all written guidelines is another weakness found in existing IPS documents.

To be meaningful, the individual guidelines for asset classes, allocation, return, risk, benchmarks, and time horizon must work in concert. Ensuring consistency in your IPS will deliver significant value because no single element of the guidelines will offset or negate another.

Consider these questions when reviewing your IPS:

  • Time horizon—Is the investment time horizon clearly stated and used when modeling historic performance and risk profiles?
  • Asset allocation—Have the targeted asset allocation percentages been modeled to validate that, historically, the targeted rate of return was achievable over similar investment time horizons?
  • Rate of return—Is the targeted rate of return stated as average annual rate of return with a clear expectation that the range of returns across the investment time horizon will be both higher and lower?
  • Risk tolerance—Has the statement of risk tolerance or acceptable risk of loss been modeled to validate that, historically, the targeted asset allocation weightings will result in a composite portfolio that has demonstrated the same risk profile?
  • Benchmarks—Have the performance measurement benchmarks been aligned with each approved asset class in the target asset allocation?
  • Performance monitoring—Do you have a composite weighted benchmark for the portfolio that matches your portfolio structure and goals?
  • Reporting—Do you require your portfolio performance reports to include a comparison of actual returns to the IPS’s targeted rate of return and the composite benchmark across multiple time intervals?

This certainly is not a complete list of elements in the IPS that should be assessed for consistency, but it does represent some of the more critical ones.

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