Drafting Your Investment Policy Statement: 10 Critical Issues

December 12, 2016 |
1 minute read

Endowed institutions differ in their missions, capabilities and resources, and investment policy statements naturally mirror these differences.  In that sense, there is no single ‘right’ investment policy statement; each institution’s board must craft a statement that responds to the needs of the institution and the preferences and risk tolerances of the trustees. 

Annual review of the statement by the board can help to ensure that it remains an appropriate distillation of the institution’s investment philosophy and practice.  It can be said, however, that a properly drafted investment policy statement should address, at a minimum, the following ten issues:

1. Purpose of the investment pool

What is the purpose of the investment pool? What is its role in supporting the mission of the institution?

2. Duration of the pool

Is the fund intended to be perpetual in duration, or will it have a finite life? To what extent is maintenance of purchasing power an explicit goal?

3. Responsibility for investment decisions

What are the required qualifications of these individuals, and how are they to be recruited?

4. Delegation to a committee, a consultant, or a manager

If the board of trustees intends to delegate its authority to an investment committee or some other body or entity, how should that delegation be evidenced and documented?

5. Target return and endowment dependence

What is the investment pool’s target return, both in nominal and real (i.e., after inflation) terms? What is its expected annual contribution as a proportion of the institution’s operating budget or other relevant criterion?

6. Investment Strategy

What should be the overall investment strategy of the fund, including asset allocation targets and ranges, permitted and prohibited investment strategies and instruments?

7. Risks

What kind and degree of risk is the board prepared to take in pursuit of its investment goals? How are risks to be defined and measured?

8. Liquidity

How much liquidity should be maintained by the fund, either for investment needs within the fund or for wider institutional purposes?

9. Spending

How much of the endowment should be spent and how much reinvested? What rules determine how this amount is calculated?

10. The fund’s role in supporting the balance sheet

To what extent is the fund expected to assist in maintaining the balance sheet of the institution (for example, by supporting its credit rating)?

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