The responsibilities of those charged with oversight of a long-term investment fund such as an educational, religious or charitable endowment, foundation, hospital asset pool or pension fund differ fundamentally from those of other investment fiduciaries. The differences arise primarily from the nature of these funds’ beneficiaries.
In this 7-part series, we’re going to discuss key issues and essential principles of investment management. We’ll start with Principle #1: Objectives.
The board, in consultation with the institution’s administration, should determine the objectives of the fund and the policies that will guide its management, explain them in a written statement, and periodically review and update the statement.
Defining and Measuring Success
Trustees or governing board member’s experience mainly lies in the private sector are accustomed to thinking of financial objectives in terms of net profit, return on investment, and shareowner value, all of which are measurable in quantitative terms. In their roles as fiduciaries of a fund, however, they have to measure success against more subjective goals.
The terms may resemble those used in business; profit and growth certainly have relevance to the management of an organization’s endowment or pension fund. But in this environment, success has very different implications.
First and foremost, It must be understood in terms of the social purpose and utility of the institution (taken here to include a mutual benefit institution such as a pension fund), however intangible that may seem. Additionally, it must be viewed in a time frame that is much more extended than those normally considered in business.
Moreover, when planning investment policy for a fund, the trustees must first start with an understanding of the institution’s charter and its mission. And against that background they must proceed to review the condition of the institution and its short-, medium- and long-term needs.
Get It In Writing
These deliberations are best carried out in a formal legislative manner, with the resulting policy expressed in writing. The members of the board may represent various backgrounds, points of view and priorities. As in any such deliberative body, the final result—a written investment policy statement—will, in most cases, reflect the give and take of negotiation and compromise.
Your institution’s investment policy statement should bring these varied perspectives to a resolution, providing a written guide for the management of the fund. Thus, before assets are allocated or investments selected, the trustees, through their policy-making, make the most significant contribution to the achievement of their objectives.