Writing an effective investment policy statement is crucial for nonprofits to manage their assets properly. When drafting an IPS, nonprofits need to define responsibilities, set objectives and constraints, benchmark the investment plan, and make the document portable. Defining responsibilities ensures accountability. Clarifying objectives and constraints like return targets, risk tolerance, time horizon provides guidance for investment. Benchmarking the investment performance periodically is essential for evaluation. Making the IPS portable facilitates transition when personnel changes. With clear guidelines in these four aspects, the IPS can serve as an important tool to govern investments and fulfill nonprofit missions.
Nonprofits should clearly define responsibilities of parties in IPS
The investment policy statement should identify who is responsible for governance, oversight, and maintenance of the document itself. It needs to specify who will set investment objectives, make asset allocation and manager selection decisions, and evaluate performance. These responsibilities should be assigned to specific owners like board members, trustees, investment committee members as well as financial advisors. Defining responsibilities in writing provides clarity on the duties of each party involved, especially those with fiduciary obligations. It also ensures accountability regarding the completion of tasks.
Objectives, constraints, return targets should be detailed in IPS
When constructing an investment portfolio, nonprofits need to consider factors like return objectives, risk tolerance, time horizon, liquidity needs, legal requirements, and unique circumstances. These factors should be defined and shared with investment managers. Return objectives need to account for nonprofit’s distribution needs and desire to preserve capital. Quantifiable risk tolerance levels based on mission should be set. Realistic time horizons for the assets should be established. Cash flow needs for distributions must be considered. Any legal or regulatory constraints should be noted. Responsible investing requirements, if any, need incorporation. The IPS needs to be designed and regularly reviewed to adapt to evolving circumstances.
Benchmarking investment performance is critical for evaluation
Measuring the investment program’s performance relative to appropriate benchmarks periodically is essential. “Success” should be defined upfront through relative or absolute benchmarks. For a relative benchmark, market indices can be used for comparison. For an absolute benchmark, a target return rate can be set as the hurdle. The investment program’s performance needs to be calculated against the established benchmarks regularly, like annually or whenever material portfolio changes occur. This helps determine if the program is on track or if strategy adjustments are required.
The IPS should be crafted to withstand personnel changes
Given that decision-makers and financial advisors associated with the investment program may change over time, the IPS should be portable and include sufficient details for new personnel. With clear guidelines around governance, execution, and monitoring functions, the IPS can serve as a tool to keep the investment program on track despite turnover.
An effective investment policy statement that thoroughly addresses governance, oversight, investment management, and monitoring can serve as the backbone of a nonprofit’s investment program. Defining responsibilities, setting objectives, benchmarking, and making the IPS durable are key considerations in creating a robust statement.