Endowments and Foundations: Three Critical Elements of a Sound Investment Policy

An Investment Policy Statement is a document that outlines the key elements of an Endowment or Foundation’s long-term objectives.  Applying careful attention to three critical elements during the process of formulating and establishing this document will promote the ultimate realization of goals and continued success.

I. Investment Goals & Spending

The first critical element of a sound Investment Policy Statement (IPS) entails setting the appropriate investment goals and spending parameters.

  • Investment Goals and Objectives – These should be aligned with the mission of an institution and closely tied to its financials.
  • Growth of Capital, Capital Preservation, Income – These terms should be chosen carefully and reflect the investment goals and level of risk tolerance for the organization.
  • Spending Policy – Multi-year averaging can help smooth the impact of spending during volatile market swings.  Guidelines for spending should be clearly articulated and answer the following questions:
  • How is the spending rate determined, reviewed, and changed?
  • How is the asset base determined?
    • Strategic Planning – This is a critical area that has tremendous importance and impact.  Historical cash flow analysis is used to guide decisions in critical areas of an investment policy.
  • Measurement – The question of how the investment goals are to be measured is answered in this section, which also includes appropriate benchmarks and comparative metrics to be utilized.
II. Investment Guidance
  • Once the initial goals and spending parameters are established and in place, specific guidelines are then outlined for the investments.  An Investment Policy Statement acts as a guide for all fiduciaries, establishing terms for acceptable investments such as the following:
  • Allowable and Restricted Security Types – What investments are allowable as well as what asset classes or vehicles may be prohibited – such as limited partnerships or illiquid investments.
  • Asset Allocation Ranges – Targets must be set for allowable ranges within each asset class.  The client’s investment committee, together with their consultant, will implement and monitor based upon the stated parameters.
  • Asset Manager Guidelines – Rules by which investment managers must abide for each asset class.  For example, fixed income managers are bound to invest only in bonds rated BBB or better.
III. Roles and Responsibilities

The Investment Policy Statement must be signed by fiduciaries, and serves as a binding contract.  Like any contract, it should identify the various parties involved, as well as their specific roles, responsibilities, and expectations:

  • Finance & Investment Committees – It is critical to articulate detailed responsibilities:
  • Set the responsibility of the committee to maintain compliance of the IPS.
    • Investment Consultant – Specific detail must identify responsibility regarding investment-related decisions.
    • Ethical Standards – CFA Institute’s Code of Ethics should be included in this section.
    • Communication – Expectations are outlined for the consultant surrounding the provision of proactive advice pertaining to the investment portfolio, portfolio rebalancing, any IPS changes, and asset allocation decisions.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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