Crafting a Robust Investment Policy Statement: A Step-by-Step Guide for Institutional Investors

The landscape of institutional investment management is characterised by increasing complexity, market volatility, and heightened scrutiny of fiduciary responsibilities. In this environment, establishing clear portfolio governance and strategic alignment is not merely advantageous; it is imperative. Fiduciaries, including Chief Investment Officers (CIOs), Portfolio Managers, Family Office Directors, and Investment Committee members, are responsible for prudently and effectively stewarding assets. Central to fulfilling this duty is the Investment Policy Statement (IPS).

An Investment Policy Statement (IPS) is the foundational governance document that provides the strategic roadmap for managing an investment portfolio. It serves as a blueprint, meticulously drafted to guide investment decisions and ensure they remain consistently aligned with the institution’s unique objectives, risk tolerance, and constraints. Far more than a static document, a well-constructed IPS acts as a dynamic guide for navigating the complexities of asset management.

This guide offers a comprehensive, step-by-step methodology designed specifically for sophisticated investment professionals and committee members tasked with creating, implementing, and maintaining a robust IPS. It delves into the strategic importance of the IPS, dissects its core components, explores the nuances of establishing governance frameworks, defining objectives and constraints, quantifying risk, and formulating asset allocation strategies. 

Furthermore, it synthesises industry best practices, addresses regulatory considerations, and examines the evolving role of technology in streamlining IPS management. By understanding and applying the principles outlined herein, fiduciaries can significantly enhance their portfolio governance and strategic decision-making capabilities. Key areas covered include the strategic value proposition of the IPS, its essential structural elements, governance protocols, the definition of investment objectives and risk parameters, asset allocation frameworks, best practices in drafting and maintenance, and the enabling power of modern technology in managing this critical asset management policy document.

Crafting a Robust Investment Policy Statement: A Step-by-Step Guide for Institutional Investors

1. The Strategic Imperative of the Investment Policy Statement (IPS)

The Investment Policy Statement transcends its function as a mere document; it stands as a cornerstone of effective portfolio governance. For institutional investors managing significant assets often subject to complex liabilities or spending requirements, the IPS serves as the primary mechanism for aligning diverse stakeholders, including board members, investment committees, internal staff, external advisers, and portfolio managers, around a unified set of investment goals, strategies, and constraints. Its strategic importance stems from the tangible benefits it delivers when thoughtfully constructed and diligently maintained.

A robust IPS instils disciplined decision-making. By providing a pre-agreed framework based on long-term objectives and risk tolerance, it acts as a crucial bulwark against emotional or reactive decisions, particularly during periods of market stress or volatility. It serves as an objective guidepost, reminding stakeholders of the overarching strategy and preventing impulsive actions driven by short-term market noise. This disciplined approach is fundamental to achieving long-term investment success.

Furthermore, the IPS plays a critical role in fiduciary duty fulfilment. For entities governed by regulations such as the Employee Retirement Income Security Act (ERISA) or the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a well-documented IPS is instrumental in demonstrating procedural prudence. It records the processes for decision-making, monitoring, and oversight, providing tangible evidence that fiduciaries are acting in the best interests of beneficiaries or the organisation, consistent with legal and regulatory standards.

The IPS fosters clear communication and accountability. It explicitly defines the roles, responsibilities, and expectations of all parties involved in the investment process—from the governing board to the custodian. This clarity minimises ambiguity, prevents misunderstandings, and establishes clear lines of accountability for performance and adherence to policy.

Crucially, the IPS reinforces a long-term strategic focus. It commits the organisation to an agreed-upon investment strategy designed to meet long-range goals, whether funding pension liabilities, supporting an endowment’s spending rate, or preserving capital for future needs. This long-term perspective helps balance the pursuit of growth objectives with the management of spending requirements or liability streams.

Finally, the IPS establishes the performance evaluation framework. By defining investment objectives, specifying allowable risk levels, and designating appropriate benchmarks, it creates the necessary context for measuring success and evaluating the performance of the overall portfolio and individual investment managers. This enables objective assessment and informs decisions regarding strategy adjustments or manager retention.

The absence or inadequacy of an IPS exposes an institution to significant risks, including strategic drift, inconsistent decision-making driven by individual biases or market sentiment, potential conflicts among stakeholders, difficulties in assessing performance objectively, and, critically, potential breaches of fiduciary duty.

An often-underappreciated function of the IPS is its role as a tool for organisational memory and continuity. Institutional memory regarding investment philosophy, risk appetite evolution, and strategic rationale can be easily lost with the turnover of board members, committee members, or key staff. 

The IPS serves as a codified repository of this critical information, documenting past decisions and their underlying logic. This ensures that new fiduciaries can quickly understand the context of the current investment programme, preventing the need to revisit settled debates and promoting consistency in strategy execution over time. 

Maintaining the IPS as a living, accessible document, potentially enhanced through digital platforms offering features like version control, is therefore vital not just for current governance but for preserving strategic coherence across generations of leadership.

2. Deconstructing the IPS: Core Components and Their Purpose

While the specific format and level of detail in an Investment Policy Statement can vary depending on the institution’s complexity and needs, a comprehensive and effective IPS generally incorporates several core components. Industry standards, such as those referenced by the CFA Institute, provide a valuable framework for addressing all critical elements. Understanding the purpose and content of each section is fundamental to crafting a robust document.

 

A. Introduction / Scope and Purpose:

  • Content: This initial section sets the stage. It identifies the investor entity (e.g., pension fund, endowment, foundation, family office) and the specific pool of assets governed by the IPS. It articulates the fundamental purpose of these assets – for instance, to provide retirement benefits, support the operating budget of a non-profit, preserve intergenerational equity, or meet specific long-term financial goals. It should also state the purpose of the IPS document itself: to serve as a guiding framework for managing these assets prudently and effectively. Context regarding the source of wealth or assets may also be relevant.
  • Importance: This section provides essential context, linking the investment strategy directly to the organisation’s overarching mission, liabilities, or objectives. It ensures that all subsequent policy decisions are grounded in this fundamental purpose.

 

B. Statement of Goals and Objectives:

  • Content: This section translates the broad purpose into specific, measurable investment goals. Key elements include defining the primary investment objective (e.g., capital preservation, income generation, long-term growth, achieving a specific rate of return), stating the required return target (e.g., an absolute percentage, a real return target like inflation plus spending rate, or a return relative to a benchmark or actuarial assumption), and specifying the investment time horizon (e.g., perpetual, long-term >10 years, specific number of years). Crucially, it should link these return objectives to the institution’s spending policy or liability requirements. Secondary objectives, like prudent diversification, may also be included.
  • Importance: Clearly defined objectives provide unambiguous targets for the investment strategy and establish the criteria against which performance and success will ultimately be measured. They ensure the portfolio is actively managed toward achieving specific, desired outcomes.

 

C. Governance:

  • Content: This section details the operational framework for investment oversight and decision-making. It explicitly defines the roles and responsibilities of all involved parties: the governing board, the investment committee, the CIO and internal staff, external investment consultants or advisers, investment managers, and the custodian. It specifies who holds authority for critical decisions like setting overall policy, approving the IPS, determining asset allocation, selecting and terminating managers, and executing trades. The process for hiring and firing external vendors and the procedures for reviewing and updating the IPS itself must be clearly outlined. Reporting lines and the required standard of care (e.g., fiduciary duty) should also be specified.
  • Importance: A well-defined governance structure is paramount for ensuring clarity, accountability, and the smooth, effective functioning of the investment programme. It is essential for demonstrating prudent oversight and fulfilling fiduciary responsibilities.

 

D. Risk Tolerance and Risk Management:

  • Content: This section addresses the institution’s posture towards investment risk. It defines the investor’s risk tolerance, encompassing both the financial ability and the organisational willingness to withstand potential losses or volatility. This may be linked to factors like funded status, sponsor financial strength, or spending dependency. It should quantify acceptable risk levels where possible (e.g., maximum drawdown, target volatility range). The section also outlines risk management protocols, including specific risk limits (e.g., concentration limits by security, manager, sector, or geography; constraints on leverage or derivatives), the metrics used to measure and monitor risk, and control procedures for specific issues like proxy voting or handling gifts.
  • Importance: Explicitly defining risk tolerance ensures the investment strategy aligns with the institution’s capacity for risk-taking. The risk management protocols provide the framework for controlling and mitigating potential adverse outcomes.

 

E. Asset Allocation and Portfolio Parameters:

  • Content: This section translates the objectives and risk tolerance into a tangible investment structure, focusing on the Strategic Asset Allocation (SAA). It specifies the target allocation percentages for major asset classes (e.g., domestic equity, international equity, fixed income, real assets, private equity, cash) along with permissible ranges around these targets. It should address diversification principles and outline the portfolio rebalancing policy, including the methodology (e.g., calendar-based, range-based) and triggers. Guidelines regarding permissible and prohibited asset classes, strategies, or specific securities and potentially asset quality guidelines (e.g., minimum credit ratings) are also included here.
  • Importance: The SAA is widely considered the primary driver of long-term portfolio risk and return. This section provides the concrete plan for portfolio construction and maintenance, ensuring it remains aligned with strategic goals.

 

F. Investment Constraints:

  • Content: This section details specific limitations that shape the investment strategy. These commonly include liquidity requirements (cash needed for operations, spending, capital calls, unforeseen needs), the investment time horizon (if not fully covered in objectives), tax considerations based on the institution’s status, applicable legal and regulatory requirements (e.g., ERISA, UPMIFA, state statutes), and any unique circumstances or organisational preferences, such as mandates for Environmental, Social, and Governance (ESG) investing or specific exclusions.
  • Importance: Constraints ensure that the investment strategy is realistic, feasible, and compliant within the specific operating environment and ethical framework of the institution.

 

G. Monitoring, Evaluation, and Review:

  • Content: This section establishes the framework for ongoing oversight and accountability. It specifies the benchmarks against which the performance of the total portfolio and individual investment managers will be measured. It details reporting requirements, including frequency (e.g., quarterly, annually) and content. The process for evaluating investment managers, including criteria beyond just performance (e.g., adherence to style, personnel changes, fees), and the criteria or events that could trigger manager termination, should be outlined. Finally, it reiterates the schedule and process for reviewing the IPS document itself.
  • Importance: This section closes the loop, ensuring that performance is tracked against objectives, managers are held accountable, and the IPS itself remains a relevant and effective governance tool over time.

 

H. Appendices (Optional but Recommended):

  • Content: Appendices can house detailed information that supports the main body of the IPS but might be subject to more frequent change or is too granular for the primary text. Common examples include the specific Strategic Asset Allocation targets and ranges, details of the rebalancing policy, definitions of benchmarks used, and a version control log documenting historical changes to the IPS.
  • Importance: Using appendices keeps the core IPS document more focused and concise. It allows for updates to specific parameters like the SAA without requiring a formal revision and re-approval of the entire IPS document, streamlining the update process. Maintaining a version control history enhances transparency and governance.

 

The following table summarises these core components:

Table 1: Summary of Key IPS Sections and Core Content

IPS Section

Key Elements / Purpose

A. Introduction/Scope

Defines the investor, assets governed, and purpose of the fund and the IPS; provides context.

B. Goals & Objectives

Specifies measurable return targets, time horizon, and links to spending/liabilities; sets performance goals.

C. Governance

Defines roles, responsibilities, decision authority, vendor management, IPS update process, and standard of care; ensures accountability.

D. Risk Tolerance/Management

Defines risk capacity and willingness, sets quantifiable risk limits (e.g., drawdown, volatility), and outlines risk metrics and control procedures.

E. Asset Allocation/Params.

Sets Strategic Asset Allocation (SAA) targets and ranges, diversification guidelines, rebalancing policy, permissible/prohibited investments, and asset quality.

F. Investment Constraints

Details limitations: liquidity needs, legal/regulatory (ERISA/UPMIFA), taxes, unique circumstances (ESG, exclusions).

G. Monitoring/Evaluation

Specifies benchmarks, reporting requirements, manager evaluation process, manager termination criteria, and IPS review schedule.

H. Appendices (Optional)

Contains detailed SAA, rebalancing policy, benchmark specifics, version control; allows easier updates to details.

3. Establishing Robust Governance Frameworks within the IPS

While all sections of the IPS are important, the governance framework is arguably the linchpin holding the entire structure together. Experience suggests that weaknesses in defining and adhering to governance protocols are a common failing in less effective policy statements. Without clear governance, the IPS risks becoming an irrelevant document, unable to guide decisions or ensure accountability. Establishing robust governance involves meticulous attention to defining roles, decision-making authority, and the processes for maintaining the IPS itself.

 

Defining Roles and Responsibilities:

Ambiguity in roles is a primary source of governance failure. The IPS must explicitly and unambiguously assign duties to every party involved in the investment programme. This includes the ultimate governing body (e.g., Board of Trustees), the Investment Committee, the Chief Investment Officer (CIO) and/or internal investment staff, any external Investment Consultants or Outsourced CIOs (OCIOs), specific Investment Managers, and the Custodian.

Beyond listing the parties, the IPS must delineate specific decision-making authority. Who is responsible for setting the overall investment policy? Who approves the IPS document and its subsequent revisions? Who determines the strategic asset allocation? Who has the authority to hire and fire investment managers or consultants? Who executes trades? Clear answers to these questions prevent confusion and ensure decisions are made at the appropriate level. 

The IPS should also acknowledge the fiduciary nature of delegation; if responsibilities are delegated (e.g., from a board to an investment committee, or to an external adviser), the delegating body retains oversight responsibility. 

Furthermore, the applicable standard of care, typically a Fiduciary Duty under regulations like ERISA or UPMIFA for many institutions, or potentially a Suitability standard in other contexts, must be clearly stated.

 

The IPS Review and Update Process:

A critical governance function is ensuring the IPS remains a relevant, living document. It cannot be created once and then filed away. Best practices generally recommend a formal review and reaffirmation of the IPS at least annually. More substantial revisions might occur every 3-5 years, coinciding with market cycles or strategic planning horizons, or whenever significant changes necessitate it. However, it is equally important to avoid reactive changes based on short-term market movements.

The IPS must detail the process for conducting these reviews. Who is responsible for initiating the review? Which parties participate in the assessment? What is the mechanism for approving changes (e.g., investment committee vote, full board ratification)? How are approvals documented (e.g., inclusion in meeting minutes )? Defining this process ensures reviews happen systematically. 

The IPS should also identify potential triggers for review outside the regular schedule, such as material changes in the organisation’s mission, financial situation, or spending needs; significant shifts in the capital markets or regulatory landscape; or major changes in key personnel.

The rigor applied to defining and executing these governance procedures directly impacts the effectiveness of the IPS over time. Clear roles, responsibilities, and a consistent, documented review cadence ensure the IPS remains aligned with the institution’s current reality and continues to serve as a useful guide for decision-making and fiduciary oversight. Conversely, ambiguity in responsibilities or infrequent, ad-hoc reviews inevitably lead to an outdated policy that fails to provide meaningful guidance or demonstrate procedural prudence. 

Therefore, embedding the IPS governance process into the institution’s regular operational rhythm is as crucial as drafting the initial policy. This operational discipline is where digital platforms offering automated reminders, workflow tracking, and centralised access can significantly enhance adherence to governance protocols.

4. Defining Clear Investment Objectives and Constraints

The investment objectives and constraints articulated within the IPS serve as the foundational pillars upon which the entire investment strategy is built. They dictate the required rate of return, the acceptable level of risk, the appropriate time horizon, and the boundaries within which the portfolio must operate. Clarity and precision in defining these elements are essential for effective portfolio management.

 

Setting Investment Objectives:

Vague or poorly defined objectives render an IPS ineffective. Objectives must be specific, measurable where possible, achievable, relevant, and time-bound (SMART). Common objectives for institutional investors include:

  • Meeting Actuarial Assumptions: For defined benefit pension plans, a primary objective is often to achieve a rate of return that meets or exceeds the long-term actuarial return assumption used to calculate liabilities and required contributions.
  • Covering Spending and Inflation: For endowments and foundations, a common objective is to generate returns sufficient to cover the annual spending rate plus inflation, thereby preserving the real purchasing power of the corpus over time (e.g., achieve CPI + 5%).
  • Capital Preservation/Growth/Income: Objectives might focus on preserving principal, generating current income, achieving long-term capital appreciation, or a combination thereof, depending on the fund’s purpose.
  • Absolute or Relative Returns: Objectives can be stated in absolute terms (e.g., achieve 7% annualised return) or relative terms (e.g., outperform a specific benchmark index or peer group). Real return objectives (inflation-adjusted) are particularly relevant for investors with inflation-linked liabilities or long-term purchasing power goals.

 

The investment time horizon is intrinsically linked to objectives and must be explicitly stated. Is it perpetual, long-term (e.g., >10 years), medium-term, or short-term? The time horizon significantly influences the capacity to take risks and the suitability of different asset classes.

Critically, return objectives must be established in the context of the institution’s liabilities or spending policy. An objective must be realistic and sustainable, ensuring the investment strategy can reasonably support the financial obligations or distribution requirements of the organisation.

 

Identifying and Articulating Constraints:

Constraints define the boundaries and limitations within which the investment strategy must operate. Thorough identification of all relevant constraints is crucial for ensuring the strategy is practical and compliant. Key constraints include:

  • Liquidity Needs: The IPS must define the portfolio’s requirements for readily available cash to meet operating expenses, planned distributions, capital calls for private investments, or unexpected demands. Some institutions may benefit from segmenting cash into operating, reserve, and strategic pools or defining minimum allocations to different liquidity categories (e.g., daily/monthly, >1 year).
  • Legal and Regulatory: The IPS must acknowledge and incorporate constraints imposed by applicable laws and regulations, such as ERISA for pension plans, UPMIFA for non-profits, state-specific statutes governing public funds, or other relevant legal frameworks.
  • Tax Considerations: The institution’s tax status (taxable or tax-exempt) and any associated implications for investment selection or strategy (e.g., preference for tax-efficient vehicles, impact of Unrelated Business Taxable Income (UBTI)) must be specified.
  • Unique Circumstances: This category captures any other specific policies, preferences, or restrictions unique to the institution. This often includes policies regarding ESG or responsible investing factors, prohibitions or restrictions on certain asset classes (e.g., derivatives, leverage, alternative investments) or specific securities/sectors, or requirements for special approval processes for certain types of investments.

 

When defining objectives and constraints, fiduciaries must navigate a delicate balance. While the IPS requires clear, specific guidelines to be effective, excessive rigidity can be counterproductive. An overly prescriptive IPS might prevent the investment manager from making prudent tactical adjustments in response to changing market conditions or capitalising on unforeseen opportunities. 

Therefore, careful judgment is required. Specificity should focus on core principles, the fundamental return objective, the overall risk tolerance, and absolute prohibitions. For elements like asset allocation, using ranges provides necessary flexibility. Similarly, using less rigid language (e.g., “periodically” rather than “quarterly,” “may consider” rather than “will terminate”) for certain operational procedures can grant appropriate discretion while still providing guidance. This balance isn’t static; the regular IPS review process provides the opportunity to reassess and recalibrate the level of specificity versus flexibility as circumstances evolve.

5. Quantifying Risk Tolerance and Implementing Risk Management Protocols

A central tenet of prudent investment management is understanding and managing risk. The IPS must clearly articulate the institution’s tolerance for risk and establish the protocols for monitoring and managing portfolio exposures. This involves moving beyond vague statements to more quantifiable measures and defined procedures.

 

Defining Risk Tolerance:

Risk tolerance for an institution has two dimensions: the ability to take risks and the willingness to take risks.

  • Ability (Risk Capacity): This relates to the institution’s financial capacity to withstand losses without jeopardising its core mission or ability to meet obligations. Factors influencing ability include the plan’s funded status (for pensions), the sponsor’s financial strength, the degree of reliance on investment returns for the operating budget, the stability of other income sources, and the length of the investment time horizon.
  • Willingness: This reflects the governing body’s psychological comfort level with volatility and potential short-term losses. It can be influenced by the experiences of committee members, organisational culture, and sensitivity to stakeholder perceptions. While harder to quantify, understanding willingness is crucial for setting realistic expectations and avoiding emotional reactions during downturns.

 

The IPS should strive to quantify risk tolerance where feasible. This might involve:

  • Defining a maximum acceptable drawdown over a specific period (e.g., maximum loss of X% in any 12-month period).
  • Setting target volatility ranges (e.g., aiming for an annualised standard deviation between Y% and Z%).
  • Using metrics like Surplus-at-Risk (SaR) for pension funds, which measures the potential decline in funded status.
  • Linking risk tolerance directly to the liability profile or spending requirements. While risk tolerance questionnaires are common for individuals, institutional assessment often involves scenario analysis and discussions among fiduciaries. Importantly, investment risk should always be evaluated within the context of the total portfolio, recognising how diversification can mitigate the risk of individual holdings.

 

Establishing Risk Management Protocols:

Once risk tolerance is defined, the IPS must outline the specific protocols for managing risk:

  • Risk Metrics: Specify the key metrics that will be used to measure and monitor risk. Common metrics include standard deviation (volatility), Sharpe ratio (risk-adjusted return), Value-at-Risk (VaR), tracking error (deviation from benchmark), beta, duration (for fixed income), and maximum drawdown. The chosen metrics should align with the defined risk objectives.
  • Risk Limits: Establish clear, quantifiable limits on various portfolio exposures to prevent unintended concentrations or excessive risk-taking. Examples include maximum percentage allocation to a single security, investment manager, industry sector, or geographic region; limits on the use of leverage or derivatives; and minimum credit quality standards for fixed income.
  • Control Procedures: Detail specific procedures for managing identified risks. This might include processes for counterparty risk assessment, liquidity management protocols, guidelines for handling unsolicited gifts or contributions, policies regarding securities lending, and proxy voting guidelines.
  • Monitoring and Reporting: Clearly assign responsibility for ongoing risk monitoring (e.g., to the CIO, internal risk team, or external consultant) and define the frequency and format of risk reporting to the investment committee or board.

 

The following table provides examples of common risk metrics and their relevance within an IPS:

Table 2: Common Risk Metrics and Their Application in an IPS

Risk Metric

What it Measures

Relevance in IPS

Standard Deviation

Volatility or dispersion of returns around the average

Defines acceptable range for overall portfolio volatility; sets expectations for return variability.

Sharpe Ratio

Return per unit of total risk (standard deviation)

Measures risk-adjusted performance relative to objectives; helps evaluate the efficiency of return generation.

Value-at-Risk (VaR)

Maximum expected loss over a specific time horizon

Can help quantify downside risk tolerance; sets a threshold for potential worst-case short-term losses.

Maximum Drawdown

Largest peak-to-trough decline in portfolio value

Directly addresses tolerance for loss; sets a limit on the largest acceptable decline from a previous high point.

Tracking Error

Volatility of excess returns relative to a benchmark

Measures deviation from a benchmark; relevant for strategies with relative return objectives; sets limits on active risk.

Beta

Sensitivity of portfolio returns to market returns

Measures systematic market risk; relevant for understanding portfolio behaviour relative to broad market movements.

Duration

Sensitivity of bond prices to interest rate changes

Key risk metric for fixed income portfolios; helps manage interest rate risk exposure.

 

It is crucial to recognise that an institution’s risk tolerance is not necessarily static. While the IPS provides a long-term framework, factors influencing risk capacity (like funded status or reliance on distributions) and risk willingness can change over time or be reassessed, particularly during periods of significant market stress or changes in organisational circumstances. 

Therefore, the governance process outlined in the IPS must incorporate periodic reassessment of the institution’s risk tolerance. This ensures that the risk parameters defined within the policy remain appropriate and aligned with the institution’s current ability and willingness to bear risk, preventing a potentially dangerous disconnect between stated policy and actual risk posture.

6. Crafting the Asset Allocation and Rebalancing Strategy

The Strategic Asset Allocation (SAA) is the cornerstone of the investment strategy outlined in the IPS, widely recognised as the primary determinant of long-term portfolio risk and return outcomes. This section of the IPS translates the institution’s objectives and risk tolerance into a concrete plan for structuring the portfolio and maintaining its integrity over time through disciplined rebalancing.

Defining the Strategic Asset Allocation (SAA):

The IPS must clearly define the SAA framework. This involves:

  • Target Allocations and Ranges: Specify the long-term target percentage allocation for each major asset class identified as appropriate for the portfolio (e.g., global equities, investment-grade bonds, high-yield bonds, private equity, real estate, infrastructure, cash). Alongside targets, establish permissible ranges (e.g., target 50% equity with a range of 45%-55%). These ranges allow for market fluctuations and potentially some tactical flexibility without triggering immediate rebalancing.
  • Asset Class Definitions: Provide clear definitions for each asset class used in the SAA to avoid ambiguity in classification and monitoring.
  • Diversification: Explicitly state the commitment to diversification across asset classes, investment strategies, geographic regions, and potentially investment managers as a key risk management principle.
  • SAA Location: Consider placing the detailed SAA targets and ranges in an appendix. This allows the SAA to be updated (following appropriate governance procedures) without requiring a full revision and re-approval of the entire IPS document, facilitating more timely adjustments if needed.

Permissible Investments and Guidelines:

Beyond the broad SAA, the IPS should provide guidelines on the specific types of investments and strategies that are permitted or prohibited:

  • Eligible Investments: List the specific asset classes, sub-asset classes, and investment vehicles (e.g., individual securities, mutual funds, ETFs, collective investment trusts, separate accounts, limited partnerships) that are considered appropriate and permissible within the portfolio.
  • Prohibited Investments: Clearly identify any investments or strategies that are explicitly forbidden (e.g., specific industries for ESG reasons, highly speculative instruments, excessive leverage, certain types of derivatives).6 When setting prohibitions, care should be taken to avoid overly broad language that might unintentionally exclude suitable investments held within commingled vehicles.
  • Asset Quality/Selection Criteria: The IPS may establish minimum quality standards (e.g., minimum credit ratings for bonds) or outline the criteria to be used for selecting specific investments or investment managers (e.g., track record, philosophy alignment, fee reasonableness, organisational stability).

Rebalancing Discipline:

Maintaining the integrity of the SAA requires a disciplined rebalancing strategy. The IPS must outline this process:

  • Purpose: Explain that rebalancing is undertaken primarily to control risk by bringing asset class weights back in line with their target ranges after market movements have caused them to drift. It enforces a “buy low, sell high” discipline counter to emotional impulses.
  • Methodology: Describe the specific approach used for rebalancing. Common methods include calendar rebalancing (reviewing and adjusting allocations at set intervals, e.g., quarterly or annually) and percentage-range rebalancing (adjusting allocations whenever an asset class breaches its predefined minimum or maximum range limit). A combination approach is also possible. If using ranges, the width of the bands and the rebalancing thresholds must be clearly defined.
  • Responsibility: Specify which party (e.g., CIO, investment consultant, OCIO, specific manager) is responsible for monitoring the portfolio’s allocations relative to the targets and ranges, and for executing the necessary rebalancing trades when triggers are met.

 

 While the IPS explicitly defines risk tolerance in a dedicated section, the chosen width of the asset allocation ranges serves as a powerful, albeit implicit, risk control mechanism. Narrow ranges enforce tighter adherence to the strategic risk profile defined by the target SAA but can lead to more frequent trading and higher transaction costs. Wider ranges allow for greater portfolio drift, potentially leading to larger deviations from the intended risk posture between rebalancing events, but incur lower trading costs. 

The decision on range width is therefore not merely administrative; it is an active risk management choice that directly reflects the institution’s tolerance for deviation from its strategic risk target. Ideally, the IPS or supporting documentation should articulate the rationale for the chosen range widths, explicitly linking them back to the institution’s defined risk tolerance and objectives.

7. IPS Best Practices: From Drafting to Ongoing Maintenance

Crafting and maintaining an effective Investment Policy Statement requires a disciplined process grounded in industry best practices. Adhering to these practices helps ensure the IPS fulfils its intended purpose as a critical governance tool and a roadmap for achieving long-term investment objectives.

 

Drafting the IPS:

The initial creation of the IPS sets the foundation for its future effectiveness. Key considerations during drafting include:

  • Collaboration: The IPS should not be created in isolation. It requires collaborative input from all key stakeholders, including the investment committee, senior management, investment advisers or consultants, and potentially legal counsel to ensure buy-in and comprehensive coverage.
  • Customisation: While templates can provide a starting point, the IPS must be tailored to the unique circumstances, mission, objectives, risk tolerance, and constraints of the specific institution. Generic, boilerplate language should be avoided.
  • Clarity and Conciseness: The language used must be clear, precise, and unambiguous to avoid misinterpretation. While comprehensive, the document should avoid unnecessary jargon and complexity, ensuring it is understandable to all relevant parties, including non-investment professionals who may serve on governing bodies.
  • Realistic Expectations: Objectives for return and assumptions regarding risk, inflation, and spending must be grounded in realistic market expectations and the institution’s specific situation. Overly ambitious goals can lead to inappropriate risk-taking or disappointment.
  • Focus on Process: Beyond stating objectives and constraints, the IPS should clearly document the processes for decision-making, monitoring, evaluation, and review. This procedural documentation is crucial for demonstrating fiduciary prudence.

 

Implementation and Adherence:

Drafting the IPS is only the first step; effective implementation and ongoing adherence are critical:

  • Formal Approval: The final IPS document must be formally approved and adopted by the appropriate governing body (e.g., Investment Committee, Board of Trustees). This approval, along with the date, should be clearly documented, often in meeting minutes.
  • Communication: Once approved, the IPS should be distributed to all relevant parties who have roles or responsibilities outlined within it, including investment managers, consultants, custodians, and internal staff.
  • Consistency is Crucial: Emphasise that the IPS must be consistently followed in practice. Failure to adhere to the policies and procedures outlined in the IPS can be considered a breach of fiduciary duty, potentially negating the benefits of having the document in the first place. Regular checks should ensure that actual investment practices align with the written policy.

 

Ongoing Maintenance:

The IPS must be treated as a dynamic document requiring regular attention:

  • Regular Review: As previously discussed, establish a formal schedule for reviewing and reaffirming or amending the IPS, typically at least annually.
  • Version Control: Implement a system for tracking revisions to the IPS over time. Maintaining a history of changes provides transparency and context for future reviews.
  • Benchmarking Review: Periodically (e.g., annually) review the appropriateness of the benchmarks selected for evaluating portfolio and manager performance to ensure they remain relevant to the investment strategy and objectives.

 

Regulatory Considerations:

The IPS is a key document for demonstrating compliance with relevant regulations:

  • ERISA: For fiduciaries of plans subject to ERISA (e.g., 401(k)s, defined benefit plans), the IPS helps document adherence to duties of prudence and loyalty. It provides a framework for investment selection and monitoring, demonstrates diversification efforts, and outlines the decision-making process. While not explicitly mandated by the statute, the Department of Labor strongly supports the use of an IPS as evidence of a prudent process. Recent guidance clarifies that ESG factors can be considered when material to risk-return analysis.
  • UPMIFA: For nonprofit organisations and charitable funds, the IPS helps demonstrate compliance with the Uniform Prudent Management of Institutional Funds Act (adopted by most states). It addresses key UPMIFA considerations, including the duty of prudence in investing and managing assets, consideration of the fund’s purposes, the need for diversification, management of costs, standards for delegating investment management, adherence to donor intent, and guidelines for spending endowment funds.

 

Avoiding Common Pitfalls:

Fiduciaries should be aware of common mistakes that can undermine an IPS’s effectiveness:

  • Overly Restrictive Policies: Drafting policies that are too rigid and do not allow for necessary flexibility or prudent adjustments in changing market environments.
  • Vague or Ambiguous Language: Using unclear terms that lead to confusion or misinterpretation of intent.
  • “Set and Forget” Mentality: Failing to conduct regular reviews and updates, allowing the IPS to become outdated and irrelevant.
  • Inconsistency Between Policy and Practice: Allowing actual investment activities or governance procedures to diverge from what is written in the IPS.
  • Inadequate Constraint Definition: Failing to thoroughly identify and address critical constraints like liquidity needs, regulatory requirements, or unique organisational circumstances.

 

The IPS serves a broader purpose than merely managing investment risk; it acts as a proactive mitigation tool for various institutional risks. By clearly defining governance structures, it reduces operational risk associated with unclear processes. By documenting adherence to prudent practices and regulatory requirements, it mitigates compliance risk and potential fiduciary liability. 

By aligning stakeholders and managing expectations, it lessens reputational risk arising from conflict or unmet goals. Ensuring operational consistency and alignment with the institution’s mission helps manage strategic risk. Recognising this comprehensive risk management function underscores the profound strategic importance of the IPS and justifies the commitment required for its meticulous development and ongoing maintenance.

 

The following checklist summarises key best practices and can serve as a practical tool for drafting or evaluating an IPS. A downloadable version, potentially including a template, can provide further practical assistance (referencing resources like).

Table 3: IPS Drafting and Maintenance Checklist

Category

Checklist Item

Relevant Considerations / Questions

I. Initial Drafting

Collaboration

Have all key stakeholders (committee, management, advisers, legal) provided input?

 

Customisation

Is the IPS tailored to the specific institution’s mission, objectives, risk profile, and constraints? Avoids generic language?

 

Clarity & Conciseness

Is the language clear, unambiguous, and understandable to all intended readers? Is it detailed enough for guidance but not overly complex?

 

Content Coverage

Does the IPS adequately address all core components (Intro, Objectives, Governance, Risk, Asset Allocation, Constraints, Monitoring)? (See Table 1)

 

Realistic Expectations

Are return objectives, risk assumptions, and spending links achievable and sustainable?

 

Process Documentation

Are the processes for decision-making, monitoring, and review clearly documented?

II. Implementation

Formal Approval

Has the IPS been formally approved by the governing body, with the date recorded?

 

Communication

Has the approved IPS been distributed to all relevant parties (managers, staff, custodian)?

 

Adherence

Are mechanisms in place to ensure that actual investment practices and governance align with the written IPS?

III. Ongoing Maintenance

Review Schedule

Is there a defined schedule (at least annual) for reviewing the IPS?

 

Update Process

Is the process for amending the IPS (triggers, participants, approval) clearly defined?

 

Version Control

Is there a system for tracking changes and maintaining a history of IPS versions?

 

Benchmark Review

Are benchmarks reviewed periodically for appropriateness?

 

Regulatory Alignment

Does the IPS reflect current understanding and compliance requirements of relevant regulations (e.g., ERISA, UPMIFA)?

 

Risk Tolerance Reassessment

Does the review process include periodic reassessment of the institution’s risk tolerance?

 

Flexibility Check

Does the IPS strike an appropriate balance between providing clear guidance and allowing necessary flexibility?

8. Leveraging Technology: Streamlining IPS Creation and Management

The traditional process of drafting, approving, distributing, monitoring, and updating Investment Policy Statements can be labour-intensive and administratively burdensome, particularly for institutions with complex structures or advisers managing numerous client relationships. Maintaining consistency, ensuring timely reviews, tracking adherence, and managing version control manually presents significant challenges. Fortunately, the evolution of financial technology (FinTech) has brought forth digital platforms specifically designed to streamline and enhance IPS management.

These platforms offer a range of capabilities aimed at improving efficiency, consistency, and governance throughout the IPS lifecycle. Key benefits include:

  • Efficiency and Automation: Many platforms automate time-consuming tasks such as gathering client data through digital questionnaires (including risk tolerance assessments), generating draft IPS documents based on predefined templates and client inputs, and managing approval workflows. This significantly reduces the manual effort required from fiduciaries and support staff.
  • Consistency and Standardisation: Utilising standardised templates and defined digital workflows helps ensure consistency in the structure, content, and language used across multiple IPS documents, which is particularly valuable for advisory firms or large institutions. This standardisation aids compliance and simplifies oversight.
  • Collaboration and Accessibility: Centralised, cloud-based platforms can serve as a single source of truth for the IPS, facilitating easier collaboration among committee members, advisers, and staff, regardless of location. They ensure all stakeholders have access to the most current, approved version of the policy.
  • Compliance and Audit Trails: A major advantage of digital solutions is their ability to automatically create robust audit trails. Every review, proposed change, approval, and distribution can be time-stamped and logged, providing clear documentation for governance reviews and regulatory audits. Version control is often an inherent feature, simplifying the tracking of policy evolution.
  • Integration Capabilities: Some platforms offer integration with other core systems used by investment professionals, such as Customer Relationship Management (CRM), portfolio management software, or risk analytics tools. This allows for seamless data flow, reducing redundant data entry and enabling more holistic portfolio oversight relative to the IPS.

 

Platforms such as those offered by Acclimetry focus specifically on streamlining the IPS drafting, approval workflows, and ongoing monitoring, helping fiduciaries maintain compliance and operational efficiency through features like automated review reminders and integrated policy management.

Beyond mere efficiency gains, technology acts as a crucial enabler for achieving the ideal of a dynamic, “living” IPS. While best practices call for regular reviews and updates, manual processes often make this burdensome, leading to the “set and forget” pitfall. 

Digital platforms automate many of the administrative hurdles associated with the review and update cycle – integrating data, populating templates, routing documents for approval, sending reminders, and logging changes. By significantly reducing the friction involved, technology makes it more feasible for institutions to conduct the frequent, rigorous reviews necessary to keep the IPS truly aligned with evolving market conditions, regulatory landscapes, and organisational circumstances. 

This capability enhances the practical application of IPS best practices, ultimately strengthening portfolio governance and strategic alignment.

9. Conclusion: The IPS as a Cornerstone of Investment Success

The Investment Policy Statement is far more than a compliance checkbox; it is the indispensable cornerstone of effective institutional investment management and responsible fiduciary oversight. In an increasingly complex and demanding financial world, a robust, well-conceived, and diligently maintained IPS provides the essential framework for navigating markets, aligning stakeholders, and achieving long-term objectives.

For Chief Investment Officers, Portfolio Managers, Family Office Directors, and Investment Committee members, dedicating the necessary time and resources to craft and uphold a high-quality IPS is a critical investment in strategic clarity and governance integrity. This guide has outlined the key components, governance structures, objective-setting processes, risk management protocols, and asset allocation strategies that form the bedrock of an effective policy. It has also highlighted best practices drawn from industry standards and regulatory expectations, emphasising the importance of customisation, collaboration, clarity, consistency, and regular review.

The true value of the IPS lies in its ability to foster disciplined decision-making, ensure alignment among all parties, provide a clear basis for accountability and performance evaluation, fulfill crucial fiduciary duties, and maintain a steadfast focus on long-term goals amidst short-term noise. 

By embracing the principles and practices discussed, fiduciaries can leverage the IPS to enhance portfolio governance, mitigate risks, and ultimately improve the probability of achieving their organisation’s unique financial objectives. Utilising the available downloadable resources, such as templates and checklists, can provide practical assistance in translating these concepts into action. Ultimately, the Investment Policy Statement empowers fiduciaries with the structure and discipline required to successfully steward assets and fulfill their vital mission.

References

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