A well-defined Investment Policy Statement (IPS) is critical for institutional investors navigating the complexities of financial markets. This governing document provides a strategic framework that dictates how an institution’s investment portfolio will be managed, ensuring alignment with its overarching goals and objectives. Much like a constitution provides the fundamental principles for a nation, the IPS serves as the foundational document for investment activities, offering guidance and establishing accountability for all involved parties. The significance of the IPS lies in its ability to translate an institution’s broad mission into actionable investment strategies, enhancing its capacity to meet its financial targets. For various types of institutional investors, including endowments, foundations, and pension funds, the IPS is not merely a procedural formality but a crucial tool for effective investment management.
A thoughtfully constructed IPS offers numerous benefits that extend beyond investment returns. It plays a vital role in maintaining stability and continuity within an organisation, especially during periods of personnel transition. By clearly outlining the institution’s risk tolerance and investment objectives, the IPS establishes realistic expectations and provides a consistent framework for decision-making. Furthermore, it aids in contextualising the institution’s spending outlook and facilitates better communication among stakeholders regarding investment objectives. In times of market volatility or when differing opinions arise, a robust IPS helps maintain a disciplined approach to investing, ensuring that long-term strategy rather than short-term emotions guide decisions. Ultimately, a well-crafted IPS has the potential to enhance investment returns while effectively mitigating risks, contributing to the long-term financial health and sustainability of the institution. This article will delve into the essential aspects of crafting an effective IPS for institutional investors, covering its definition, key components, best practices for drafting each section, guidelines for investment management, the role of governance and fiduciary responsibilities, the process for review and updates, and practical insights from real-world examples.
At its core, an Investment Policy Statement for institutional investors is a formal document that outlines the general rules and guidelines for managing the institution’s investment portfolio. Typically drafted through a collaborative effort between the portfolio manager and the client (the institutional investor), the IPS clearly articulates the client’s financial goals and investment objectives. It outlines the institution’s objectives and acts as a predetermined guide for how the portfolio will be managed to achieve those objectives. This document encompasses specific details such as investment objectives, performance benchmarks, asset allocation guidelines, and any restrictions or requirements that must be adhered to. Furthermore, the IPS clearly defines and documents the roles and responsibilities of all parties involved in managing the portfolio, ensuring that everyone understands their obligations. The definition of an IPS underscores its dual nature as both a formal agreement establishing the parameters of the investment relationship and a practical manual guiding the day-to-day management of the portfolio. Including specific, measurable elements ensures clarity and actionability for all stakeholders.
The primary purposes of an institutional IPS are multifaceted, aiming to create a shared understanding and a disciplined approach to investment management. Firstly, it aligns the institutional investor and the investment manager on all aspects of the investment process, ensuring that both parties work towards the same goals with a common understanding. The IPS provides a clear framework for managing the institution’s assets, enhancing its ability to achieve its stated financial targets. As the central point of reference between the institution and its outsourced chief investment office (OCIO) or other fiduciaries, the IPS facilitates consistent communication and guides decision-making throughout the investment lifecycle. An essential purpose of a well-crafted IPS is to help maintain stable relationships between the institution and its investment managers, particularly during periods of turnover among individuals involved. By laying out clear guidelines for risk-taking and ensuring that investment objectives are realistic, the IPS contributes to a more stable and effective investment management process. Beyond these foundational elements, the IPS provides crucial guidance for informed decision-making, acting as a roadmap for successful investing and a safeguard against potential errors or imprudent actions. It helps the institution maintain a disciplined approach to investing, especially when faced with market volatility or conflicting opinions from stakeholders, ensuring that the long-term mission remains the guiding principle. Ultimately, the IPS assists the institution in aligning its investment portfolio with its long-term mission, balancing the often-competing goals of long-term asset appreciation and the need to spend from the portfolio to meet operational requirements. By clearly defining investment objectives and constraints, documenting governance mechanisms, and establishing accountability, the IPS provides an objective course of action to follow even during market disruption periods.
A comprehensive and effective Investment Policy Statement for institutional investors typically comprises several key sections and components, each serving a distinct yet interconnected purpose. While the specific structure and content may vary depending on the institution’s unique characteristics and needs, certain elements are commonly found across well-designed IPS documents.
The Scope and Purpose section is fundamental as it establishes the context for the IPS. It identifies the investor (the institution) and defines the specific assets or accounts the IPS will govern. This section also sets forth the roles and responsibilities of all parties involved in the investment process, including the investment committee, board of directors, outsourced CIO, investment managers, and custodians. Furthermore, it may identify the risk management structure and assign portfolio monitoring and reporting responsibility.
The Governance section outlines the framework for decision-making and oversight. It specifies the responsibilities for determining, executing, and monitoring the implementation of the IPS. This includes describing the process for reviewing and updating the IPS, the authority for engaging and terminating external advisors, and the assignment of responsibility for key functions such as asset allocation and risk management monitoring. The governance component also often includes a statement of the institution’s investment philosophy, which guides all investment-related decisions.
The section on Investment Objectives is crucial as it defines the financial goals of the institution’s investment portfolio. It describes the overall investment objective, including growth, income, or a combination. This section also states the institution’s return expectations, risk tolerance, and spending assumptions or requirements. Relevant constraints such as liquidity needs, tax considerations, legal restrictions, and any unique circumstances affecting the investment strategy are also detailed here. Many IPS documents also include a clearly defined spending policy within this section.
The Portfolio Parameters, often called the asset allocation policy, provide a strategic blueprint for how the institution’s assets will be invested across different asset classes. This section details the target asset allocation percentages and acceptable ranges for various asset classes, along with the benchmarks that will be used to evaluate performance. Guidelines for portfolio rebalancing, specifying when and how the portfolio will be adjusted to maintain the target allocations, are also included. Furthermore, this section may cover the selection and retention of investment managers and specify the types of securities permissible for investment.
The Risk Management section outlines the procedures and metrics for identifying, assessing, and mitigating investment risks. It establishes performance measurement criteria and reporting accountabilities, specifying the metrics that will be used to measure and evaluate risk. The process for portfolio rebalancing, initially mentioned in the Portfolio Parameters section, is often further elaborated here from a risk management perspective. Control procedures and specific performance objectives are also typically defined within this section.
Sometimes, an IPS may include a section on Client Services detailing communication protocols and reporting requirements between the institution and its investment managers or consultants. An Acknowledgement of the IPS section may also be included, requiring signatures from relevant parties to signify their understanding and acceptance of the policies outlined in the document. Beyond these core components, an IPS might also incorporate additional sections addressing specific aspects such as investment guidelines and constraints (including environmental, social, and governance (ESG) considerations), investment manager selection and termination process, and proxy voting policies.
Table 1: Essential Components of an Institutional Investment Policy Statement
Component | Primary Purpose |
Scope and Purpose | Establishes context, identifies investors and assets, defines roles and responsibilities, and outlines risk management structure. |
Governance | Defines decision-making processes, oversight responsibilities, procedures for review and updates, and authority for engaging advisors. |
Investment Objectives | Articulates financial goals, return expectations, risk tolerance, spending policies, and relevant constraints. |
Portfolio Parameters | Sets strategic asset allocation targets and ranges, specifies benchmarks, and includes guidelines for portfolio rebalancing and asset classes. |
Risk Management | Outlines procedures for identifying, assessing, and mitigating risks, establishes performance measurement criteria, and defines reporting. |
Client Services (Optional) | Details communication protocols and reporting requirements. |
Acknowledgement of IPS (Optional) | Formalises understanding and acceptance of the IPS by relevant parties. |
The specific combination and level of detail within these sections will ultimately depend on the unique circumstances and requirements of the institutional investor. The key is to create a document that is comprehensive enough to provide clear guidance yet flexible enough to adapt to changing market conditions and institutional needs.
The foundation of an effective Investment Policy Statement lies in clearly defining the institution’s investment objectives, risk tolerance, and time horizon. These three elements are intrinsically linked and serve as the guiding principles for all subsequent investment decisions.
When articulating investment objectives, it is crucial to go beyond simply stating a desired rate of return. The process should begin by anchoring the objectives to the organisation’s core mission. As the adage goes, “money serves mission,” and the investment portfolio should ultimately support the institution’s broader goals. Therefore, the IPS should explicitly link the investment return targets to the institution’s spending needs, ensuring the portfolio can generate sufficient resources to fund its ongoing operations and programs. Furthermore, a key objective for many institutions is to preserve the real, inflation-adjusted purchasing power of their endowment over the long term. This necessitates incorporating a realistic estimate of long-term inflation into the return target. Beyond these overarching goals, the IPS should include specific, measurable objectives that elaborate on the policy statement’s purpose. This could involve aiming for a minimum return that exceeds inflation plus spending, defining the investment time horizon (whether perpetual, long-term, or finite), and considering secondary objectives such as prudently diversifying the portfolio to mitigate risk or maintaining sufficient liquidity to meet obligations. Ultimately, the investment objectives should clearly define the portfolio’s goals and the standards against which its performance will be measured. These objectives can encompass various aspects, including providing operational support, preserving capital, and minimising the risk of permanent capital loss. Many institutions adopt multiple objectives, such as maintaining and enhancing the real purchasing power of the portfolio, providing a predictable stream of earnings, and attaining long-term returns without assuming undue risk. To ensure the objectives are achievable, it is vital to be realistic in the assumptions made about expected returns and the inflation rate. The investment objectives should provide a clear and measurable roadmap for the investment program, aligning with the institution’s mission and ensuring its long-term financial sustainability.
Defining an institution’s risk tolerance and capacity is equally critical. This involves understanding the different facets of risk, including market volatility, the potential for capital loss, liquidity constraints, and even reputational risks. The focus should be on the total risk exposure at the portfolio level rather than viewing individual investments in isolation. A thorough assessment requires considering the organisation’s willingness and financial ability to absorb potential investment losses. This assessment should consider the institution’s liquidity needs, investment time horizon, and the overall importance of the investment goals to its financial well-being. Risk tolerance can be expressed in various ways depending on the type of institution, such as surplus volatility for defined-benefit pension funds, the probability of investment losses for sovereign wealth funds, or the volatility of total returns for endowments and foundations. The IPS should reflect the collective attitude of the board or investment committee towards risk, considering any long-term commitments that significant fluctuations in asset values could jeopardise. It is essential to define an appropriate level of risk that the portfolio can comfortably undertake, considering any unique circumstances or specific rules regarding certain types of investments, such as alternative assets. The IPS should also set guidelines around specific risk metrics, allowing each metric to be understood, measured, and monitored within the portfolio. Ultimately, the definition of risk tolerance should provide clear parameters for investment decision-making, ensuring that the assumed risk level is consistent with the institution’s financial capacity and appetite for potential losses.
The investment time horizon is the third crucial element to define in the IPS. This should align with the organisation’s long-term mission and strategic goals, reflecting the period over which the investments are expected to generate returns. The IPS should clearly state whether the investment time horizon is perpetual, long-term with a specific duration, or short-term to meet immediate needs. For investment guidelines, it is beneficial to specify the time horizon in terms of a specific number of years, providing a clear benchmark for strategic asset allocation and performance evaluation. It is important to ensure that short-term liquidity requirements are addressed separately and are not the primary driver of long-term investment strategy. Different pools of assets within the same institution may have varying time horizons depending on their specific purpose. For example, an endowment fund typically has a perpetual time horizon, while an intermediate fund might have a 10-year horizon and operating assets a short-term focus. The IPS should consider the expected lifespan of the assets and whether there is a specific drawdown period planned. The investment time horizon is closely intertwined with both the institution’s objectives and its risk tolerance. Generally, a longer time horizon allows for a greater capacity to take on investment risk, as there is more time to potentially recover from market downturns and to benefit from long-term growth trends.
Establishing an effective asset allocation policy is a cornerstone of institutional investment management, as it is widely recognized as the primary driver of long-term portfolio returns. The IPS should clearly articulate the institution’s approach to asset allocation, outlining the methodologies and considerations that will guide the allocation of assets across various classes.
Several approaches and methodologies can be employed to set asset allocation targets within an institutional IPS. Strategic Asset Allocation (SAA) is a long-term approach that involves setting target allocations for different asset classes based on the investor’s risk tolerance and financial objectives. Once these target allocations are established, the portfolio is periodically rebalanced to maintain the desired asset mix. The specific target allocations in an SAA strategy are influenced by factors such as the institution’s risk tolerance, investment time horizon, and return objectives. In contrast, Tactical Asset Allocation (TAA) is a more dynamic approach that involves actively adjusting the portfolio’s asset allocation in the short term to take advantage of perceived market trends or economic conditions. TAA seeks to capitalise on market inefficiencies and deliver excess returns by strategically shifting asset allocations based on a short-term market outlook. Factor-Based Asset Allocation involves allocating assets based on specific factors or characteristics that have historically been shown to drive investment returns, such as value, momentum, and size. This approach aims to capture the factor premiums observed in the markets. Risk Parity Asset Allocation is a strategy that balances risk across different asset classes by allocating assets based on their risk contributions to the overall portfolio rather than their market value. This seeks to achieve a more balanced risk exposure across the portfolio. Dynamic Asset Allocation (DAA) is an investment strategy that involves frequently adjusting the weights of different asset classes within a portfolio based on overall market performance or the performance of specific securities. Unlike SAA, DAA does not typically involve a fixed target asset mix, providing portfolio managers greater flexibility to react to market changes and risks. The Total Portfolio Approach (TPA) takes a holistic view, where every investment idea competes for capital based on its risk, return, liquidity, and cost characteristics, aiming to build a portfolio where the whole is greater than the sum of its parts. Finally, a Business Cycle Approach involves making asset allocation decisions based on the current phase of the economic cycle, recognising that different asset classes tend to perform differently during various economic phases. In determining the most suitable approach, institutions should consider the expected returns on assets, the expected costs of liabilities (if applicable), the overall risks of assets and liabilities, and the economic relationships between them.
Diversification is a fundamental principle that should underpin any effective asset allocation policy. The IPS should explicitly reference the role of diversification across various asset classes, investment strategies, and investment managers to pursue the institution’s objectives and enhance risk-adjusted returns. Establishing specific asset allocation ranges or targets within the IPS is crucial, providing clear guidance for portfolio construction and management. When setting these targets, institutions must consider their long-term strategic goals, ensuring that the asset allocation is designed to meet these objectives even during market uncertainty. The IPS should set both target allocations and acceptable minimum and maximum ranges for individual asset classes, allowing tactical shifts in response to market conditions while preventing excessive risk-taking or drift from long-term objectives. Diversification should extend both across different asset classes (such as equities, fixed income, real assets, and alternatives) and within each asset class (e.g., by sector, geography, and investment style) to provide reasonable assurance that no single security or class of securities will have a disproportionate impact on the overall portfolio performance. Short-term market fluctuations should not unduly influence the long-term strategic asset allocation, which should be the primary focus of the IPS.
Table 2: Common Asset Allocation Models for Institutional Investors
Model | Characteristics | Potential Benefits | Potential Drawbacks |
Norway Model | 60/40 equity/fixed income allocation, few alternatives, mostly passive investments, tight tracking error limits, benchmarks as a starting position. | Low costs, transparency, scalability, easy for board members to understand. | Limited potential to beat market returns. |
Endowment Model | High alternatives exposure, active management, outsourcing of asset management. | High potential to beat market returns. | Not feasible for most sovereign wealth funds due to large asset sizes and high costs. |
Canada Model | High alternatives exposure, active management, insourcing of asset management. | High potential to beat market returns, and development of internal capabilities. | Often expensive and challenging to manage. |
LDI Model | Invests in fixed-income securities with duration-matched exposure to hedge liabilities and interest rate risk. A growth component in the return-generating portfolio is also frequently used. | Carefully satisfies liabilities in a systematic way. | Certain risks may not be hedged. |
The selection of an appropriate asset allocation strategy and the establishment of clear targets and ranges within the IPS are critical steps in creating a resilient and mission-aligned investment framework for institutional investors.
Once the strategic asset allocation policy is established, the IPS must provide clear guidelines for selecting investment managers and specific investments, the ongoing monitoring of the portfolio, and the framework for evaluating investment performance.
The IPS should outline the specific criteria that will be used to select investment managers and the permissible investment types. This ensures a transparent and diligent selection process that aligns with the institution’s objectives and risk tolerance. Considerations for manager selection may include the manager’s reputation in the marketplace, their track record with institutional clients, the alignment of their interests with the institution’s (e.g., through co-investment), the stability and experience of their professional team, the management of their firm’s growth and assets under management, their long-term performance relative to peers, and whether they undergo regular independent audits. The IPS may specify asset quality guidelines for specific investments, such as restricting public equity investments to high-quality, readily marketable securities of corporations traded on major exchanges. The guidelines might address credit quality, sector diversification, duration management, and issuer concentration limits for fixed income investments. The IPS should also detail any due diligence procedures followed when selecting investment managers and individual investments to ensure they meet the established criteria.
Ongoing portfolio monitoring and investment managers’ performance is a crucial responsibility that should be clearly defined in the IPS. The IPS should specify the frequency with which the portfolio will be reviewed, ensuring it complies with the established guidelines. Regular portfolio reviews should take place to assess performance, asset allocation, and adherence to the IPS. The IPS should also set out guidelines around specific risk metrics that will be monitored to ensure the portfolio’s risk profile remains within acceptable parameters. Furthermore, the performance of investment managers should be regularly evaluated against predefined benchmarks and the institution’s objectives. This ongoing monitoring process should also include checks for any material changes within the investment management firms, such as changes in organisational structure, investment philosophy, or key personnel.
The IPS must create a clear framework for performance evaluation, including selecting appropriate benchmarks and establishing reporting requirements. Benchmarks serve as crucial reference points against which the portfolio’s returns can be compared to assess the effectiveness of the investment strategy. The IPS should define what constitutes “success” by specifying the benchmarks that will be used, which can be either relative (comparing to market indices or peer groups) or absolute (requiring a specific rate of return). Performance should be measured relative to these benchmarks periodically to determine if the investment program is on track to meet its objectives. The IPS should establish clear performance measurement criteria and define the accountabilities for performance reporting. For the total fund, performance will often be compared against a policy benchmark that reflects the target asset allocation and the returns of the respective asset class benchmarks. Performance evaluation should also aim to attribute the sources of returns and assess whether they were achieved through skill or simply due to market factors. Different types of benchmarks, such as market indices, peer groups, and absolute return targets, can provide a comprehensive evaluation of performance from various perspectives.
Strong governance structures and a clear understanding of fiduciary responsibilities are essential for the effective management of institutional investment portfolios. The IPS serves as a key document in establishing and reinforcing these pillars of trust.
A systematic approach to documenting governance mechanisms within the IPS is crucial for clarifying the roles, responsibilities, and accountabilities of all parties involved in the investment program. The IPS should anticipate and address issues related to the governance of the investment program, ensuring a well-defined framework for decision-making and oversight. This includes outlining the process for updating the IPS itself and clearly defining the roles of various stakeholders, such as the board of directors, investment committee, staff, and external advisors. By assisting the governing bodies in fulfilling their fiduciary duties, the IPS ensures that investment decisions are made responsibly and prudently. It establishes a clear decision-making framework and assigns specific roles and responsibilities to each relevant party, promoting accountability and effective oversight. As articulated in the IPS, a well-defined governance framework is a driving force behind a successful investment strategy, enhancing the institution’s ability to formulate and execute its investment goals over time.
Fiduciary responsibility is a fundamental principle underpinning all institutional investment management aspects. The IPS plays a vital role in highlighting and reinforcing the fiduciary duties of the various stakeholders involved in the investment process. These responsibilities include the duty of loyalty, requiring fiduciaries to act solely in the best interests of the beneficiaries and avoid conflicts of interest, and the duty of care or prudence, which involves managing assets with the care, skill, and diligence that a prudent person would exercise. The IPS documents the accountability for all investment policy development and implementation stages, reinforcing the obligations of advisors and the principals they serve. For instance, board members have a fiduciary duty to the institution’s members and beneficiaries, requiring them to discharge their duties solely in their interest. Similarly, investment advisors are held to a fiduciary standard, obligating them to serve their clients’ best interests. The IPS serves as a mechanism to define and uphold these fiduciary responsibilities, ensuring that all investment-related decisions are made with the utmost loyalty and prudence, always prioritising the institution’s and its beneficiaries’ interests.
An Investment Policy Statement is not a static document; instead, it should be viewed as a living framework that requires periodic review and updates to ensure its continued relevance and effectiveness in guiding the institution’s investment activities.
It is a best practice for institutions to review their IPS at least once a year. This annual review helps ensure that the IPS remains aligned with the institution’s current mission, objectives, and financial situation and reflects any significant changes in the market environment. While an annual review is recommended, a more in-depth review of the IPS guidelines should typically occur every two to three years to ensure they remain in sync with any meaningful changes within the institution, its assets, or updated expectations for the capital markets. Institutions should establish a fiduciary calendar that includes the IPS review as a regular agenda item for the relevant committee or board meetings to facilitate this process. The process for reviewing and updating the IPS should be clearly defined within the governance section of the document itself, outlining who is responsible for initiating reviews, proposing changes, and approving updates. This often involves the Investment Committee, which may review the IPS on a quarterly basis and provide opportunities for proposing or considering amendments. Any changes made to the IPS should be appropriately documented with a clear revision history, allowing future board members and stakeholders to understand how the policy has evolved over time.
Several triggers may necessitate an update to the institution’s IPS outside of the regular review cycle. Significant changes in the institution’s investment objectives, financial situation, or the prevailing market or regulatory environment should prompt a policy review. For example, a significant shift in the institution’s strategic priorities or a substantial change in its funding needs would likely warrant an update to the IPS. Similarly, significant deviations in the portfolio’s performance from expected returns could indicate a need to re-evaluate the asset allocation or investment strategies outlined in the IPS. For institutions with long-term liabilities, such as pension funds, reaching key milestones related to beneficiary demographics or funding status might also trigger an IPS review. Major changes in market conditions, such as a significant economic downturn or a sustained period of high inflation, or changes in the organisation’s budget, such as a large unexpected gift or a major capital project, could also merit a more immediate review of the IPS to ensure it remains appropriate. By being responsive to these triggers and adhering to a regular review schedule, institutions can ensure that their IPS remains a relevant and effective guide for their investment program.
Examining real-world examples of Investment Policy Statements used by different types of institutional investors can provide valuable insights into their practical application and highlight key considerations.
Endowment IPS Examples: A common thread among endowment IPS examples is the focus on preserving the endowment’s purchasing power over the long term while providing a stable stream of funding to support the institution’s operations. These IPS often reflect a long-term investment horizon with a willingness to tolerate interim market fluctuations in pursuit of long-term growth, typically exhibiting a bias towards equity and equity-like investments. Diversification across and within asset classes is a key principle emphasised in these documents to manage risk. Endowment IPS also typically establish spending policies, often based on a percentage of the endowment’s market value averaged over a preceding period to provide a predictable income level. Increasingly, endowment IPS are incorporating considerations for mission alignment and environmental, social, and governance (ESG) factors in their investment strategies.
Pension Fund IPS Examples: A pension fund IPS’s primary purpose is to ensure adequate resources to provide retirement benefits to its members. Investment decisions are typically guided by the principles of safety of principal and the pursuit of optimal total return, often with safety taking precedence. A key objective is to meet or exceed the actuarial return assumptions required to fund the plan’s liabilities. Liquidity is also a significant consideration in pension fund IPS to ensure sufficient funds are available to meet benefit payments as they come due. These IPS must also adhere to strict fiduciary standards and comply with applicable legal and regulatory requirements, such as the Employee Retirement Income Security Act of 1974 (ERISA) in the United States.
Foundation IPS Examples: Foundation IPS often reflect their specific missions, including promoting education, supporting charitable causes, or fostering community development. These IPS typically aim to provide income for scholarships, grants, and the foundation’s operational expenses while focusing on capital preservation and long-term appreciation. Foundations may have specific impact objectives they seek to achieve through their investments and financial return goals. The spending policies for foundations often dictate the funds to be distributed annually to meet their charitable purposes.
Template Insights: Investment Policy Statement templates can provide a useful structural framework for institutions developing or revising their own IPS. While templates offer a starting point, it is crucial to customise them to reflect the specific objectives, risk tolerance, and governance structure of the institution. Key sections consistently found in IPS templates include the statement’s purpose, investment objectives, asset allocation guidelines, risk tolerance parameters, governance roles and responsibilities, and procedures for monitoring and review. A common theme is the emphasis on using clear and concise language and avoiding overly rigid guidelines that might hinder the institution’s ability to adapt to changing market conditions.
Table 3: Comparative Analysis of IPS for Different Institutional Types
Feature | Endowment | Pension Fund | Foundation |
Primary Objective | Preserve purchasing power, and provide stable funding. | Assure resources for retirement benefits. | Support programs and provide income for grants and operations. |
Time Horizon | Perpetual, long-term. | Long-term, but with near-term liquidity needs. | Long-term. |
Risk Tolerance | Moderate to high, tolerates interim fluctuations for long-term growth. | Moderate, prioritises safety of principal. | Moderate, balances income and capital preservation. |
Asset Allocation | Bias towards equities, diversified across asset classes and strategies. | Balanced includes fixed income to match liabilities and some allocation to equities. | Balanced may include impact investments alongside traditional asset classes. |
These examples and template insights underscore the importance of tailoring the IPS to the specific needs and characteristics of the institutional investor while adhering to common best practices that promote effective investment management.
Crafting an effective Investment Policy Statement is indispensable for any institutional investor seeking to achieve long-term financial goals. The key principles for developing a robust IPS include ensuring a clear alignment with the institution’s mission and objectives, establishing specific and measurable investment goals, defining a well-considered risk tolerance and capacity, developing a strategic asset allocation policy that promotes diversification, establishing strong governance and fiduciary oversight, and committing to a process of regular review and updates.
The IPS should not be treated as a static document created once and then forgotten. Rather, it should be a dynamic tool that actively guides investment decisions over the long term, adapting to the institution’s evolving needs and changes in the market environment. Adherence to a thoughtfully crafted IPS can significantly contribute to the financial health and sustainability of the institution, fostering accountability and transparency in its investment management practices. By embracing the principles and best practices outlined in this article, institutional investors can build a resilient and mission-aligned investment framework that serves their long-term interests and enables them to pursue their overarching goals effectively.