The IPS as a Governance Cornerstone
The Investment Policy Statement (IPS) stands as a foundational document for institutional investors, including pension funds, endowments, foundations, and family offices. It is far more than a mere formality; it serves as a critical governance tool, acting as a “road map” that outlines the rules, guidelines, and strategic direction for managing an investment portfolio. between the asset owner (represented by the board, investment committee, or family) and the asset manager (internal CIO or external adviser/OCIO), the IPS codifies the client’s investment objectives, risk tolerance, time horizon, liquidity needs, and other constraints. Its primary purpose is to align the investment portfolio with the organisation’s long-term mission, goals, and liabilities, ensuring a disciplined approach to achieving financial targets. Furthermore, the IPS clearly defines the roles and responsibilities of all parties involved – the board, committee members, staff, investment managers, consultants, and custodians – establishing clear lines of authority and accountability. For family offices, the IPS plays a particularly vital role in memorialising the investment plan, reinforcing trust among family members and stakeholders, ensuring continuity across generations, and guiding decisions even amidst personnel changes.
Why a “Living Document” Approach is Essential
The investment landscape is inherently dynamic. Market conditions shift, sometimes dramatically; economic regimes evolve; organisational goals and circumstances change; regulatory requirements are updated; and new investment opportunities and asset classes emerge. Consequently, an IPS draughted and then filed away becomes rapidly outdated, potentially leading to a dangerous disconnect between stated policy and current reality. A static IPS risks misaligning the portfolio with the institution’s evolving mission or liabilities, hindering the ability to meet financial objectives, or failing to incorporate new risk management techniques or investment strategies. Perhaps most critically, an outdated policy can fail to provide adequate guidance during periods of market stress, potentially leading to emotional, suboptimal decisions or even breaches of fiduciary duty.
Therefore, the IPS must be treated as a “living document” — a dynamic guide that evolves alongside the organisation and its environment. This necessitates a commitment to regular, periodic review and updating. Such reviews ensure the policy remains relevant, reflects current best practises, and continues to serve as an effective framework for decision-making and risk management. This dynamic approach reinforces the IPS’s role in providing discipline, particularly during market turbulence, and ensuring continuity of strategy despite changes in committee membership or market sentiment.
The Cost of Neglect
Failing to maintain and update the IPS carries significant risks. An outdated policy can lead to a portfolio that no longer aligns with the institution’s mission, spending needs, or risk tolerance. In times of market stress, the absence of relevant, actionable guidance can open the door to emotional decision-making, deviating from the long-term strategy precisely when discipline is most needed. This can result in significant financial losses or failure to meet objectives. Furthermore, neglecting the IPS can expose fiduciaries — board members, committee members, trustees — to potential liability if their decisions are not grounded in a prudent, documented, and up-to-date process. For family offices, the lack of a formal, current IPS represents a fundamental gap in governance, potentially leading to disputes, mismanagement, and failure to preserve wealth across generations. Finally, a stale IPS can mean missing out on opportunities presented by new asset classes, evolving market structures, or improved investment strategies.
Beyond its formal governance role, the IPS serves a critical, often underappreciated, function as a behavioural anchor. Institutional decision-makers, like all investors, are susceptible to emotional responses, particularly during periods of market stress or internal disagreement. By codifying a long-term strategy and agreed-upon guidelines, the IPS provides an objective course of action when turbulence hits or opinions diverge. Referencing this pre-agreed framework helps committees and CIOs resist impulsive decisions driven by fear, greed, or short-term noise, thereby preserving strategic focus and preventing costly behavioural errors. This function is vital for achieving long-term investment success.
While specific events often trigger a review, the very concept of the IPS as a “living document” implies a proactive, ongoing monitoring mindset rather than purely reactive updates following a major disruption. Markets, regulations, and organisational needs evolve continuously, not just during discrete “events”. Waiting solely for major triggers can mean the IPS is already significantly misaligned by the time a review occurs. Instituting regular, scheduled reviews — often annually for reaffirmation, with a deeper refresh every few years — fosters this proactive stance. This approach ensures the IPS is consistently evaluated against current realities, allowing for timely, incremental adjustments and preventing the need for potentially disruptive wholesale changes driven solely by crises.
While embedding a regular review cycle into the governance calendar is a best practise, certain events or changes act as critical triggers that demand a more immediate and thorough reassessment of the Investment Policy Statement. Recognising these triggers is the first step towards ensuring the IPS remains a relevant and effective guide.
Trigger 1: Significant Market Regime Shifts
Markets do not operate under static conditions. They experience distinct regimes characterised by prevailing trends in inflation, interest rates, economic growth, volatility, and correlations between asset classes. A significant market regime shift occurs when these fundamental dynamics undergo a sustained change. The breakdown of the traditional negative correlation between equities and bonds observed in 2022, driven by rising inflation and simultaneous central bank tightening, serves as a prime example. Such shifts can fundamentally invalidate the core assumptions underpinning the existing strategic asset allocation (SAA), risk models, and return expectations embedded in the IPS. The long-held reliance on a simple 60/40 stock/bond portfolio, for instance, may prove inadequate or even detrimental in a new regime characterised by higher inflation and volatility.
When a regime shift is identified or strongly suspected, it necessitates a comprehensive review of the IPS. Key areas for reassessment include:
Failure to adapt the IPS to a new market regime can lead to portfolios that are poorly positioned, excessively risky, or unlikely to meet their objectives.
Trigger 2: Changes in Organisational Objectives, Liabilities, or Circumstances
The IPS must reflect the specific circumstances and goals of the institution it governs. Therefore, significant internal changes are major triggers for review:
Trigger 3: Evolving Regulatory or Legal Landscape
Institutional investors operate within a complex web of legal and regulatory requirements that can influence investment decisions and fiduciary responsibilities. Changes in this landscape often necessitate IPS updates:
Fiduciaries must ensure the IPS remains compliant with all applicable laws and regulations, making regulatory shifts a key trigger for review.
Trigger 4: Introduction of New Asset Classes or Investment Strategies
The investment universe is constantly expanding, with new asset classes and strategies gaining prominence. When an institution considers or decides to incorporate previously unused asset classes (such as private equity, private credit, infrastructure, real estate, hedge funds or digital assets/cryptocurrencies) or implement novel investment strategies (like liability-driven investing (LDI), risk parity, factor-based investing or the use of derivatives for hedging or return enhancement), the IPS must be updated accordingly.
The review should address:
Integrating new investments without updating the IPS can lead to policy violations, inadequate risk management and unclear performance evaluation frameworks.
Trigger 5: Scheduled Periodic Governance Reviews
Beyond event-driven triggers, best practice dictates incorporating IPS reviews into the regular governance calendar. Many organisations conduct an annual review to reaffirm the existing policy or make minor adjustments, coupled with a more comprehensive review and potential refresh every three to five years, often coinciding with a strategic asset allocation study. This scheduled review ensures the IPS does not become neglected—a ‘set and forget’ document. It provides a systematic opportunity to assess alignment with ongoing organisational needs, incorporate incremental market insights or lessons learnt, and maintain the document’s relevance even in the absence of major external shocks.
It is important to recognise that these triggers often do not occur in isolation. A significant shift in the market environment, such as sustained high inflation, can simultaneously impact return requirements and liability valuations (an organisational change), spur interest in new asset classes like real assets or private credit for inflation hedging (a new asset class consideration), and prompt new regulatory guidance on managing inflation risk or disclosures for alternatives (a regulatory change). Therefore, a single root cause can activate multiple triggers, necessitating a comprehensive IPS review that addresses all interconnected aspects.
Furthermore, even without discrete external events, gradual ‘strategy drift’ can act as a silent trigger. Market movements naturally cause portfolio weights to deviate from target allocations. If unaddressed through systematic rebalancing or periodic review, this drift can subtly alter the portfolio’s intended risk profile, potentially leading to an implicit violation of the IPS. Persistent or significant deviation of the actual portfolio from the policy guidelines, therefore, necessitates a review of the IPS targets, ranges or the rebalancing policy itself, underscoring the critical importance of ongoing portfolio monitoring.
Table 1: Summary of IPS Review Triggers
Trigger Category | Specific Examples | Key IPS Sections Potentially Impacted |
Market Regime Shifts | Sustained changes in inflation, interest rates, volatility; breakdown in historical asset correlations (e.g., stock/bond) | Investment Objectives (Return/Risk), Strategic Asset Allocation (SAA), Risk Management, Benchmarks |
Organisational Changes | Shifts in mission, goals, spending needs, time horizon; changes in liabilities (magnitude, duration, funded status); major personnel/governance changes; significant inflows/outflows; new liquidity needs; revised tax status | Introduction & Purpose, Governance, Investment Objectives (Return/Risk), Constraints (Time Horizon, Liquidity, Tax, Unique Circumstances), SAA, Spending Policy (if included) |
Regulatory/Legal | New laws (e.g., ERISA updates), regulations (e.g., ESG disclosure), tax code changes, accounting standard updates, fiduciary duty clarifications | Governance, Constraints (Legal/Regulatory, Tax, Unique Circumstances – e.g., ESG), Permissible Investments, Reporting Requirements |
New Assets/Strategies | Adoption of private equity, private credit, crypto, infrastructure, hedge funds; implementation of LDI, risk parity, derivatives overlays | Investment Objectives (Risk), Constraints (Liquidity, Unique Circumstances), SAA, Permissible Investments, Investment Restrictions, Benchmarks, Manager Selection/Monitoring, Risk Management |
Scheduled Review | Annual reaffirmation/review; 3-5 year comprehensive refresh; review coinciding with SAA study | Potentially all sections, ensuring overall relevance, alignment, and incorporation of incremental changes/lessons learnt. |
Strategy Drift (Silent) | Persistent deviation of actual portfolio allocation/risk from IPS targets due to market movement or lack of rebalancing | SAA (Targets/Ranges), Rebalancing Policy, Risk Management, Monitoring Procedures |
Conducting an IPS review is not an ad hoc exercise but a systematic process integral to fulfilling fiduciary duties. A structured approach ensures thoroughness, incorporates diverse perspectives and results in a robust, relevant policy document. This process typically involves the following key steps:
Step 1: Performance and Risk Diagnostics
The review process should begin with an objective assessment of the current situation: how has the portfolio performed, what risks were taken and did the outcomes align with the existing IPS? This diagnostic phase involves analysing:
This analysis requires robust data and analytical capabilities. While internal staff may perform some analysis, input from investment consultants or OCIOs is often valuable for independent perspective and sophisticated analytics. Specialised investment analytics platforms play a crucial role here. These systems can automatically monitor portfolio allocations against IPS ranges, flag compliance breaches and provide the detailed performance attribution and risk diagnostics essential for an informed review. Platforms, such as those offered by Acclimetry, can deliver objective diagnostics, for instance, confirming whether actual allocations stayed within policy ranges and analysing the reasons for any deviations, thereby supporting a data-driven policy refresh and strengthening governance oversight. The outcome of this step is a clear understanding of how the current strategy has performed relative to the policy, highlighting potential areas of misalignment, underperformance, excessive risk-taking or policy breaches that warrant further investigation and potential IPS revision.
Step 2: Stakeholder Consultation and Input
The IPS governs the collective investment endeavour; therefore, gathering input from key stakeholders is crucial to ensure the revised policy reflects current needs, future aspirations and shared values. This involves engaging:
Engagement techniques can include dedicated agenda items in committee/board meetings, structured interviews, targeted surveys or facilitated workshops. Open communication and transparency throughout the process are vital. Discussions should cover potential shifts in organisational goals, spending requirements, risk tolerance or capacity, liquidity needs, investment time horizon, unique circumstances like ESG or mission-related investment preferences and overall satisfaction with the existing policy framework and its effectiveness in guiding decisions.
Step 3: Incorporating Market Insights and Lessons Learnt
An effective IPS must be forward-looking, grounded in realistic expectations about the future investment environment, and informed by past experiences. This step involves:
This forward-looking assessment helps ensure the revised IPS is not merely reacting to the past but is proactively positioning the portfolio for the anticipated future landscape.
Step 4: Draughting and Refining Policy Amendments
The insights gathered in the preceding steps must be translated into clear, specific, and actionable revisions to the IPS document. This involves:
Step 5: Formal Approval and Documentation
The final step is to formalise the updated IPS and ensure its effective implementation:
The value derived from this structured review process extends beyond the updated document itself. The act of systematically analysing performance, engaging stakeholders in discussions about goals and risks, considering future market conditions, and formalising policy forces critical thinking, clarifies assumptions, builds consensus, and reinforces fiduciary discipline throughout the organisation. This enhanced understanding and commitment to the investment strategy are invaluable outcomes of a diligent IPS review cycle.
Table 2: Roles & Responsibilities in the IPS Review Cycle
Role | Key Responsibilities in Review Process |
Board of Trustees/Dirs. | Ultimate fiduciary oversight; Ensuring alignment with mission; Final approval of IPS; Delegating authority to Committee/Staff |
Investment Committee | Direct oversight of investment programme; Initiating/leading the review process; Reviewing diagnostics & analysis; Engaging stakeholders; Recommending/approving amendments; Monitoring implementation |
CIO / Investment Staff | Providing performance/risk data & analysis; Identifying need for updates; Draughting/refining amendments; Implementing policy changes; Monitoring compliance; Liaising with managers/consultants |
Consultant / OCIO | Providing independent diagnostics & analysis; Offering market insights & CMAs; Advising on best practises & strategy; Facilitating discussions; Assisting with draughting (if requested) |
Legal Counsel | Reviewing draught amendments for legal/regulatory compliance, clarity, and potential fiduciary implications |
Other Stakeholders | Providing input on goals, values, constraints, mission alignment (e.g., family members, beneficiaries, management) |
To ensure a comprehensive review and update of the Investment Policy Statement, fiduciaries should systematically evaluate each core component of the document. This checklist serves as a diagnostic tool at the beginning of the review process to identify potential gaps or areas needing attention, and as a final check before approval to confirm all critical elements have been adequately addressed. While this checklist covers standard components, the specific content within each element must be highly customised to the unique circumstances, mission, risk profile, and complexity of the individual institution. Relying on generic templates is insufficient and potentially risky.
Table 3: IPS Update Checklist
IPS Element | Key Considerations/Questions for Review |
1. Introduction & Purpose | – Does it clearly identify the specific assets or accounts governed by the IPS? <br> – Is the overarching purpose of the assets (e.g., support operations, perpetual endowment) clearly stated? <br> – Does it explicitly link the investment programme to the organisation’s mission and long-term goals? <br> – Is the context (type of institution, source of funds) established? <br> – Is the date of the last review/approval clearly indicated? |
2. Governance Structure | – Are the roles, responsibilities, and authority of all relevant parties (Board, Investment Committee, Staff/CIO, Managers, Consultant/OCIO, Custodian) clearly defined and delineated? <br> – Is the process for decision-making specified (e.g., who approves SAA, hires/fires managers)? <br> – Are procedures for selecting and discharging external advisers/managers outlined? <br> – Is the applicable standard of care (e.g., fiduciary duty) defined? <br> – Are policies regarding conflicts of interest referenced or included? |
3. Investment Objectives | – Is the primary investment objective clearly articulated (e.g., preserve real purchasing power, achieve specific return target, meet liability funding goals)? <br> – Are specific, measurable, achievable, relevant, and time-bound (SMART) return requirements stated (absolute/relative, nominal/real)? <br> – Is risk tolerance defined both qualitatively (e.g., general attitude towards risk) and quantitatively (e.g., maximum drawdown, volatility limits, surplus volatility, probability of loss)? <br> – Are the return objectives realistic given current capital market assumptions and the defined risk tolerance? <br> – Are the objectives consistent with the organisation’s spending policy and constraints? |
4. Constraints | – Time Horizon: Is the relevant investment time horizon (e.g., perpetual, long-term, intermediate, short-term) clearly specified? <br> – Liquidity: Are anticipated cash flow needs (amount, timing) defined? Are minimum requirements for assets in different liquidity categories (e.g., daily, monthly, >1 year) established, especially if illiquid alternatives are used? <br> – Legal/Regulatory: Are relevant legal or regulatory constraints (e.g., UPMIFA, ERISA, state laws) identified? <br> – Tax Status: Is the tax status of the portfolio clearly stated and its implications for investment strategy considered? <br> – Unique Circumstances: Are specific organisational policies or values addressed (e.g., ESG/SRI mandates, mission alignment, negative screens/exclusions, policies on alternative investments, guidelines for accepting non-cash gifts)? |
5. Strategic Asset Allocation (SAA) | – Are target allocations and permissible ranges (minimum/maximum percentages) defined for each major asset class? <br> – Does the IPS reference the methodology or assumptions used to develop the SAA? <br> – Are all permissible asset classes and investment vehicles clearly listed (including alternatives, private investments, derivatives if allowed)? <br> – Are guidelines for diversification within and across asset classes included? <br> – Are any specific investment restrictions detailed (e.g., limits on single security/issuer concentration, sector exposures, use of leverage, prohibited securities)? |
6. Rebalancing Policy | – Is the methodology for rebalancing the portfolio clearly defined (e.g., calendar-based, range-based)? <br> – Are the triggers for rebalancing specified (e.g., frequency, deviation thresholds)? <br> – Are the target ranges for each asset class clearly stated (linking back to SAA)? <br> – Does the policy address how cash flows (contributions/withdrawals) will be used in the rebalancing process? |
7. Performance Benchmarks & Evaluation | – Are specific, appropriate benchmarks designated for each asset class, each manager (if applicable), and the total portfolio? Are they clearly defined (e.g., specific index, blended benchmark, absolute return target)? <br> – Is the frequency and methodology for performance evaluation specified? <br> – Are requirements for performance reporting (content, frequency, format) outlined for managers and/or consultants? |
8. Manager Selection & Monitoring | – Are the criteria for selecting investment managers clearly defined (e.g., philosophy, process, people, performance, fees, operational soundness)? <br> – Is the process for ongoing monitoring and evaluation of managers described? <br> – Are specific grounds for manager review, probation, or termination outlined (e.g., performance deviation, style drift, personnel changes, ethical breaches)? <br> – Is there a requirement for operational due diligence (ODD) on managers, particularly for alternatives? |
9. Review and Update Procedures | – Does the IPS itself specify the frequency (e.g., annually) and process for its own review, potential amendment, and formal reaffirmation or approval? <br> – Does it assign responsibility for initiating and overseeing the IPS review process? |
Navigating the complexities of Investment Policy Statement (IPS) review and maintenance can be a significant challenge, particularly in the face of evolving markets, regulatory changes, and increasingly sophisticated investment strategies. Leveraging both external expertise and appropriate technology can materially enhance the process, resulting in a more resilient, relevant, and effectively monitored policy.
The Value of External Expertise
Engaging experienced investment consultants or an Outsourced Chief Investment Officer (OCIO) can add substantial value to the IPS review cycle. These professionals offer:
Consultants or OCIOs may support all phases of the review process, from initial diagnostics and stakeholder interviews to policy drafting and implementation guidance, ensuring a comprehensive, well-managed outcome.
The Role of Investment Analytics Platforms
Technology is playing an increasingly vital role in facilitating IPS implementation, ongoing monitoring, and periodic review. Purpose-built investment analytics platforms provide functionality that enhances governance and improves operational efficiency, including:
Platforms such as Acclimetry are purpose-built to deliver objective diagnostics and automated compliance monitoring. By leveraging such technology, institutions can conduct IPS reviews that are thoroughly data-driven, ensuring continuous adherence to policy guidelines. This in turn reinforces governance standards and supports sound, informed decision-making.
The most effective approach to IPS governance lies in the synergy between human expertise and technological capability. Consultants and OCIOs can harness the data processing power, real-time monitoring, and advanced analytics provided by these platforms to develop more strategic, insight-rich recommendations. Technology excels in managing the scale and complexity of data analysis and routine oversight, enabling fiduciaries and advisors to concentrate on higher-order tasks, such as strategic interpretation, applying nuanced judgement, understanding organisational dynamics, and guiding meaningful discussions.
This collaborative model allows institutions to capitalise on both the operational efficiency and scalability of digital tools, and the bespoke, context-sensitive insights offered by seasoned professionals.
Ultimately, investment analytics platforms should not be viewed merely as operational aids, but as integral components of the governance framework. They empower boards and investment committees to discharge their fiduciary duties more effectively by delivering timely, accurate, and comprehensive insights into portfolio composition, performance attribution, risk exposures, and compliance with IPS mandates. Enhanced transparency and analytical depth enable fiduciaries to ask better-informed questions, detect emerging risks sooner, make more prudent decisions, and uphold a disciplined and demonstrable oversight process.
The Investment Policy Statement (IPS) forms the cornerstone of a sound institutional investment programme. Far from being a mere compliance document, it functions as a vital, dynamic governance tool that guides strategy, defines responsibilities, manages risk, and anchors decision-making, particularly in periods of uncertainty. However, its value depends upon its continued relevance. In an ever-evolving landscape of markets, regulations, and organisational priorities, a static IPS quickly loses its efficacy, potentially exposing the institution to avoidable risks and impeding the achievement of long-term objectives.
Adopting a proactive approach to IPS maintenance, characterised by regular, systematic reviews prompted by defined events or scheduled governance cycles, is essential. This disciplined process, incorporating comprehensive diagnostics, broad stakeholder engagement, forward-looking market analysis, and careful policy refinement, ensures the IPS remains aligned with the institution’s mission and current realities. The benefits of this diligence are considerable: enhanced decision-making discipline, improved risk management, greater alignment between investments and organisational goals, continuity through leadership transitions, and demonstrable fulfilment of fiduciary responsibilities.
Institutional Chief Investment Officers, Board Investment Committees, and Family Office Managers are encouraged to treat the IPS not as a static requirement but as a strategic asset. Establishing a robust review process, guided by the identified triggers, the structured methodology outlined herein, and the critical elements checklist, will significantly strengthen the investment governance framework. Leveraging external expertise and utilising advanced analytics platforms can further enhance the quality, efficiency, and objectivity of this process. By committing to the continuous stewardship of the Investment Policy Statement, fiduciaries can build a more resilient investment programme, capable of adapting to complexity and delivering sustained success in support of their organisation’s enduring mission.