A few months ago, our Institutional team reviewed an investment portfolio for a nonprofit that contacted us for a second opinion. We first reviewed its Investment Policy Statement (IPS) and then began the process of analyzing the portfolio.
What is an Investment Policy Statement?
An Investment Policy Statement is an organization’s road map for its investments. For example, it includes a target asset allocation, what types of assets are permitted in the portfolio, and is what keeps everything on track.
Not long into the process, we noticed the portfolio was not in line with its investment policy. They had exposure to a risky investment the IPS clearly stated was not allowed.
In his highly-acclaimed book, Pioneering Portfolio Management, David Swensen, Chief Investment Officer of Yale University, states, “While many important investment activities require careful oversight, maintaining policy asset-allocations stands near the top of the list…without a disciplined approach to maintaining policy targets, fiduciaries fail to achieve the desired characteristics for the institution’s portfolio.”1
Making sure your organization follows its investment policy guidelines should be at the top of the list of anyone serving on a Board of Directors or Investment (Finance) Committee. In the case of the portfolio we reviewed, the deviation from the IPS could severely hinder the institution’s ability to meet both short-term and long-term obligations. Ultimately, it jeopardized the ability to support the purpose, mission, and vision of the organization.
Individuals should also have clear guidelines on how they should invest. If you are currently serving on an Investment Committee or you are an individual investor and unsure whether your portfolio is invested appropriately, start by reviewing your Investment Policy Statement.
We would then encourage you to talk to your investment advisor or contact us for a no-obligation second opinion. We could also help you construct an Investment Policy Statement. After establishing this road map, whether you sit on an investment committee or are saving for your family, making sure you stay within your investment policy guidelines should be at the top of your list.
1Swensen, David F. (2009). Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (Fully Revised and Updated). 5.
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PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.