Investment Policy Statement (IPS)

Purpose:

The Investment Policy Statement (IPS) serves to define the investment objectives, risk tolerance, and guidelines for managing the organization’s investments. It is a formal document that guides investment decisions and ensures consistency and alignment with the organization’s overall goals.

Key Components:

1. Investment Objectives:

• Define specific goals and objectives for the organization’s investments.
• Examples include generating long-term returns, preserving capital, or generating income.

2. Risk Tolerance:

• Determine the organization’s willingness to accept investment risk.
• This includes identifying the potential impact of market fluctuations on investment returns.

3. Asset Allocation:

• Outline the target asset allocation for different investment categories, such as stocks, bonds, and cash equivalents.
• Specify the proportion of funds allocated to each asset class.

4. Investment Guidelines:

• Establish guidelines for selecting investments, including criteria for evaluating managers, performance benchmarks, and diversification.
• Define procedures for rebalancing the portfolio and managing risk.

5. Reporting and Monitoring:

• Establish reporting mechanisms to track investment performance and ensure alignment with the IPS.
• Monitor the investments regularly to assess their effectiveness in meeting objectives.

6. Governance:

• Establish governance procedures to ensure the IPS is followed and reviewed regularly.
• Designate responsible parties for implementing and overseeing investments.

Example IPS:

Organization: ABC Corporation

Investment Objectives:

• Generate long-term returns of 8%
• Preserve capital of $10 million
• Generate income of $250,000 per year

Risk Tolerance: Moderate

Asset Allocation:

• 60% stocks
• 20% bonds
• 10% cash equivalents
• 10% alternative investments

Investment Guidelines:

• Invest in high-quality stocks with a track record of growth and dividend payments.
• Diversify investments across a range of asset classes to reduce risk.
• Rebalance the portfolio annually to maintain the target asset allocation.

Reporting and Monitoring:

• Monthly reports on investment performance
• Quarterly reviews to assess alignment with IPS