A comprehensive investment policy statement is vital to your foundation sustaining its organizational purpose and achieving its giving goals.
The benefits of a well-crafted investment policy statement
Strive for an investment policy statement that does more than just checking the box. A valuable IPS goes beyond establishing basic investment guidelines. It delivers other important benefits too.
Reduce the impact of emotions and subjectivity
Following your investment policy statement’s guidelines can reduce portfolio risk and increase return, particularly when turbulent markets occur. Portfolio changes that are based on emotion rather than process are subjective guesses. These decisions are usually unsupported by thoughtful analysis or evaluation of the potential impact on the portfolio.
Instead, using the IPS’s portfolio management rules means that a well-defined process guides decision making. It also eliminates (or greatly reduces) the potential negative impact of emotions or individual opinions about the most suitable course of action.
Eliminate or address conflicts of interest
In addition to a duty of care in decision making and duty of obedience to the foundation’s mission, trustees are bound by a fiduciary duty of loyalty to avoid or address conflicts of interest that might result in personal benefit.
For example, it may be convenient or tradition at many foundations for a board or family member to manage the investment portfolio. However, if they are compensated for this task, the potential for a conflict of interest exists.
What may be an appropriate investment strategy for the individual portfolio of a board member may not serve the best interests of the foundation and its corpus. Moreover, the compensation of brokers and dually registered firms may wholly or partially depend on the products they recommend for your investment program.
Establishing written investment guidelines and portfolio management rules will set clear boundaries for the roles and responsibilities of all parties engaged in the process.
Protect the corpus
Some organizations adopt separate spending and withdrawal policy documents. Others include spending and withdrawal guidelines within the investment policy statement. In either case, how the organization chooses to manage its spending can have a dramatic impact on the corpus and may result in unintended spend down.
For example, a simple spending plan normally includes at least a 5% annual allocation for grants and expenses. But might also include provisions for increased spending in years when actual portfolio returns are higher than 5%. Assuming the portfolio achieves the IPS’s targeted (average annual) rate of return of 5% or greater, the corpus remains stable. However, investment markets are inconsistent and do not provide guaranteed returns every year.
When markets have down years, portfolio returns may be less than the targeted average annual rate of return. Spending at the 5% level in these years can trigger an unanticipated spend down of the corpus unless. That is, unless the foundation adopts prudent advance plans in the spending and withdrawal sections of the financial governance documents.
Even though changes in fiduciary and trust statutes have given trustees greater latitude in spending interest, dividends, and capital gains above the historic dollar value of the initial corpus, it can still be a challenge to manage the variable portfolio returns and mandatory spending levels.