How Endowment Managers Can Get the Most Out of Their Investment Policy Statement

See this article by BFS executive vice president and portfolio manager Greg Miller as it originally appeared in the Hartford Business Journal.

Serving on a board of an organization supported with endowments can be a wonderful experience.

The hospitals, churches, social service providers and other nonprofit organizations that rely on these generous gifts for a portion of their funding do great work, and the volunteers who sit on their boards and investment committees make important decisions that affect the organization today and into the future.

Overseeing an endowment is unlike most other financial responsibilities. For those who join an investment committee, the challenges quickly become apparent: complying with gift restrictions, balancing current needs with those years in the future, adhering to good governance, and fulfilling one’s fiduciary duties.

An investment policy statement (IPS) is an important first step for an organization to meet its responsibilities.

While every IPS is as unique as the organization it helps guide, there are a few things to consider that can help organizations get the most out of their endowments.

The IPS is a document that links endowment assets and how they are managed with the mission of the organization. Stripped to its bare essentials, it serves as the mandate for your investment manager and provides parameters that can be used as a report card for the investment manager.

The primary components of any IPS include the organization’s investment goals, a framework for asset allocation and a spending policy. In addition, the IPS is the place to designate roles and responsibilities, and a schedule for regular rebalancing, as well as the benchmarks by which progress should be measured.

Some organizations may also include a section on restrictions or prohibitions, dictated by rules around certain gifts or a values’ statement.

There is a lot to consider, and much of it is governed by the Uniform Prudent Management of Institutional Funds Act. Who knew you had to understand statutes to volunteer with a nonprofit organization?

The first question is: Can you get there from here? Are your investment strategies likely to achieve the required returns, and generate sufficient returns to meet the organization’s needs?

Is it reasonable to expect the assets to grow over time to offset inflation for future beneficiaries?

Sometimes, the answer is no.

For instance, I worked with an organization recently whose investment goals were substantially higher than could be reasonably expected from their very conservative investment strategy. A range of alternatives were considered, and they ultimately reduced their expected return and modified their strategy to one likely to earn higher returns over time.

IPSs should also describe roles and responsibilities of everyone who is involved. Has the board delegated authority to the investment committee to make changes? What is the scope of that authority and what communication does the board expect to get?

If the investment committee engages a professional to help with investing, does that professional have discretion? Are they a consultant?

Simply stated, a well-drafted IPS leaves no questions about who is responsible for what.

By clearly defining roles and addressing the unique needs of the organization, the IPS brings continuity to an organization. You may have just joined the investment committee, but at some point in the future, someone will replace you.

A well-drafted IPS demonstrates why you and others have done what you have.

Not every IPS is the same. Some organizations require many pages, while others work well with a two-page document. In both cases, the statement should be painstakingly crafted and reviewed periodically.

A well-drafted policy should endure typical market fluctuations, but when the needs and goals of the organization change, the policy might require modification to reflect them.