Investment Policy Statement

DEFINITION

What Is an Investment Policy Statement?

In the financial industry, an investment policy statement (IPS) is a document that spells out general rules for a portfolio manager to follow when working with a particular client. An IPS should include the client’s specific goals and objectives for their investment while laying out the manager’s plans and strategies for reaching those goals. 

That might include information such as allocation of assets, requirements for liquidity, and assessments of risk tolerance. When executed efficiently, an IPS provides both an investor and a manager with a long-term plan that makes it easier to focus on their most important objectives.

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What is the purpose of an investment policy statement? 

An IPS can be thought of as a sort of map for an individual or organization’s investment strategy. By laying out the specific investment goals your client wishes to pursue in a single document, you create a clearer guide for making important financial decisions, as well as a line of defense against avoidable errors or mismanagement. 

 A strong IPS includes not only financial goals, but also a clearly defined time horizon for accomplishing them. For example, a business that needs to hit a specific financial benchmark before expanding to a new location might have an IPS that sets a particular monetary goal for the next five years, the next ten, and the next fifteen. That gives a portfolio manager a clear set of parameters for how aggressively to invest over each period of time. 

 A detailed IPS also gets into targets for asset allocation. This helps keep the portfolio balanced by allowing a manager to allocate and set deviation limits between different kinds of assets, such as stocks, bonds, and equity. This kind of allocation makes it simpler to identify the need for portfolio rebalancing. 

Why Are Investment Policy Statements Important? 

A well-considered IPS is especially important during times of economic instability or volatility, as it provides a coherent, overarching strategy that keeps an organization’s focus on specific financial targets while still allowing enough flexibility to adapt to changing financial realities.  

 It is important to remember that an investment policy statement is not a set-in-stone list of financial strategies, but rather a living document that can be adjusted and evolved as goals and markets change. That doesn’t mean that an IPS should be constantly tweaked and fine-tuned – core elements such as the structure of the document and established guidelines and investment policies should be adjusted only when necessary. Handled this way, an IPS serves as both a solid foundation and a scalable guide for your organization’s investment journey. 

What Are the 4 Main Components of an IPS? 

Most IPS documents follow a format laid out by the CFA Institute. This detailed document breaks an IPS down into four key components that define the policy for both the manager and the client.  

 Scope and purpose 

This component should: 

  • Identify the investor and define their role 
  • Identify the portfolio manager’s role and responsibilities 
  • Establish a process for risk management 
  • Define who is responsible for tracking and reporting on the portfolio’s performance 

 Governance 

This component should: 

  • Spell out responsibilities for setting and executing investment policy, as well as tracking the results of that implementation 
  • Establish a process for reporting, risk management, and monitoring investments 
  • Assign roles for deciding a portfolio’s asset allocation and monitoring an investment plan’s execution 
  • Establish a process for evaluating and updating a policy 

 Investment, return, and risk objectives 

This component should: 

  • Describe the overall objective of the investment 
  • Establish return, distribution, and risk requirements 
  • Establish the investor’s risk tolerance 
  • Establish any relevant constraints, such as legal requirements, tax considerations, or investment restrictions 
  • Provide any other details relevant to the investment strategy 

 Risk management 

This component should: 

  • Establish a process for measuring and reporting investment performance 
  • Establish metrics for measuring risk and evaluating performance 
  • Establish a process for rebalancing the portfolio and targeting asset allocations 

Investment Policy Statement Example 

To illustrate the essential elements of an investment policy statement, we’ve put together a basic example template. Note that this example is considerably simplified and that the contents of an actual IPS will vary according to an organization’s specific goals, financial limitations, risk tolerance, and other factors.  

What makes a good investment policy statement? 

The definition of a good IPS can vary widely depending on the goals and scope of the investment portfolio. Generally speaking, the mission of an IPS is to explain a client’s specific investment goals and lay out the strategies and measurements they will follow to reach them. Beyond those basics, a high-quality IPS should help a portfolio manager:  

  • Guide a client through constructing a portfolio and managing it on a long-term basis 
  • Keep portfolio management aligned as closely as possible with the client’s stated goals, even as market conditions change 
  • Provide the client with a reference tool to keep them focused on their investment goals 

 On the other hand, there are also a number of commonly made mistakes that can hinder an ISP’s success for both the client and the portfolio manager. A good investment policy statement usually should not:  

  • Include vague or general language that isn’t specific to the client’s particular needs 
  • Be limited to strategies only intended to maintain basic regulatory compliance  
  • Fail to include benchmarks for evaluating the success of your portfolio strategy  
  • Create confusion for the client about why their portfolio may perform differently than others in their market 

How often should an investment policy statement be reviewed? 

Markets and financial situations are constantly changing. An investment policy statement needs to be as flexible and scalable as the current situation dictates. The CFA Institute recommends reviewing your IPS benchmarks annually, or whenever a substantial change in the portfolio or the client’s goal happens. If the current policy doesn’t measure up to the client’s current needs, this is an opportunity to make necessary adjustments that align more closely with their future goals. 

How to Create an Investment Policy Statement with Document Creation Automation Software 

Creating a comprehensive, flexible investment policy statement requires a broad range of financial knowledge and highly accurate analysis. That makes automating your IPS creation process an appealing option for any business. MHC NorthStar includes state-of-the-art financial document creation software that can help you build a reliable, scalable IPS that fits your organization’s specific needs.  

Our document creation tools make it easy to create even complex financial documents leveraging data from a wide range of sources. Create personalized templates branded with your logo and preferred format and details, then reuse those elements as needed across future templates. Our deep library of reusable content fragments allows for easy adjustments according to changing goals and needs. Automating the document creation process not only saves your team time and money, it also makes sure your IPS is easy to access and in compliance with internal policies and legal requirements.  

Find Out How MHC Can Help Build a Better IPS 

A well-crafted and maintained IPS can make a major difference in your organization’s investment strategies and overall financial future. By building yourself a document that functions as both a stable foundation and an adjustable financial map, you can make it easier to stay focused on the goals and practices that will get you where you want to be in the years to come.  

Ready to learn more about how MHC NorthStar’s document creation automation software can help you build a better investment policy statement for your organization’s future? Contact us today to schedule a demonstration of our industry-leading automation software. 

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