The Investment Policy Statement and Spending Policy are written specifically for the foundation that incorporates the investment objectives, investment time horizon, risk tolerance, eligible asset classes, diversification, asset allocation targets, minimum and maximum asset class ranges, re-balancing procedures, investment selection, implementation and investment monitoring, policy benchmarks and performance evaluation.
The Investment Policy Statement should include the following:
Purpose, objectives, responsibilities
Spending Policy
Investment objectives
ESG or sustainability considerations
Use of alternatives (optional)
Time horizon
Risk tolerance
Asset allocation
Re-balancing procedures
Selection criteria for investment managers
Monitoring and replacing investment managers
Performance objectives
Control procedures
Reporting
Spending Policy
The foundation’s spending policy, which is integral to the investment goal and asset allocation decision should be addressed in the Investment Policy Statement. The foundation may have already budgeted the amount it will spend over the next few fiscal years. The policy will consider the foundation’s mission and weigh the investment risks that the foundation can afford to take in seeking the return needed to support its philanthropic goals. The management, oversight and spending policy of the Foundation assets are guided by the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the prudent standard of conduct. This guidance should be included in the Investment Policy Statement.
ESG and Sustainable Considerations
The foundation Investment Policy Statement may include Environmental, Social and Governance (ESG) criteria and define the organization’s priorities. ESG strategies or ESG factors, Socially Responsible Investing (SRI) and Impact Investing may be considered, as appropriate. There are numerous well-developed strategies that implement SRI through negative screening which excludes certain industries and companies. Impact investing has typically involved private equity, private debt and other alternatives but recently some investment managers have created pools of public securities whose revenues are “green” or deliver a positive impact. Investments can be made that are consistent with the United Nations Sustainable Development Goals (SDG).
Alternatives
The IPS may include alternatives to help meet the investment objectives and target return on assets for the foundation. Alternatives considered may include private equity, private debt and credit. Hedge fund strategies such as diversified, event driven, long bias, relative value, macro and other alternative strategies may be considered. Commodities and natural resources may also be included for consideration.
Policy Benchmark
The policy benchmark reflects the target asset allocation established in the Investment Policy Statement. A customized portfolio policy index that reflects the asset allocation analysis should be articulated in the investment policy. The policy benchmark is intended to be used to assess the foundation’s progress versus stated objectives.
Re-balancing Procedures
Formal re-balancing rules are fundamental to successful portfolio management. The Investment Policy Statement should set minimum and maximum bands around policy asset allocation targets. This provides the necessary flexibility to take advantage of strategic opportunities, overweight or underweight specific sectors as risk/return expectations change.
Periodic Review
The Investment Policy Statement and Spending Policy should be reviewed annually for adequacy and appropriateness. If significant changes occur in achieving the expected return of the asset mix with the projected spending, a policy and asset allocation review may be necessary.
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