Introducción     

Una declaración de política de inversión (IPS) puede ser uno de los documentos más importantes para los inversionistas institucionales. That said, not all IPSs are of the same quality.

Which of the following statements best describes your organization?

A. Our IPS is the backbone of our successful investment program. 
B.  I know someone has an IPS around here somewhere...

If you answered “B”, you are not alone. But your organization is likely missing out on the potential benefits a well-crafted IPS can bring to your investment program. A strong IPS can provide a solid foundation for an investment program and instill in organizations the discipline to face the uncertainties of challenging investment environments. If you were to “stress test” your IPS, would it be able to withstand a turbulent market period?

In this paper, we describe four considerations to determine if an IPS is strong. The overarching theme is thoroughness — as it relates to documenting the governance, oversight, investment management and monitoring/evaluation functions of the investment program.

Panorama actual

Again, in our view, the key distinction between a “strong” and “weak” IPS is thoroughness. We believe a thorough IPS should contain as many elements of the five components listed in Figure 1 as are relevant to a given investment program, to cover all details relevant to governing, executing and monitoring the program and its portfolio(s).

The IPS should document how the investment program will be constructed in support of the organization’s objectives and goals for the assets (i.e., to support a distribution, budget support, specific capital projects, etc.). The five key components identified cover a wide range of governance, portfolio execution and monitoring/oversight responsibilities relevant to the board, governing committee or staff serving in a fiduciary capacity.

In our experience, this is where organizations with a “weak” IPS fall short. In some cases, sections are left out. In other cases, when they are included, they lack the specificity to drive the intended behavior, processes and/or outcomes. In this paper, we address four potential problem areas commonly encountered when creating an IPS.

Figura 1. Componentes de una IPS

1. Gobierno

a.    Purpose & Scope of IPS
b.    Definition of Duties

2. Investment Objectives & Constraints

a.    Statement of Investment Goals
b.    Investment Objectives
c.    Investment Constraints

3. Parámetros de cartera

a.    Investment Principles
b.    Strategic Asset Allocation
c.    Investment Criteria
d.    Portfolio Benchmarks

4. Ongoing Portfolio Oversight

a.    Portfolio Rebalancing
b.    Frequency & Format of Portfolio Reviews
c.    Portfolio Reporting Requirements
d.    Additional Client Servicing Requirements
e.    Retention of OCIO

5. Acknowledgement & Adoption of IPS

a.    Authorized Signer(s)
b.    OCIO

1. Define responsibilities

While it may seem obvious, it is important to define who does what for an investment program. For members of an organization’s board, governing committee or staff serving in a fiduciary capacity, there should not be any ambiguity regarding who is responsible for certain tasks and obligations associated with the investment program. The list below outlines some of the assignments that likely need to be made:

  • ¿Quién está a cargo del gobierno y supervisión del programa, incluido el mantenimiento de la IPS?
  • ¿Quién establecerá los objetivos de inversión y distribución del fondo?
  • Who is responsible for making asset allocation, manager selection and other portfolio management decisions?
  • Who will be responsible for evaluating the success of the investment program in meeting its objectives?

These responsibilities, to name a few, should be identified and assigned to specific owners in writing. This way, the expectations are clear as to who is responsible for what. These key owners may include board members, trustees, committee members, staff, the outsourced chief investment officer (OCIO) and custodian(s). If done appropriately, this will provide clarity regarding the responsibilities of each party, especially those with fiduciary duties, and accountability around the completion of those tasks.

2. Establish investment objectives and constraints

When creating an investment policy, it is important to consider key objectives and constraints, such as return objective, risk tolerance, liquidity requirements, time horizon, legal/regulatory 

  1. Objetivo de retorno: What is the purpose of these funds? Si se tiene la meta de realizar una distribución al mismo tiempo que se mantiene el poder de compra, ¿el objetivo de retorno toma esto en cuenta?
  2. Risk Tolerance: Have you determined an appropriate level of risk for the portfolio, and is it congruent with the stated return objective?
  3. Liquidity requirements: What are the cash flow needs (i.e., to fund distributions) of the organization, and at what frequency?
  4. Time horizon: How long will you invest these assets? In perpetuity or for a set time period?
  5. Requerimientos legales/regulatorios: Are there any federal or state regulatory requirements that are applicable? ¿Restricciones con respecto a los donantes? Other considerations by which the organization must abide?
  6. Tax sensitivity/issues: Are there any tax impacts or implications that should be considered as they relate to the investment portfolio?
  7. Unique circumstances: Are there any specific policies that your organization wants to incorporate into the portfolio?

An investment program should be built upon these factors, and they should adapt as your organization evolves. Documenting these factors in the IPS can help those in charge make prudent investment decisions.

3. Benchmark your portfolio

Measuring progress toward goals is an integral component of a successful investment program. Specifically, measuring the performance of the investment program against the investment goals of the organization or defined benchmarks can allow an organization to determine if it is on track to meet its objectives or if strategy adjustments are needed. Two steps are critical to this process:

  1. defining “success” in specific terms, through a relative benchmark(s) and absolute benchmark(s); and
  2. periodically measuring the investment program's performance against your definition of success.

A common method to define the success of an investment program involves comparing the portfolio's returns to relative and absolute benchmarks. We recommend organizations incorporate both types of benchmarks to help assess the performance of the portfolio.

  1.  A relative benchmark utilizes a broad-based index or blend of indices that have a similar risk profile as the portfolio to compare the performance of the investment program. For example, a relative benchmark might involve comparing the performance of your investment portfolio against the performance of a 60%-40% blend of the S&P 500® and the Barclays Aggregate Bond Index.
  2. An absolute benchmark, or hurdle rate, is an actual percentage return. For example, if your objective is to retain the principal and purchasing power of your portfolio against a 4% annual distribution, 2% inflation and 0.5% in fees, a back- of-the-envelope calculation would require a 6.5% return. Long-term investment returns below this benchmark would imply the program is failing to meet its objective; returns above this number would imply that it is meeting its objective.

Importantly, another element of benchmarking is confirming that the appropriate benchmarks are used and it is important to regularly measure the investment program's performance against the established benchmarks. Additionally, we recommend that the benchmarks used are reviewed annually and in response to material changes in the investment portfolio or investment program objectives. This can help determine that the benchmarks remain appropriate for what your organization is trying to accomplish with your investment program.

4. Strive for sufficient portability

Over time, your board, key decision makers and vendors may change. When the organization experiences turnover, how do you keep your investment program on track? An effective IPS can help the investment program maintain continuity. Consider this, can someone pick up your IPS and understand the investment program without any further guidance? Some additional questions to consider may include:

  1. Does the IPS include the common components mentioned above?
  2. Have you defined the portfolio’s purpose and responsibilities for key decision makers?
  3. Have you defined the investment goals, objectives and constraints?
  4. ¿Ha definido lo que significa el éxito (es decir, ha establecido pautas de referencia)?
  5. Have you defined how frequently you are going to monitor the portfolio and the format and content of those reviews?

If you can answer “yes” to these questions, there may be a higher likelihood that your IPS can reduce the difficulties inherent to personnel changes over time.

Conclusión

A strong IPS can give organizations the discipline to face the uncertainties of challenging investment environments. Along with the four considerations discussed in this paper, we recommend working with your decision makers, legal counsel and OCIO to determine if your IPS is thorough enough to meet your needs or if improvements can be made.