QFIP-136: Elements of an IPS for Institutional Investors

Question 1

What is the purpose of an investment policy statement?

Answer 1

• Serves as a strategic guide in the planning and implementation of an investment program
• Serves as a policy guide that can offer an objective course of action to be followed during periods of market disruption
• It is a highly customized document that is uniquely tailored to the preferences, attitudes, and situation of each investor

Question 2

What should an IPS focus on regarding the scope and purpose of an investor?

Answer 2

1. Define Investor
   
   • Define who the investor is, and which assets are to be governed by the IPS
2. Define the structure
   
   • Set forth key responsibilities and actors (i.e. the retirement board, Chief Investment Officer)
   • Identify an organizational structure for investing
   • Identify a risk management structure applicable to investing
   • Document acceptance of the IPS

Question 3

Describe what an IPS should specify in terms of governance of a fund

Answer 3

1. Specify who is responsible for determining investment policy, executing policy, and monitoring results
2. Describe the process for reviewing and updating the IPS
3. Specify who is responsible for hiring and firing external money managers/advisers
4. Describe the roles and responsibilities of boards and staff
   
   • Institutional investors often have boards of trustees with oversight responsibility for asset management
   • There are also professional staff responsible for day-to-day management and execution of board-approved strategies.
5. Assign responsibility for determination of asset allocation, including the input assumptions
6. Assign responsibility for risk management, monitoring, and reporting

Question 4

Describe what an IPS should specify in terms of risk management of a fund

Answer 4

1. Establish investment performance measurement and reporting accountabilities
2. Specify appropriate metrics for risk measurement and evaluation
   
   • Consistent use of metrics to assess and evaluate the risk profile of investment portfolios is important for meaningful comparisons across time
3. Define a process for rebalancing portfolios to target allocations
   
   • Boundaries for acceptable variations from targets should be documented in the IPS.

Question 5

What are different components of risk and return requirements that an IPS should
specify?

Answer 5

• State the overall investment performance objective
  
  • Example: The Foundation portfolio should achieve a 5% annualized return after inflation in order to preserve the Foundation’s capital and spending policy
• Identify performance objectives for each asset class
  
  • A brief description of each asset class should be provided and a benchmark for performance should be identified.
• Define a policy portfolio to serve as a basis for performance and risk assessments
  
  • Target allocations should be specified for each asset class

Question 6

What are some constraints on a fund that the IPS should address?

Answer 6

• Define an evaluation horizon for performance measurement
• Identify any requirements for maintaining liquidity
• Identify how tax considerations affect investment decisions
• Specify any policies related to leverage
• Identify any restrictions on investment in foreign securities, and specify a policy on managing exchange rate risk