E&F Advice & Administration
May 05, 2021
Nonprofit and Foundation Investment Policy Statement Essentials
Nonprofit and foundation boards have a fiduciary duty to be responsible stewards of their organization’s assets. A robust investment policy statement (IPS) is central to fulfilling that obligation. The IPS is a document that outlines the investment policies that will determine how assets are invested. Having an IPS supports the board’s legal duty of care by codifying prudent investment decision-making and oversight procedures. As part of our client services, Glenmede often works closely with nonprofit and foundation boards to help them create or update their IPS.
Maintaining a thoughtful, comprehensive IPS is considered a best practice. As a fundamental governance document, the IPS should be treated as a living document that is reviewed annually by the board or when triggering events occur.
Why an IPS matters
The importance of an IPS cannot be overstated. As the detailed roadmap for how assets will be invested, it helps boards stay focused on oversight, governance and strategy-related activities by:
- Memorializing the investment philosophy and goals
- Aligning the investment strategy with the organization’s mission
- Defining roles and responsibilities of board members, including executive management and investment managers
- Providing a framework for objective decision-making
- Maintaining focus on long-term objectives through market ups and downs, periods of disruption and volatility
- Ensuring continuity of purpose and process during times of leadership, management or generational change
- Supporting new member orientation and education
- Reinforcing a fiduciary culture that adheres to best practices
Making the IPS a public document
An IPS can be a powerful public-facing document where key stakeholders can view your investment policies to better understand how they support prudent stewardship. Key stakeholders may include donors or other partners with a vested interest in understanding how gifts will be managed. In the spirit of transparency and accountability, many organizations now choose to make their IPS available on their website.
Creating a robust IPS
If your nonprofit or foundation does not have an IPS, creating one should be a priority. Best practices for developing an IPS include seeking input from trusted investment professionals and legal advisors. Glenmede frequently facilitates client meetings to help draft the new IPS and provides the materials and guidance needed to create this important document.
Since the IPS incorporates many existing policies and procedures, we recommend that documentation covering the following topics be up to date before beginning to craft an IPS:
- Board member and trustee roles, duties and responsibilities
- Delegations of investment authority records
- Organization’s time horizon
- Spending policy
- Risk tolerance
- Permitted and prohibited asset classes
- Sustainable and impact investing policy, if applicable
- Conflicts of interest policy
Keeping the IPS current
As a best practice, your board should review the IPS at least annually and whenever any of the following occur:
- Change in investment managers
- Transfer of assets into/out of the portfolio
- Change in spending rates or needs
- Modification in time horizon or end date
- Change in your applicable laws or regulatory environment
When a board reviews its existing IPS, we often guide the discussion by asking the following questions:
- Is the IPS complete?
- Does it reflect your current situation?
- Do long-term asset allocation guidelines still align with your spending rate and time horizon?
- How can you be better? Does the IPS incorporate best practices?
- Have areas of confusion come up that need to be clarified?
- Are there new policies that should be included?
Components of an IPS
Nonprofits and foundations have the option to be as straightforward or expansive as they choose in developing an IPS. While there is wide latitude with respect to the contents, best practices have evolved toward a consensus about how an IPS should be organized and what it should contain. Our experience working with a wide variety of nonprofit and foundation boards and investment committees suggests the following content areas are a good place to start:
Statement of purpose
This is the introduction to the IPS itself. It puts forth the purpose of the document in the context of the broad objectives of your nonprofit or foundation. It often contains a statement about the board’s fiduciary duty of care with respect to the assets, including prudent decision-making, the principles of responsible stewardship and its legal obligation to always act in the best interest of the nonprofit or foundation.
Organization mission and/or values
Your nonprofit’s or foundation’s mission and/or values should drive your investment policy and deserve to be front and center of your IPS. If applicable, sustainable and impact investment value statements can be included in this section.
Roles and responsibilities/assignment of investment authority
Good governance begins with a clear understanding of who is responsible for the oversight and management of the investment assets, and the tasks necessary to implement the duties outlined in the IPS. This section includes the roles and responsibilities of the board of directors, relevant committees such as investment and/or finance and any outside parties engaged to manage or oversee investment assets.
If investment authority has been delegated to an Outsourced Chief Investment Officer or other investment managers, the discretionary or non-discretionary nature of the relationship should be spelled out.
Spending policy is a critical factor in the success of the investment strategy. The IPS includes the spending policy and outlines how annual cash flow and operating capital needs are determined and fulfilled in a manner consistent with the prudent stewardship of the assets. The IPS should also address procedures to maintain the liquidity necessary to meet cash flow obligations, including sufficient notice to ensure prudent liquidation of investment assets. It should quantify any mandatory annual spending rate, potential administrative/additional spending, inflation assumptions and time horizon.
Investment goals and objectives
A well-defined set of investment objectives should reflect the nonprofit’s or foundation’s investment philosophy and establish how it supports the organization’s purpose and contributes to its ongoing fiscal well-being.
Investment objectives: Include primary and secondary objectives, for example, real portfolio growth, capital appreciation or meeting annual spending needs. Include appropriate timeframe for evaluating investment performance versus objectives.
Investment philosophy and strategy: This is typically a broad statement of your investment beliefs and strategy, for example, diversified or concentrated, active or passive.
Sustainable and impact investing guidelines: If your nonprofit or foundation has sustainable or impact investment policies and objectives, identify the specific approaches to be used, including relevant criteria, advocacy, public policy or other guidelines for choosing preferred assets and determining permitted or prohibited investments.
Permitted and prohibited assets: Document permitted and prohibited asset classes, security types and/or investment methods or transaction types. This section should be as specific as possible to avoid misinterpretation.
Time horizon: State the time horizon in terms of meeting investment goals and objectives. Being specific about any known time horizons will help determine what length of time assets are intended to be invested before being liquidated, which may affect certain investment types and fees.
Risk tolerance: The ability to assume risk is usually framed in terms of the nonprofit’s or foundation’s time horizon and annual spending requirements. The IPS should indicate what level of risk (low, medium or high) the board will accept to achieve the portfolio’s objectives. Include more quantitative metrics if desired.
Asset allocation policy and guidelines
This section of the IPS describes the asset allocation policy and specifies the strategic asset allocation ranges, including minimum, maximum and target policy weights for each asset class and subclasses and any sustainable and impact investing allocation guidelines.
Rebalancing policy guidelines
This section provides guidance for short-term tactical asset allocation and periodic rebalancing to correct for divergence from target allocation ranges.
Review and reporting
This section sets out the process and procedures for periodic portfolio and performance review meetings, including which parties should attend, mandatory topics and the responsibilities of the investment manager and the board to communicate changes that could affect the long-term management of the portfolio. It also lays out reporting requirements, including reporting frequency and types of information required at each interval.
Identify performance measurement indexes or benchmarks to be used for the total portfolio and each asset class. Include standards for performance calculation and appropriate time horizons, for example, rolling 1-, 3-, 5- and 10-year.
This is a good place to highlight any unique investment considerations that are not covered elsewhere in the IPS. Some boards include shareholder activism commentary in this section, and others identify bylaws, regulations or tax-specific circumstances that might affect the investment policy or procedures.
Conflict of interest policy
As a result of increased regulatory scrutiny, most nonprofit and foundation boards have developed a conflict of interest policy. It should include specific steps for identifying, disclosing and avoiding potential conflicts among board members, trustees, directors and staff. Since conflicts often touch on areas of investment and financial oversight, it makes sense to include the policy statement in the IPS.
Fulfilling fiduciary duty
The IPS is an essential governance document for nonprofit or foundation boards aspiring to apply fiduciary best practices. It memorializes the investment policies necessary to be prudent stewards of the organization’s assets, ensuring continuity of purpose during times of change. Creating and maintaining a robust IPS is critical to our clients’ success, and Glenmede makes it a priority in our work with them.
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.