The Investment Policy Statement

The creation of an appropriate investment policy document, or statement, is the cornerstone of an asset management mandate. It is central.

The Investment Policy Statement (IPS) is the product of analysing the investment assignment, identifying investment objectives, determining asset allocation guidelines, and establishing performance measurement benchmarks. The lack of an investment policy statement, or the existence of a poorly developed one, is a fundamental weakness in portfolio management risk control. A properly constructed investment policy statement can ensure the continuity of the investment program and limits second-guessing of investment decisions. It also limits the temptation to increase portfolio risk to take advantage of perceived short-term market trends. The length and explicitness of the policy statement depends on the type of client, and the policy statement is customised for each client. The IPS can be short - one or two pages - or long for complexer circumstances - 15 to 20 pages.

The IPS establishes investment objectives and strategies for a specified period of time. It may include investment constraints such as liquidity needs, tax considerations, regulatory requirements, and special circumstances of the client. A properly developed policy supports long-term investment discipline and helps prevent ad-hoc revisions of strategy prompted by panic or overconfidence. An investment policy is an effective risk management tool provided it is understood, agreed with, and consistently followed. 

 

Contents of the IPS

1.   Account/Client Type and Identification
Introduction. Basic details of client described and recorded here. What kind of client is this, what are his overall needs, objectives, goals. Special circumstances etc. All client specific.

2.   Account Purpose and Background
General statement of purpose and background of client and portfolio. What is the purpose of the account(s), special needs etc. All account specific. Including:
 - Account type
 - Reference Currency 

3.   Portfolio Objectives and Constraints
  3.1.   Return Expectations
  3.2.   Risk Tolerance
  3.3.   Constraints
  3.4.   Other Factors 

4.   Investment Policy Guidelines
The core of the mandate. Covering;
 - Strategic asset allocation
 - Re-balancing
 - Income distribution

5.   Investment Guidelines
What kind of investments are covered by the mandate. What is included, what is expressly excluded. Types of investments to be expressly mentioned. 

6.   Investment Manager/Adviser Selection Guidelines
Envisage will where desired and appropriate delegate Asset Management functions to dedicated Asset Managers. Often when a particular strategy or targeted investments in particular sectors is desired. This will always be in line with the overall strategy outlined in the IPS. There are set criteria for third party money managers.  

7.   Risk Monitoring and Performance Measurement Guidelines
A detailed description of account/mandate monitoring and reporting.
  7.1.  Investment Reporting

 

For an example IPS outline with more detail, click here.