Do You Have An Investment Policy Statement?
You wouldn’t build a home without a blueprint. Why, then, do so many organizations make institutional investment choices without a formal investment policy statement (IPS)—a customized blueprint for navigating today’s complex investment environment?
An IPS outlines the realistic institutional investment goals that fiduciaries have for invested assets. It’s viewed as a business plan and considered the essential management tool for directing and communicating the activities of the portfolio. An investment policy statement also sets clear and enforceable performance standards for money managers, including mutual funds, and defines the relationship between fiduciary and client.
Academic studies have shown that over long-term time periods, market timing is responsible for less than 2 percent of the variance of investment returns; security selection is responsible for less than 5 percent; while the asset allocation policy (the desired mix of stocks and bonds) is responsible for almost 92 percent of the total return various. This is yet another reason why it’s critical to document the desired asset allocation policy and other guidelines for the portfolio in a written IPS.
Components of an IPS
Among other things, an IPS should include:
- Statement of purpose and background
- The investment decision-making process
- The intended diversification of assets with respect to specific risk/return objectives
- Procedures used to monitor the activities of all money managers and service providers and measure performance
- Criteria for fund removal
- The methods intended to control investment expenses and ensure the best price and execution of investment transactions
Developing the Investment Policy Statement
Because the IPS is such an important document, it should be prepared only by professional investment consulting experts who is well-versed in investment management, and is familiar with the laws governing these matters. Our institutional investment consulting team has been involved in hundreds of engagements and brings hands-on knowledge of the retirement plan investment advisory services industry. PMFA has the expertise to deliver customized institutional investment consulting services, investment policy statements and strategic solutions to companies and institutions so that they can stay abreast of fiduciary responsibilities and offer their staff a best-in-class retirement plan investment solution.
When was the last time you had an investment policy review?
