SUMMARY
Seeking investment returns is crucial for many nonprofits. This calls for a robust investment policy statement setting out guiding principles for managing the assets in line with the organization's investment goals and objectives.
Over the years, nonprofit organizations have been instrumental in driving growth and progress.
Science, arts, literacy, healthcare and social welfare are just some of the areas where they have done vital work for the greater good.
As their name states, these organizations do not exist to distribute profits to owners or shareholders, but rather to invest the profits back into the organization for the ultimate benefit of the general public.
Nevertheless, advancing their mission relies on their financial health. This means that nonprofits must generate positive investment returns to protect and grow their resources, which can then finance their programs and operations.
Typically, the assumption is that a nonprofit will exist in perpetuity. This timeframe requires very long-term investment planning, but also striking a balance with short-term needs.
To go about this, every nonprofit should define elements such as its investment objectives, time horizon, liquidity needs and risk tolerance.
An investment policy statement (IPS) sets out the guiding principles for managing assets in line with the nonprofit’s goals and objectives.
The IPS can inform everyone involved with a nonprofit. These include its board, employees, investment advisors, risk managers, beneficiaries and donors.
Note, an IPS is an internal governance document approved by the board. As such, it is not a legally binding document with the nonprofit’s investment manager, custodian, bank provider, or other service provider. Separate agreements with such service providers will govern the relationship between the nonprofit and the service provider. It is incumbent upon the investment committee/board to ensure those separate agreements are consistent with the IPS.
Key points to include in an IPS
An IPS enshrines the guiding principles for asset management in line with the nonprofit’s investment goals and objectives.
For those with a fiduciary duty of care, this document provides the framework for helping them to manage the nonprofit’s assets effectively, manage risk and show that governance responsibilities are being met.
The IPS should provide transparency as to the philosophy and approach when it comes to investment management.
We believe the statement should be sufficiently specific to be meaningful, yet flexible enough to be practical.
Its key components may include:
- Administrative aspects: This section should touch on the nonprofit’s corporate structure, mission and regulatory compliance that may be fulfilled through the adoption of the statement.
It could define its scope (i.e., which assets the IPS will cover or exclude), purpose (i.e., what the statement would cover, all parties’ responsibilities and an understanding of the investment goals and objectives covered under the scope of the IPS), and delegation of authority (i.e., an outline of the responsibilities of each party to the investment management process).
- Investment portfolio construction and review: This section should cover asset allocation, portfolio risk management, investment benchmarks, costs and fees along with the nonprofit’s stance on alternative investments, liquid holding weightings and investments to be avoided given the nonprofit’s values and operating mission.
- Spending guidelines: This section may outline the rationale for a spending policy, providing a consistent, predetermined amount for prudent use of the nonprofit’s endowment. Not all nonprofit organizations have a spending policy.
The final section of the IPS – known as the investment policy review – may stipulate that the board will review the IPS annually, that any changes or policy amendments must be approved by the board, and make note of the date the approval was granted.
While there is much to consider when drafting or updating an IPS, the document should definitely reflect the nonprofit’s own culture.
This calls for a customized IPS that sets the governance and operational framework for the effective management of the endowment assets and investments.
Using the above guidance as a basis to draft an IPS may be an important first step for nonprofits embarking on an investment journey or provide a more structured and prudent approach to existing investment activity.
For further guidance on crafting your IPS, please read our latest white paper.
