Centuries ago, a wise person said, “Without vision, the people perish.” It is axiomatic that unless an individual—or an organization—has a vision for the future that is intentionally defined and clearly communicated, they are fated to wander into irrelevance, or worse.
Foundations, nonprofit agencies, and other organizations that are stewards of assets deployed for public benefit certainly owe it to their members, benefactors, and the public they serve to have a clear vision for the future. And defining that vision with a carefully considered investment policy may be one of the most important tasks they face.
What Is an Investment Policy Statement, and Why Do We Need One?
An investment policy statement (IPS) is, at its most basic, a founding document for your organization’s stewardship of financial resources. It functions as both a roadmap and a “prescription” for how you will manage, grow, and deploy your assets in pursuit of your mission. It describes in writing your institutional investing goals, risk tolerance, portfolio discipline, time frame, liquidity needs, and other special considerations. This document guides leadership as they manage investments consistently over time. Remember: executive, board, and committee composition changes over time; your IPS serves as the financial benchmark, both now and in the future. A well-crafted IPS that is systematically reviewed and updated is your organization’s best tool for ensuring fiduciary management and consistent governance over time.
What Makes a Good IPS?
To function properly, your investment policy statement should address several key areas:
1. Oversight and governance.
This section defines the responsibilities of executive leadership, staff, board officers, and members of any related committees such as finance or investment. It also covers what is expected of external advisors the organization may employ or consult. Finally, it should establish guidelines and timeframes for regular review of the document, including requirements and procedures for enacting changes or revisions.
2. Asset allocation strategy.
The IPS should stipulate what types of assets may be held and in what ratios. It should indicate target ranges and procedures for rebalancing, and all these stipulations should reflect the organization’s risk tolerance. These provisions should be aimed at maintaining a disciplined institutional approach rather than a reactionary stance.
3. Investment objectives.
This section should communicate performance targets or benchmarks, risk tolerance levels, timeline horizons, liquidity needs, and any special requirements. Permitted and prohibited investment types should be clearly indicated.
4. Monitoring, Assessment, and Risk Management.
This section should specify acceptable benchmarks for performance and procedures for measuring and managing risk as well as reviewing results.
Your IPS Should Support Your Mission
Because each organization is different, each IPS should be tailored to the specific needs of the organization. For example, if your foundation is focused on social justice issues, your IPS may need to dictate conformance to environmental, social, and governance (ESG) best practices when choosing investments. If your focus is on short-term granting, your IPS may emphasize liquidity. If you have a significant endowment, your organization may be well advised to consider longer-term vehicles that can deliver sustaining growth over time.
Keeping Your IPS Current
Because every organization experiences change—in people, project emphasis, economics, and other areas—you should not view your IPS as “carved in stone.” Various circumstances may dictate a careful review: receipt of a major gift, a change in executive leadership, regulatory changes, adoption of a revised operations model, and others. But careful attention to alignment with the organization’s established goals, along with attention to the principles outlined above, can help you ensure that your IPS is a “living document,” capable of evolving and adapting along with the changing needs of your organization.
At GEM Asset Management, we hold a deep appreciation for the many ways that nonprofit organizations and foundations benefit our community and society as a whole. To learn more about how we serve groups like yours, please visit our website.
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