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Investment - Investment Policy Statements
It is good practice to record information about the client and the client’s needs in an investment policy statement (IPS). An IPS, for both individual and institutional investors, acts as a guide for the investor and investment manager or adviser regarding what is required of and acceptable in the investment portfolio. An IPS also forms the basis for establishing what constitutes success in managing the portfolio.
The IPS should incorporate the investor’s objectives and any limits that will apply to the portfolio. The investor and manager/adviser should agree on the IPS and evaluate it on a regular basis, often once a year. It should also be revisited when the client encounters a change in circumstances. Creating and revising an IPS is a wonderful opportunity for the investment manager and client to discuss the client’s goals.
A common format for an IPS is to split it into sections covering objectives and restrictions. Each section has its own subsections. The IPS identifies the investor’s conditions and ambitions within the categories of needs and differences described in this course.
Objectives
Return requirement
Risk tolerance
Constraints
Time horizon Liquidity
Regulatory restrictions
Taxes
Unique conditions
A standard IPS comprises objectives and restrictions, but many investors, especially institutional investors, may additionally include procedural and governance issues in the IPS.
The IPS may spell out the role of an investment committee along with its organization and its jurisdiction. It may also lay out the functions of investment managers along with the grounds on which they will be appointed and the criteria on which they will be assessed.
An important aspect of the IPS is to give information that is valuable in determining the types and amounts of assets in which to invest and the way the portfolio will be managed over time.
So, the IPS serves as the basis for developing the optimal portfolio strategies and asset allocations.
Institutional Investors and the Investment Policy Statement
Most institutional investors design and employ a thorough IPS. These statements specify several of the following points:
The overall aims (including return objectives) of the investment strategy and its relevance to the mission of the institution
The risk tolerance of the organisation and its capability for carrying risk
All economic and operational constraints, such as tax concerns, legal and regulatory circumstances, and any other particular requirements
The time horizon over which funds are to be invested
The relative importance of capital preservation and capital growth
The asset types in which the institution is allowed to invest
A target asset allocation that states what proportion of the investment funds will be invested in each asset class
Whether leverage (use of debt) or short positions are authorized
How actively the institution will trade
How investment decisions will be made
The benchmarks against which the institution will measure total investment returns
After the IPS is prepared and required points addressed, the board of the institution or its senior leadership formally accepts the investment and payout policies.
The investment leaders then select whether to handle investments in-house or to contract with one or more investment managers.
Institutional investors that handle their investments in-house hire a team of investment specialists to manage their investments.
Institutional investors who hire outside investment managers may use one manager to oversee all investments or numerous managers. Institutional investors generally use numerous managers to lessen the risk of considerable loss as a result of poor performance by any one manager. Many institutional investors utilize distinct managers for each asset class in which they invest.
By engaging managers who specialise in particular asset classes, the institutional investors receive investment experience and access to investments that a generalist might not have.
It is good practice to record information about the client and the client’s needs in an investment policy statement (IPS). An IPS, for both individual and institutional investors, acts as a guide for the investor and investment manager or adviser regarding what is required of and acceptable in the investment portfolio. An IPS also forms the basis for establishing what constitutes success in managing the portfolio.
The IPS should incorporate the investor’s objectives and any limits that will apply to the portfolio. The investor and manager/adviser should agree on the IPS and evaluate it on a regular basis, often once a year. It should also be revisited when the client encounters a change in circumstances. Creating and revising an IPS is a wonderful opportunity for the investment manager and client to discuss the client’s goals.
A common format for an IPS is to split it into sections covering objectives and restrictions. Each section has its own subsections. The IPS identifies the investor’s conditions and ambitions within the categories of needs and differences described in this course.
Objectives
Return requirement
Risk tolerance
Constraints
Time horizon Liquidity
Regulatory restrictions
Taxes
Unique conditions
A standard IPS comprises objectives and restrictions, but many investors, especially institutional investors, may additionally include procedural and governance issues in the IPS.
The IPS may spell out the role of an investment committee along with its organization and its jurisdiction. It may also lay out the functions of investment managers along with the grounds on which they will be appointed and the criteria on which they will be assessed.
An important aspect of the IPS is to give information that is valuable in determining the types and amounts of assets in which to invest and the way the portfolio will be managed over time.
So, the IPS serves as the basis for developing the optimal portfolio strategies and asset allocations.
Institutional Investors and the Investment Policy Statement
Most institutional investors design and employ a thorough IPS. These statements specify several of the following points:
The overall aims (including return objectives) of the investment strategy and its relevance to the mission of the institution
The risk tolerance of the organisation and its capability for carrying risk
All economic and operational constraints, such as tax concerns, legal and regulatory circumstances, and any other particular requirements
The time horizon over which funds are to be invested
The relative importance of capital preservation and capital growth
The asset types in which the institution is allowed to invest
A target asset allocation that states what proportion of the investment funds will be invested in each asset class
Whether leverage (use of debt) or short positions are authorized
How actively the institution will trade
How investment decisions will be made
The benchmarks against which the institution will measure total investment returns
After the IPS is prepared and required points addressed, the board of the institution or its senior leadership formally accepts the investment and payout policies.
The investment leaders then select whether to handle investments in-house or to contract with one or more investment managers.
Institutional investors that handle their investments in-house hire a team of investment specialists to manage their investments.
Institutional investors who hire outside investment managers may use one manager to oversee all investments or numerous managers. Institutional investors generally use numerous managers to lessen the risk of considerable loss as a result of poor performance by any one manager. Many institutional investors utilize distinct managers for each asset class in which they invest.
By engaging managers who specialise in particular asset classes, the institutional investors receive investment experience and access to investments that a generalist might not have.
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