As stewards of a nonprofit endowment, it's essential to have a well-crafted roadmap that steers investment decisions and helps staff and board members fulfill their fiduciary responsibilities. In today's ever-evolving financial landscape, organizations tasked with endowment management encounter many challenges, including unpredictable revenues, fluctuating market conditions, variable investment returns, diverse expectations for results, and ongoing risk uncertainties.  Members of the board of directors have a fiduciary obligation to act as stewards of the organization’s assets. An effectively articulated Investment Policy Statement (IPS) is the cornerstone in navigating these uncertainties while ensuring careful management of the organization's endowment investment program.

1. Clear Definition of Duties and Responsibilities

A well-structured IPS provides a comprehensive overview of the roles and responsibilities of various stakeholders involved in managing the endowment. This typically encompasses the board of directors, investment committee, investment manager, and custodian. By clearly delineating these responsibilities, the IPS establishes an accountability framework and fosters collaboration among key decision-makers.

For instance, the board of directors oversees the endowment's investment activities and ensures alignment with the organization's mission and objectives. Frequently, there is an investment oversight group, such as an investment committee,  with responsibilities delegated by the board for the day-to-day oversight of the investments. Tasks of the committee may include formulating investment policies, reviewing performance reports, and conducting periodic evaluations of investment strategies. The investment manager is responsible for executing investment decisions per the IPS, while the custodian safeguards the endowment's assets and ensures compliance with regulatory requirements.

2. Asset Allocation that Aligns with Objectives

An IPS should clearly state the investment objectives for the endowment concerning income, long-term return targets, and risk. These objectives should drive the endowment's asset allocation - the optimal mix of stocks, bonds, cash, and potentially alternative investments. In determining asset allocation,  it's essential to consider the unique characteristics of each asset class and their potential contributions to the endowment's overall risk-return profile. Consideration should be given to factors such as risk tolerance, time horizon, liquidity needs, and investment objectives. For instance, while equities may offer the potential for higher returns over the long term, they also carry greater volatility.

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On the other hand, fixed-income securities may provide stability and income but may lag in capital appreciation. A well-balanced asset allocation that diversifies across various asset classes can help mitigate risk and optimize returns over time. The IPS should also include guidelines around specific asset classes or investment types that may or may not be included in the portfolio.

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A well-written IPS is flexible enough to respond to changing marketing environments and assures changes can be made without a lengthy process. Defining target allocations and ranges for each asset class can help organizations achieve their objectives while providing flexibility.  Regularly monitoring and rebalancing the investment portfolio ensures it remains aligned with the organization's strategic objectives and risk appetite. This proactive approach to risk management enables nonprofits to safeguard the endowment's assets and preserve long-term financial stability.

3. Clearly Defined Spending Policy

The spending policy is a critical yet often overlooked component of the IPS for nonprofit endowments. It dictates the sustainable spending rate, the calculation methodology, and the implementation strategies to maintain stable cash flows, which become particularly critical during periods of market stress. Integrating a well-defined spending policy into the IPS reinforces prudent financial stewardship and ensures the investment strategy is aligned with the organization’s spending needs. Factors such as inflation, endowment size, and projected returns should be considered when formulating a spending policy. A balanced approach that strikes a harmony between preserving the endowment's purchasing power and supporting the organization's operational needs is essential. Moreover, periodic reviews and adjustments to the spending policy may be warranted to ensure its continued relevance and effectiveness in light of changing economic conditions.

4. Describe Implementation and Management:

Another crucial aspect of a successful investment policy for endowments is clearly articulating the implementation and management strategies. Primarily, the policy should state the general criteria for evaluating and selecting investment managers or investment strategies. This includes who is responsible for this decision-making and how potential managers will be chosen. Additionally, the policy must outline how the portfolio will be regularly rebalanced to adhere to strategic target allocations. This involves specifying the frequency of rebalancing, the methodology to be used (whether formulaic or discretionary), and the criteria for triggering rebalancing (such as deviation thresholds from target allocations). These components ensure that the endowment's investments are managed effectively, focusing on long-term stability and adherence to the endowment's overall objectives and risk tolerance.

5. The Importance of Assessment and Annual Review

The assessment and annual review process is vital to an effective investment policy for endowments, ensuring that the investment strategy remains aligned with the endowment's objectives and the evolving market conditions. The policy should describe the process for reviewing investment performance at periodic intervals, such as quarterly or semi-annually. This includes defining the appropriate benchmarks against which to evaluate the portfolio's performance and considering factors like asset class, investment style, and risk-adjusted returns. Such measures provide a clear frame of reference for assessing whether the investment strategy is achieving its intended goals. 

Moreover, the policy must affirm that the document undergoes a thorough review at least once yearly. This review process is crucial for making any necessary updates and adjustments in response to changes in the financial markets, the endowment’s financial needs, or other relevant factors. Ensuring these updates are effectively communicated to all stakeholders is essential for maintaining transparency and trust. Additionally, the IPS should be easily accessible to stakeholders, facilitating ongoing awareness and understanding of the endowment’s investment strategy and performance. This level of diligence and accessibility in the assessment and review process is vital to sustaining a robust and responsive investment policy.

Ready to embark on the journey of creating an Investment Policy Statement for your nonprofit's endowment?

Download our Sample Investment Policy Statement Checklist from our resource, "Elements of an Effective Investment Policy Statement," and take the first step towards enhancing your organization's financial stewardship and sustainability.