A family office investment policy statement is an important guiding document that outlines the investment philosophy, objectives, constraints, and procedures of a family office. It serves as a critical roadmap for investment decision-making. With the flourishing of family offices in recent years, having a customized investment policy statement tailored to the unique needs of the family has become increasingly crucial. This article will provide an example and analysis of key elements to include in a family office investment policy statement.
Mission statement reflecting family values and investment philosophy
The investment policy statement should start with an overview mission statement of the family office that encapsulates the family’s core values, investment philosophy, and objectives. This provides important context for guiding investment decisions. For instance, a mission statement may emphasize preservation of real purchasing power across generations, outlining a conservative approach focused on capital preservation and stable growth rather than aggressive speculation.
Return objectives, risk tolerance, and investment time horizon
The policy statement should clearly lay out return expectations, including target returns for the overall portfolio and particular asset classes. Risk tolerance also needs to be explicitly defined, such as maximum allowable volatility. Conservative family offices may prioritize capital preservation, while others seek higher returns and can endure more risk. The investment time horizon, such as 10 years or perpetuity, provides discipline for long-term compounding of returns.
Strategic asset allocation guidelines and rebalancing policy
Asset allocation across equities, fixed income, real assets, alternatives, and cash is a key determinant of portfolio returns and risk profile. The investment policy sets target allocations for major asset classes based on the family’s objectives and risk tolerance. Ranges for tactical deviations can be specified. Criteria and frequency for rebalancing should be outlined to maintain optimal allocations.
Due diligence process for hiring and reviewing investment managers
Rigorous due diligence on investment managers is crucial for a family office. Criteria for evaluating managers, such as performance benchmarks, investment philosophy, operations, and fees should be detailed. Protocols for ongoing monitoring and periodic formal review of managers also need to be established. Manager termination criteria based on violations of mandate or underperformance relative to benchmarks should be made clear.
Guidelines for sustainable and responsible investing
Leading family offices increasingly embrace sustainable investing aligned with family values. The investment policy can outline negative screens, ESG integration, thematic exposures, and impact investing. Areas like climate change, governance, and social responsibility may be emphasized. Both financial and non-financial objectives can be reflected in sustainable investing policies.
An effective family office investment policy statement lays out a clear roadmap encompassing philosophy, objectives, asset allocation, manager selection, sustainable investing, and rebalancing. It provides discipline and transparency for decision-making. However, it also needs periodic review and updating to reflect evolving family priorities. With these core elements, a policy statement can help successfully manage a family’s wealth across generations.