A family office investment policy statement is a crucial document that outlines the investment goals, guidelines, and procedures for a family office. It clearly defines the investment objectives, risk tolerance, asset allocation, rebalancing policy, spending policy, and other aspects to align various stakeholders. An effective policy statement promotes sound decision-making and governance. This article provides key elements and sample statements of family office investment policy.
Investment Objectives and Risk Tolerance Levels Critical for family office Policy
The investment objectives section clearly states the return goals and risk tolerance levels for the family office assets. It may specify targeted returns over different time horizons like 5-10% over a 5-10 year period. The risk tolerance also needs to be explicitly stated, such as low, moderate or high risk appetite. Having clear objectives and risk parameters provides a framework for constructing optimal portfolios.
Strategic Asset Allocation Policy Drives family office Portfolio Construction
This section specifies the long-term asset allocation policy across various asset classes like equity, fixed income, real estate, private equity etc. It indicates the percentage targeted for each asset type to achieve the family’s return objectives within the defined risk tolerance. These serve as guardrails for investment managers to construct diversified multi-asset class portfolios.
Rebalancing Policy Maintains family office Asset Allocation Targets
As market values fluctuate over time, the asset allocation mix tends to drift from policy targets. Hence rebalancing policy restores the strategic asset allocation by specifying ranges for each asset class. This disciplined rebalancing forces selling asset classes that have outperformed to buy cheaper underperforming assets, thereby enhancing portfolio returns.
Spending Policy Guidelines Critical for family office Financial Planning
A spending policy indicates the amount of cash flows needed from the investment portfolio every year to fund operating expenses, new investments or philanthropic causes. This provides clear withdrawal rate guidelines to ensure portfolio sustainability over long investment horizons. Matching spending needs with portfolio returns is key.
An investment policy statement aligns family office stakeholders on long-term objectives and governance of assets. It guides investment decision-making to construct optimal portfolios with appropriate risk-return parameters. Reviewing and updating the policy periodically adapts to evolving needs.