A well-crafted investment policy is crucial for nonprofit organizations to manage their assets effectively and fulfill their missions. Nonprofits hold and invest assets in trust and have a fiduciary duty to spend endowment funds appropriately. A thoughtful investment policy provides guidelines on asset allocation, risk management, investment objectives, and appropriate investments. This article will explore the key components nonprofit organizations must include when developing an investment policy.
Importance of Stating Organization’s Mission and Purpose in Investment Policy
The investment policy should begin by stating the organization’s mission, purpose and time horizon for its assets. This establishes the framework for all investment decisions and guides the policies around risk, return objectives and asset allocation. For instance, an advocacy non-profit may have a shorter time horizon and lower risk appetite than a foundation aiming to exist in perpetuity. The investment policy sets the stage for outlining appropriate investments.
Guidelines on Asset Allocation and Portfolio Diversification
The investment policy should provide guidelines on asset allocation across different asset classes such as stocks, bonds, real estate, etc. This includes target allocations and acceptable ranges for each asset type. Well-diversified portfolios reduce volatility and risk. The investment policy also outlines expectations for diversification within each asset class, such as sector, market cap, geography limits on equity concentration.
Defined Risk Parameters and Return Objectives
The investment policy should state the organization’s risk tolerance and return objectives for the assets. Nonprofits with lower risk appetite may limit equity exposure, while endowments with perpetual time horizons may accept more volatility to achieve higher returns. The policy should define acceptable risk levels and target returns to preserve capital and generate sufficient income.
Guidelines on Permissible Investments
The investment policy provides guidance on allowable investments, asset classes and strategies aligned with objectives. This ensures portfolio managers invest responsibly on behalf of the organization. Certain nonprofits may prohibit investments contrary to their mission – such as tobacco, firearms or fossil fuels. The policy establishes criteria for selecting appropriate investments.
Requirements for Regular Portfolio Reviews and Rebalancing
The investment policy should require regular portfolio reviews to ensure assets are invested according to guidelines. Periodic rebalancing realigns allocations to target levels. Performance should be evaluated against appropriate benchmarks. Frequent monitoring enables adjustments if market conditions change materially. The policy outlines reporting requirements and responsibilities for investment oversight.
An effective nonprofit investment policy contains the organization’s mission, return objectives, risk tolerance, asset allocation, guidelines on permissible investments and requirements for reviews. This provides a framework for fiduciary investing and oversight.