A well-crafted investment policy statement is crucial for nonprofit organizations to effectively manage their investment portfolios. This document clearly defines the investment objectives, risk tolerance, asset allocation, spending policy, and monitoring procedures. When formulating an investment policy statement, nonprofits need to consider several key elements such as purpose of funds, time horizon, legal requirements, and responsible investing. The statement should also outline the duties and responsibilities of all parties involved. With thoughtful planning and practical guidelines, nonprofits can develop a customized policy statement to align investments with their charitable mission and long-term financial goals.
Articulate the purpose of assets and return objectives
The investment policy statement should state the purpose of the invested assets, which is tied to the nonprofit’s charitable mission and financial needs. For example, an endowment to support future programs requires different investments than short-term operating reserves. The return objectives should also be clearly defined to preserve principal, generate income, achieve growth, match spending, or a combination. Benchmarking with specific indices helps evaluate performance.
Specify risk tolerance and time horizon
A nonprofit’s willingness and ability to accept risk, as well as its investment time horizon, must guide asset allocation. More risk may be warranted for long-term goals versus near-term expenditures. The policy should reflect the appropriate risk level and state constraints that limit higher-risk assets.
Include spending and rebalancing policies
The spending policy dictates the amount and frequency of distributions from the investment portfolio to support operations and programs. Having a spending policy helps balance current income versus future growth. The rebalancing policy maintains target asset allocation by detailing when and how to periodically adjust the portfolio.
Define roles and responsibilities
The investment policy statement should delineate the duties of all parties involved, including the board, investment/finance committee, staff, consultants, investment managers, custodians, and any others. Their respective responsibilities regarding governance, execution, and monitoring need to be clearly articulated.
Outline monitoring procedures
Ongoing monitoring ensures the investment portfolio adheres to the policy statement’s objectives, guidelines, and requirements. The monitoring process, reporting frequency, benchmarking metrics, and conditions that may trigger review should be established.
An effective investment policy statement is essential for nonprofit organizations to manage investments prudently and strategically. The statement should be robust yet flexible enough to guide investment decisions over time. With thoughtful planning around key elements like objectives, risk, allocation, responsibilities, and monitoring, nonprofits can craft a policy aligned with their mission.