Hero Banner
If the prospect of creating or updating an Investment Policy Statement (IPS) to guide investment decisions for your nonprofit organization feels like an unwelcome chore, it may be time to re-adjust your view.

Although developing an IPS does involve multiple expert inputs and several iterations of its content, there are some rewarding side benefits for your effort as well. Among them:

  • The opportunity to take a fresh look at your organization’s seasonal cash flows and cash management.
  • A chance to clarify your organization's spending, saving, and investing objectives.
  • A reason to reassess your investment strategy to make sure it lines up with your organization’s core values, particularly when it comes to Sustainable and Responsible Investing

A quick review of the elements of an effective IPS

Most investment professionals agree that there are 11 essential elements to include in an effective Investment Policy Statement (IPS). They are:

  • Purpose and Scope
  • Definition of Duties
  • Investment Objectives
  • Liquidity and Spending Requirements
  • Strategic and Tactical Asset Allocation
  • Permissible Investments, Risk Control and Prohibited Investments
  • Sustainable and Responsible Investment Guidelines
  • Performance Measurement and Rebalancing
  • Communications, Review, and Evaluation
  • Fiduciary Duty and Conflict of Interest
  • Adoption of the IPS

To complete each of these elements requires some time and energy, of course. But the exercise can also yield significant financial improvements for your organization. Here’s a quick review of three of the key benefits that come from pursuing your IPS development.

1. The opportunity to take a fresh look at your seasonal cash flows and cash management  

Creating your IPS means looking at your liquidity and spending requirements, which gives your organization the opportunity to re-evaluate how you manage your cash flows. Typically, for non-profits those flows are seasonal, with the bulk of donations/receipts coming in once or twice a year. Because expenditures may be level throughout the year, that means there will be times when your cash dips down close to (or below) zero.

Does that mean that you need a reserve fund to cover these periodic deficits throughout the year? If so, how much should go into each of those two buckets: cash and reserves? You also might consider having have two separate investment policy statements, one for each bucket.

2.  A chance to clarify your organization’s spending, saving, and investing objectives

Spending/Saving

It’s important to have both a spending policy and a savings policy written into the investment policy statement. They go hand in hand.

It's also important to understand how you came about acquiring your savings so you know how sustainable it may be. Is this an accumulation of surpluses or is it a lump sum from a large gift or the sale of a building?

That was the case recently when we worked with the executives at a local Chamber of Commerce who had sold their headquarters and were moving into rented facilities.

As we began to create their investment policy statement, we learned that they were uncertain about how to invest the money from the sale of their old building. Because they would now be paying rent, they knew that they would need enough to cover that expense. But they also wanted to give the rest of the money the potential to grow.

Our solution was to recommend a permanent fund with a spending policy for annual expenditures tied to a percentage of the average market value of the investments over the trailing 12 quarters. Having guidelines for how much would be spent each year made it much clearer for developing appropriate asset allocation targets as well as for specifying the types of investments that would make sense within each asset class. With these fundamentals in place, we were also able specify additional criteria that best exemplified the makeup of the Chamber’s membership.

Investing

Just as developing your IPS involves examining and documenting how you intend to manage your spending and saving, preparing an IPS requires that you take a closer look at your investments. That is: Why are you investing in the first place and what your plans are for that money?

It's really a matter of what you are trying to accomplish. Instead of thinking in terms of the “investment objective” just consider what you want to use the money for. For example:

  • Are you going to be using your profits, or more than your profits, to subsidize your annual budget?
  • What are your short- and long-term plans for the money you’ll be investing?

If you have a longer-term need, you want to have more of your reserve fund invested in stocks. However, if you're going to be constructing a new building and using your entire reserve fund within five years, you don't want to have too much exposure to stocks. You want to make sure that the money is actually there when it's time to pay the contractor’s bills.

What if you are finally ready to move out of more conservative investments and into stocks?

A surprisingly large number of smaller charitable organizations still have surplus cash sitting in CDs and treasury bills and similar short-term investments because they've been somewhat reluctant to invest too heavily in the stock market. Now that the stock market has done so well over the past decade, they are gradually converting their CDs and treasury bills into a portfolio of marketable securities, stocks, and bonds. This change in strategy should be reflected in their IPS as well.  

It’s also extremely important to have an investment committee appointed by the board. It could be a separate committee—or the finance committee and the investment committee could be one and the same.

Either way, the committee must understand the basics of investing. They need not be experts, but they do need to understand the markets and the nuts and bolts of their investment options. They also need to be able to come to a consensus about what the investment policy should be. 

In addition, we encourage our clients to revisit their IPS every year just to make sure that the investment strategy still reflects what’s going on within the organization as well as what's happening in the larger financial world.

3.  A reason to reassess your investment strategy to make sure it lines up with your organization’s core values

Increasingly, we’re finding that interest in sustainable and responsible investing by nonprofit organizations has grown—and we don't see that slowing down any time soon. Studies show that investment disciplines that consider environmental, social, and governance (ESG) factors can generate competitive returns.

That’s why we believe that defining your organization’s sustainable and responsible investment strategy should be a part of your IPS development. For example:

  • Do you want to reflect your organization’s values in your investments, too?
  • Will your Sustainable Investing efforts be based strictly on environmental concerns or are there social and corporate governance concerns to consider as well?
  • Will you be looking at representation by women and minorities in the C-Suite and on the board when making decisions about investing in a particular company?

When we meet with an organization to talk about including an SRI strategy in their investment policy statements, they typically understand the environmental aspects. But we also urge them to think about responsible corporate governance as well. That is, looking at representation in the C-Suite and the boards of the companies in which they might be investing. This has become increasingly important for non-profit groups, who historically have had a higher percentage of women and minorities serving on their own boards as well.

What are your next steps?

While this quick review of the some of the benefits you may gain from creating—or re-creating—your organization’s Investment Policy Statement is by no means exhaustive, it can give you a sense of how invaluable the exercise can be in helping you refine your non-profits’ spending, saving and investment strategies. It can also help your board and investment committee members develop a shared vision of how the organization can achieve its mission in a financially viable way.

Contact us to learn more about how Cambridge Trust can help you develop and implement an IPS that meets your organization’s needs.

This article is for informational purposes only and should not be construed as investment or legal advice.