Non-profit Investment Policy Statements are the key to long-term investment success and endowment sustainability. Including a formal spending policy, they provide a roadmap for effective stewardship of your organization’s investments and spending. Through the rest of this article, I’m going to explain what goes into a non-profit IPS, how to craft one that meets your specific needs, and I’m going to provide multiple sample Investment Policy Statements that you can use as templates.
According to a 2019 survey by Exponent Philanthropy, more than a quarter of its members, which are small foundations, operate without a formal written investment policy statement (IPS).
Frankly, I was surprised that the number wasn’t even higher. In my anecdotal experience, few nonprofits have formal Investment Policy Statements and those that do rarely revisit or update them. It’s understandable, as nonprofit boards members are busy, and it feels easy to put off what should be an annual IPS review. That said, not having an updated Investment Policy Statement can put your organization at risk.
The problem with not having an IPS and spending policy is two-fold.
First, a lack of long-term planning increases the probability that your endowment will face death by a thousand cuts. I’ve seen this many times, as nonprofits treat their endowment like an emergency fund. They dip into it hesitantly at first, then more and more often, until it eventually runs out. Having an IPS and formal spending policy will spell out the organization’s ability to withdraw funds from the account. It will also usually plan for a certain amount of liquidity, or withdrawals, each year. By having a set amount of withdrawals, an organization can then build that spending into their budget.
Second, having formal governance through an IPS protects both the organization and the individual board members. As organizations grow, will donors want to see formal oversight policies and governance. Particularly when you begin to receive larger planned gifts, donors will want to know that their gift will be used well. An IPS is an easy way to define oversight and governance responsibilities, one that can show donors an organization will be effective stewards of their gift.
Here are the reasons your organization needs an IPS:
Articulates and memorializes the fundamental objectives of your organization’s portfolio.
Establishes a framework for board members and investment professionals to follow consistently.
Provides guidelines to ensure that your organization’s investments align with both short-term and long-term goals and objectives.
Creates guidelines for periodic review and rebalancing of the investment portfolio.
Assists board members in fulfilling their fiduciary responsibilities, such as the “duty of care” provision of the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
Demonstrates to donors that their contributions are being managed prudently and responsibly.
Key Components of a Non-Profit IPS
Purpose Statement
Provides a concise description of the organization, mission, and how the portfolio will impact and support the mission. Make it short and sweet.
Investment Objectives
Describes organizational goals for the funds. Will it be used to provide annual spending or is it meant for long-term growth?
Capital preservation
Capital appreciation
Income generation
Spending Policy
When, for what reasons, and how much of the account can be spent in any given year.
Outlines annual distribution strategies
Describes when and why funds can be disbursed above regular annual spending
Can be a fixed annual amount, a percentage of account growth, only dividends and interest, or any number of other options
Risk Tolerance
Assess the risk tolerance of the non-profit based on liquidity needs, time horizon, appetite for volatility, and ability to take risks.
Time Horizon
Is this portfolio meant to last indefinitely or will it be used for a specific period?
Will the portfolio be used for a specific purpose, such as capital improvements to a building or something similar?
Asset Allocation Strategy
Importance of Diversification
Diversification serves to lower portfolio risk and volatility.
Types of Investments
Equities
Fixed Income
Alternative Investments
Cash and Short-Term Investments
Mission Driven / Impact Investments such as low-interest loans or other investment vehicles
Ethical and Social Considerations
Incorporating ESG Criteria
Environmental, Social, and Governance…also known as Socially Responsible Investing, offers a way of screening out investments that don't align with an organization's mission and values.
Aligning Investments with Mission
Screening out potentially conflicting investments like:
Tobacco
Weapons / Defense
Oil & Fossil Fuels
Pornography
Abortion
Alcohol / Cannabis
Gambling
Sample Asset Allocation Models
Conservative –45% Equities to 55% Bonds
Balanced – 50% Equities to 50% Bonds
Aggressive – 85% Equities to 15% Bonds
Developing a Rebalancing Policy
Triggers for Rebalancing
Deviation from target allocation – Rebalancing is triggered when an investment or asset class moves beyond a threshold, i.e. Nvidia is supposed to be 2% of the portfolio, but due to strong 2023/2024 growth, it’s now 10% of the portfolio. Such an imbalance should trigger a rebalance.
Time – Rebalancing is done on a regular basis, typically quarterly, semiannually, or annually. In this type of rebalancing, investments are rebalanced to the initial target at each rebalance.
Performance Monitoring and Review
Setting Benchmarks Without accurate benchmarking, an organization won’t know if they’re on the right track or not.
Appropriate Benchmarks:
Blended Benchmark of 70% Russell 1000 Index and 30% US Aggregate Bond Index
Inappropriate Benchmarks:
S&P 500 or the Nasdaq
Your portfolio is unlikely to be invested in all equities, thus it’s inappropriate to benchmark your returns to an all-equity index. Your benchmark should match the risk of your portfolio via its asset allocation.
Frequency of performance reviews
How often will the Investment Committee review the investment advisor and potentially put out Request for Proposals from other advisors?
Once a year is often, every two to three years is typical. An RFP is a good way to show proper governance and ensure that fees are reasonable based on the market.
Adjusting the IPS
The IPS should be flexible enough to not need updating based on economic or market projections. These decisions should likely be delegated to the nonprofit’s investment advisor, to be made using guidelines from the IPS.
The IPS should be adjusted if the organization’s goals change or if there is a necessary change in spending policy.
Roles and Responsibilities Including Delegation
Board of Directors
Strategic governance and oversight of the investment committee
Typically has final approval of non-profit Investment Policy Statements and spending policies
Investment Committee
Tactical control, including the hiring and firing of investment managers
Implementation and monitoring
External Investment Managers Most nonprofits define their investment goals via their IPS and then delegate the actual investment decisions to investment advisors. This is often the best practice, as most nonprofits don't have the capacity to manage investments on a daily basis. It's typically more effective for them to focus on their mission as opposed to investing.
Criteria for selection
Experience
Do they work with other nonprofits or are they a retail advisor who happens to know a board member?
A problem I see often is that advisors who manage funds for a single nonprofit tend to invest those funds in the same way they invest for an individual. They don't understand the nuances that stem from organizational cash flow and liquidity needs.
Education
Do they have the education and knowledge necessary to invest in an evidence-based manner?
Services
Will they only provide investment management?
Are they willing or able to help with planned giving or other fundraising activities?
If you're able to find an advisor able to act as both an outsourced Chief Investment Officer and work with development staff on fundraising, it can be a valuable combination.
Fees
Before hiring an advisor, make sure you understand all fees that they will be charging
Investment management should be relatively inexpensive, compared to typical financial planning and investment services.
Fees should be benchmarked via RFP process. Investment advisors should be under .75% on the high end of the scale, but lower than that is better. (We offer an Outsourced Chief Investment Officer service for .25% annually)
Fiduciary duty from the advisor is a necessity
Potential conflicts of interest should be examined
Sample Non-Profit Investment Policy Statement Downloads and Resources
There are some great resources out there for sample IPS. Some of my favorites can be found here and here.
Here are three Investment Policy Statement templates that you can use as references when creating a sample Investment Policy Statement for your non-profit.