Maintaining and reviewing an Investment Policy Statement (IPS) is one of the core fiduciary duties for Not-for-Profit investment committee members. Too often, IPS’s are outdated, incomplete, or don’t reflect the purpose and goals of the organization or its funds. The good news? Little changes can make a big impact.

These are common mistakes that investment committees make when it comes to managing their organization’s investment portfolios.

Misaligned Investment Goals

Benchmarking investment performance using a specific return target can only offer limited reassurance that funds are performing as expected. Instead, investment goals and objectives may need to be reframed according to what they mean for the organization: time horizon, level of support, and what level of variability is acceptable. It’s helpful to refer back to Objectives and Constraints and Portfolio Parameters and consider revisiting how goals are defined.

Rebalance the Portfolio

Rebalancing is a key strategy to achieve long-term investment performance objectives. For example, portfolios may hold too much in fixed income, which can affect long-term growth prospects. Another common scenario is concentration risk: a donor pledges assets, like securities, which roll into the portfolio. In either case, the whole portfolio would need to be rebalanced. Or a portfolio may have a high withdrawal need but funds are weighted heavily toward stocks.

Care should be taken to avoid rebalancing as a market-timing exercise; instead, use a disciplined approach to meet target allocations.

Rigid Investment Rules

Because of the changing environment of investments, the Board and investment committee must remain flexible to respond to new or changing market conditions. Sometimes, Board rules can be too rigid and prevent quick, agile responses for investment oversight. A range of allowable allocations, for example, would better serve the IPS rather than specific targets.

Outdated Risk Policy

An outdated risk policy can negatively influence the entire investment portfolio. The IPS should clearly address level of acceptable risk, identify all risks involved, and which ones are most likely to happen and/or have the greatest impact. Traditional risk measures may include volatility, loss of principal, or donor opinions. It’s not an exact science, and investment committee members will need to rely on their knowledge, training, and experience as well as the organization’s goals and purpose to make the best possible decision about a risk policy.

Spending Policy

This is often a big challenge for many organizations, because a spending policy requires two concurrent priorities: maintain the current spending level and grow the investments. There are four frequently used spending policies to choose from: Spending amount according to inflation, annual spending based on portfolio value, fixed range spending, and a hybrid approach that blends spending as a percentage of inflation and the portfolio.

The first approach has been shown to be the most consistent over time whereas fixed range spending tends to suit organizations with longer time horizons better. Spending relative to inflation offered the best short-term spending stability but has the highest range of volatility.

Fee Management

Most organizations hire multiple fund managers or service providers, and it can become confusing to keep track of fees. Investment committees don’t always know what they’re paying for and may be paying too much relative to the portfolio objectives. For example, an IPS may target low expense investment options but have an actively managed bond portfolio with high fees.

On the other hand, some IPS’s may have rigid fee structures for specific investments. These types of requirements can hinder the flexibility of an organization as they evaluate portfolio allocations.

For more information about Not-for-Profit Investment Policy Statements and how to identify small changes that can increase investment performance, contact PBMares Partner Jonny Rosch, CPA or Brad Wilks, LACP, Wealth Advisor with PBMares Wealth Management.