FEBRUARY 2011

DEVELOPING A STRONG INVESTMENT POLICY STATEMENT

Stephen P. Carter, CPA - Partner, Assurance & Advisory Practice

Once your organization has clarified roles and responsibilities, your next step is to develop a well-written
investment policy statement (IPS) that outlines a financial strategy that will support the mission of your
nonprofit. An IPS defines the purpose, objectives and measures of success for your portfolio. It also sum-
marizes the portfolio’s investment strategy and outlines the process for evaluating investment managers.

A clearly articulated, realistic IPS is arguably the most effective way to define a portfolio’s purpose and
measure a committee’s success at fulfilling its goals. It also can help establish productive communications
and expectations with outside investment managers and other fiduciaries.
Finally, a well-crafted IPS can protect a Nonprofit from the emotional element that often inhibits a com-
mittee’s decision-making process. Nonprofits are too often tempted to follow the investment strategies
and practices of top-performing organizations. This approach is ill-advised in most cases, because larger
institutions may have expertise, staff and other resources beyond those of your nonprofit.

Investment policy statements should always address the following issues of importance to fulfilling a non-
profit’s mission:

INVESTMENT PURPOSE AND STRATEGY:

• Preservation
• Growth

PORTFOLIO CONSTRUCTION:

• Develop a strategy that meets your organization’s short and long-term goals
RISK MANAGEMENT:

• What is the risk tolerance?

• What are the expected or desired returns?

SPENDING POLICY:

• Have the ability to maintain current spending levels with the expected returns?
• Grow in size of its investments to keep pace with inflation?

MANAGER SELECTION

• Use outside consultants to hire and manage the investment managers

• Hire a manager directly

Here is a real-life example of how thoughtful leadership by a Board member helped his organization. The
following is Mr. Gene Sinclair’s personal experience:

“When the fiduciary responsibility of nonprofit board members is evaluated, it is not on the relative or
absolute investment performance of the funds in their care (or the dedication of the board members),
but on whether or not proper investment policy was created and adhered to.

When I joined the Investment Committee of a large local nonprofit, the structure of the periodic invest-
ment committee meetings needed to be rebuilt around the Investment Policy Statement (IPS), and the
IPS needed to be upgraded. Rather than focus on the existing manager’s 2008 losses in the endowment
fund, I encouraged the Committee to shift their focus to whether or not the manager was doing what
they were supposed to be doing, and whether or not that jibed with the IPS. That focus led us to replace
the long-time endowment equity manager with two more suitable managers and upgrade the IPS.

To replace the manager and establish a standard for all future managers to meet, we created a deliber-
ate, documented, logical process to use state-of-the-art financial industry analytics – and personal inter-
views of manager candidates – to find and monitor new managers that would “stick to their knitting” and
meet the requirements of the revised IPS.

By doing so, we dramatically improved the investment performance of the endowment and significantly
lowered the fiduciary risk of the board members.”

Gene Wade is a Principal and VP of Business Development in the Palo Alto, CA office of GW & Wade LLC,
a private wealth advisory firm. For more information, Mr. Sinclair can be reached at
gsinclair@gwwade.com or at 650.798.5088.

Jeff Holt - Los Angeles Lewis Sharpstone - Los Angeles

JHolt@singerlewak.com LSharpstone@singerlewak.com

Stephen P. Carter - Silicon Valley Rob Schlener - Orange County

SCarter@singerlewak.com RSchlener@singerlewak.com