Over the years, we have been asked to assist, craft, and consult with many nonprofit boards to help put an investment policy together for their entity. Boards naturally have a fiduciary duty to protect and grow the assets of the organization. While we would say there is no one-size-fits-all approach to developing these policies, there are a few things that all policies need to address to provide successful implementation and administration of an endowment or investment portfolio.

So, when crafting the portfolio policy, there are a few things that need to be addressed minimally. While the following topics are important, policies do not have to be overly prescriptive and burdensome to provide an adequate framework for boards, committees, management, and investment managers.

1. Define Purpose

• What is the purpose of the policy inside of the organization?
• What is the purpose of the funds being managed for investment?

Defining these two things adds clarity and direction.

• Are there multiple designations/uses for the funds, and are they broken into multiple pools?
• What are the timelines for the uses of each pool of assets?

This helps manage the risk partaken in each different pool.

The purpose can be multifaceted as separate pools of funds can be defined differently. For example, one fund may be for long-term sustainability, such as an endowment. Another pool can be designated to fund a specific project at a later date or ongoing projects that need to be funded annually.

2. Delegate Responsibilities

• Who has the ultimate oversight of the investments?
  • Is it the board of directors, an oversight committee, or an executive employed by the nonprofit?
• What is the reporting structure to the larger organization/board?
• Do you plan to employ an investment manager?
• Is the board managing the assets or are they delegating management to a professional money manager?

First, the board generally must “approve” the investment policy and provide a timeline for it to be re-approved or amended at specified intervals. If responsibilities are delegated to other members of an oversight committee, those terms and timelines need to be established. Also, authorized signers and representatives must be assigned.

• If an outside money manager is hired, what is the timing and cadence of their reporting structure?
• Can the fiduciary obligation the board has be delegated to the investment manager?
• What reporting should be done by the manager during the month, quarter, and year to provide for adequate monitoring by the board?

Many of these answers depend on the size of the asset pool managed and the structure of the organization. However, the timing and cadence of reporting expectations should be defined for all parties.

3. Investment Guidelines

Directions and/or parameters to the investment managers need to be given. In many instances, these directives may be broad base to give latitude to your investment managers. Depending on experience and some objectives, very prescriptive guidelines may be given to help mitigate risk.

Guidelines for the following items may be included:

• Time horizon of investments
• Liquidity requirements of those investments for use
• Risk tolerances and diversification mandates
• Prohibited investments (hedge funds, options, short-sales, commodities, etc.)
• Expected return goals or expectation
• Asset allocation objectives (percentage range given to managers to give them discretion)
• Types of vehicles allowed (stocks, ETFs, mutual funds, bonds, cash, etc.)
• Portfolio percentage ranges/thresholds for various asset classes
• Rebalancing parameters
• Benchmarking
• Where assets can be custodied by a third party
• Distribution guidelines or maximums

4. Approval and Review

Lastly, you should notate who prepared and approved the policy in its current form for continuity. Also, you should define who can amend and approve any subsequent changes or addendums going forward.

Providing a timeline on review and annual approvals should be defined and based on what is best for the organization. Remember that this is a guide for organizations, managers, and employees, which can result in ensuring flexibility and defining responsibilities for all!

If you have any questions, please contact us. You can also learn more about our Lutz Financial services.

IMPORTANT DISCLOSURE INFORMATION