Good Governance - Your IPS

The Role of Good Governance and an Investment Policy Statement

Investing is not just about picking stocks or funds—it requires a structured approach to ensure that assets are managed effectively and aligned with your appropriate timeline. Whether you are an individual, a corporation, foundation or endowment, governance is a foundational building block in building a successful investment program. Without strong governance and operational framework, individuals and committees can be tossed around by market volatility, various stakeholders, policy changes, vested interests, or emotional and cognitive biases. In recognizing this, your investment program should begin with establishing a robust, well-thought governance framework to guide you through full market cycles, turnover and changes in life and markets. One of the most critical tools in this process is the Investment Policy Statement (IPS). An IPS provides a clear framework for managing an investment portfolio, ensuring consistency, accountability, and alignment with financial goals. It should capture your views, but it should also be an evergreen document - reviewed annually but only updated with significant market changes or large changes in capital need expectations.

What is an Investment Policy Statement (IPS)?

An Investment Policy Statement is a document that outlines the guidelines for managing an investment portfolio. It serves as a roadmap that directs how investments should be selected, monitored, and adjusted over time. The IPS is particularly important for institutional investors, foundations, endowments, and high-net-worth individuals, as it establishes discipline and structure in investment decisions. It should be specific enough to articulate objectives and constraints on the investment portfolio, but it should be broad enough for pragmatic implementation across dynamic markets.

Key Roles of an IPS

1. Establishing Investment Objectives

The IPS defines the primary goals of the investment portfolio. For example, a private foundation may aim to preserve capital while ensuring long-term growth to fund charitable grants. The IPS ensures that investments align with these objectives and guides decision-making accordingly.

2. Defining Risk Tolerance and Return Expectations

Investors must balance risk and reward based on their specific circumstances. The IPS provides guidelines on acceptable levels of volatility, expected returns, and the investment time horizon. For instance, a foundation seeking CPI + 5% annual returns will structure its portfolio differently from an investor looking for preservation. This will require more risk, but how much can the portfolio tolerate? The answer to that question should be defined by the IPS. For institutions, we generally recommend including both a relative volatility measure (versus peers) and an absolute risk measure (overall volatility less than x%).

3. Assigning Responsibilities

The IPS clarifies the roles of various parties involved in managing the portfolio, including the Board of Directors, Investment Committee, staff, investment consultants, and custodians. Each entity has specific responsibilities, ensuring that governance and oversight are in place. This is a critical decision to make. Is your committee a policy committee or operating committee? Does your committee want to be responsible for investment selection, or do they want to be responsible for manager adherence to the IPS? This should be addressed in your IPS.

4. Asset Allocation Strategy

Asset allocation is one of the most crucial factors in investment success. The IPS sets target allocations for asset classes such as equities, fixed income, real assets, and alternative investments. It ultimately is the determination of how much market risk you intend to bear and what exposure to various macro-economic factors you would like to achieve. It also includes rebalancing guidelines to ensure the portfolio remains within strategic targets, avoiding excessive risk or drift from long-term objectives. We recommend developing target weights for your asset allocation as well as upper and lower bounds of those weights - this allows for normal market volatility to occur without mandating excessive portfolio turnover.

5. Liquidity and Spending Policies

For institutional investors and foundations, liquidity is critical to meet operational needs, grant-making obligations, and rebalancing requirements. An IPS outlines liquidity requirements, ensuring that a percentage of assets remain in readily available investments while allowing for exposure to illiquid but potentially higher-return assets.

6. Investment Selection and Due Diligence

An IPS provides criteria for selecting investments and managers, ensuring transparency and diligence. It may require investments to be diversified across sectors, geographies, and asset types to mitigate risk. Additionally, the IPS often specifies ongoing monitoring and performance benchmarks to assess investment managers.

7. Compliance and Ethical Considerations

Many investors and foundations prioritize ethical investing through Environmental, Social, and Governance (ESG) considerations. The IPS may include policies that favor investments aligning with the organization’s values while ensuring compliance with regulatory frameworks such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

Why is an IPS Important?

1. Provides Clarity and Consistency – Ensures that investment decisions are based on an agreed framework rather than short-term market fluctuations or emotional biases.

2. Facilitates Accountability – Establishes benchmarks for evaluating investment performance and manager effectiveness.

3. Improves Risk Management – Clearly defines acceptable risks and strategies for mitigating them.

4. Enhances Governance and Fiduciary Duty – Ensures compliance with legal and ethical obligations, protecting stakeholders' interests.

Final Thoughts

An IPS is more than just a document—it is a living strategy that guides investment decision-making and governance. Whether for an institution, foundation, or individual investor, having a well-crafted IPS ensures that investments remain aligned with objectives, risks are appropriately managed, and performance is consistently evaluated. A strong IPS is not a luxury; it is a necessity for sound investment management.

Kings Path specializes in expert governance and strategic investment program development, ensuring disciplined, transparent, and results-driven portfolio management. If you have more questions about how to implement a robust governance program inside your portfolio, please reach out to us.