Why is an Investment Policy Important?

August 30, 2011

Harold Rives, Finance Committee Chair

In June, our Vice President of Finance and Operations Carol Pollack blogged about our tips for selecting an external  Chief Investment Officer (CIO). In this post, we want to share with you the publication that we used to guide us in developing our new investment policy statement. Our new finance committee chair, Hal Rives, introduced the committee to “A Primer for Investment Trustees,” published by the Research Foundation of CFA Institute, so I spoke with him to find out more.

I read the chapter on Investment Policy before talking with Hal, and was surprised to find it so accessibly written. Even I, who do not have a background in finance, found it easy to understand.

Why did you suggest that the committee read this book? What could our grantees and other nonprofits get out of it?

It’s rare to find a really good primer for investment trustees that is this well-written and easily understandable. The authors expect Investment Trustees have had successful careers, but not necessarily in the investment field. We have a unique opportunity in that we’re starting with a new external CIO and we can rethink the key elements of our policy. Our finance committee is made up of highly competent individuals, but not all of them have been through the process of developing an investment policy from scratch and this book provides the framework for this thinking.

It is also a good tool for all board members as it outlines the key elements of strong investment fiduciary.  This will prove to be important as they review and approve the investment policy brought forth by the Finance Committee.

This brings us to the investment policy. This would seem to be the cornerstone for any group wanting to invest. Why is an investment policy so important?

The two most important aspects of investment oversight and management are:

  • Articulating and managing an investment policy;
  • Assessing investment performance.

The investment policy is a basic blueprint that describes how an organization will make its investments work to achieve its mission. The Primer outlines a process by which a group can create a policy that really makes sense for their organization.  With help from our consultant, we have been able to draft a policy that defines objectives for the portfolio, selects an asset allocation strategy, assesses our risk tolerance and develops a spending policy.  This will provide meaningful direction for day-to-day investment transactions.

What is your most important take-away from this book?

On page 27, there is a statement that is critical to all those with investment oversight — “Trustees sometimes fail to appreciate that adherence to the investment policy will produce its greatest benefits during periods of adverse market conditions.”   As human beings, we often need something like this to remind us that market downturns are not the time to panic. When the market fluctuates, we should reassess the tenets underlying the policy but NOT immediately throw it out.   Existence of a thoughtful policy can prevent trustees from doing the wrong thing at the wrong time.

Thank you to Hal for taking the time to talk to me about this book. We’re in the process of working with Cambridge Associates to finalize our investment policy. What suggestions or questions would you have for us here, at CT Health – about an investment policy, or what it takes to be a good financial fiduciary?

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