Spokane Journal of Business

Investment policy statement acts as guide for nonprofits

Organizational principles help maintain discipline while managing portfolios

  • Print Article
Jim Coats is an executive vice president and portfolio manager for Ferguson Wellman Capital Management.

The Inland Northwest has a vibrant philanthropic community that includes numerous home-grown nonprofits as well as chapters of national organizations. A great example of the area’s generous nature is Innovia Foundation’s management of over 800 donor-advised funds created by individuals in a wide range of impact areas.

One of the best ways to protect these pillars of support to our communities is to help them preserve and grow their financial resources.

Although a nonprofit, by definition, endeavors to benefit a community with no intention of earning a profit, its investment committee members most certainly are seeking to earn a return on the nonprofit’s assets while assuming an appropriate amount of risk required to earn that return on investment. Each board member or trustee has a unique risk/return tolerance that can vary in nature from their personal assets and business activities.

An investment policy statement, also known as an IPS, is designed to guide the organization for the long term. It can be a challenge to keep an implicit bias or a recent headline about the economy out of the decision-making process during an investment committee meeting.

That’s where a solid understanding of a nonprofit’s IPS can provide guardrails and safety measures for a nonprofit’s portfolio.

When joining a board, an organization typically provides an orientation, coupled with a binder or link to documents to get members up to speed. Too often, the IPS isn’t a part of board training, but it can provide insight on the history of the organization, provide continuity, convey values or a philosophy, and save time.

Having an overarching understanding of an IPS is good stewardship for a new board member. New investment committee members benefit from a thorough annual review of the IPS to not only become familiar with it, but also to participate in the committee discussion around those reviews.

Here are some key areas for a nonprofit CFO or investment committee chair to address when leading an IPS review:

•Are the purpose and goals of the IPS clear to the committee? If not, what’s missing?

•Has the fiduciary role of the committee members and the discretionary role of the advisers been clearly defined?

•Are they still aligned with the nonprofit’s mission, long-term strategic plan, and any capital expenditures that have been identified?

•Does the time horizon for investments match the plans for program support and sustainability of the organization?

•Do the objectives still match the financial health of the organization?

•Has the organization’s tolerance for risk changed?

•Is the portfolio in-line with its asset-allocation targets?

•Are the asset class categories, or specific types of investments, appropriate for the organization and its portfolio?

•Are the benchmarks suitable for the investments deployed in the portfolio?

•Is the investment philosophy—active, passive, or a blend of the two investment styles—still serving the needs of the organization?

If the group reviewing the IPS chooses to make any changes, they can help future committee members by documenting those modifications and adding commentary as to why they were made and what they were attempting to address.

One of the most important areas to monitor and benchmark against other nonprofits is the distribution or withdrawal rate from the portfolio. Looking at the portfolio’s average market value over a specific time frame can help a nonprofit and its investment adviser determine an appropriate range to minimize spending the corpus, or principal. Some nonprofits may keep part of this fiduciary responsibility in a separate or stand-alone spending policy, rather than including it in the IPS.

It’s remarkable how circumstances can change for a nonprofit, including a sharp turn in the economy, an increased need for services, or simply the need for funding capital projects. An investment policy statement can create clarity and consistency through inevitable changes and disruptions. It not only keeps everyone on the same page but can also mitigate the amount of time spent debating issues that may already be addressed in the document.

An investment policy statement is most effective when it’s not buried in a file. Keep it on hand in every investment committee meeting to keep staff, board members, and investment advisers in sync.

  • Jim Coats

  • Follow RSS feed for Jim Coats

Read More

Sign up for our E-mail updates

including the
Morning Edition

Join our list