Why All Nonprofit Organizations Should Have An Investment Policy Statement
by Johanna A. Frighetto
Most nonprofit boards are now familiar with the Sarbanes-Oxley Act and its implications for nonprofit organizations. One way to maintain public trust is to have a well-written Investment Policy Statement (IPS). Nonprofit organizations with large portfolios already have an IPS in effect, but smaller organizations may not. The IPS serves as a guide for which investment goals and strategies of your organization are identified. A wellwritten IPS outlines a prudent investment process that demonstrates compliance with the defined practices. The IPS is a test of conduct rather than being performance driven. Organizations that had an IPS during the technology frenzy of the 1990s, for example, avoided large losses when that sector suffered a severe decline in the three-year bear market that followed.
Unless your organization has an IPS, it may become the unwitting victim of a variety of unwise practices and missteps such as:
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Conflicts of interest where there may be a high concentration of a particular security or sector;
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Misallocation of funds whereby the investment portfolio may be heavily over-weighted in equities and not enough in fixed income or cash equivalents;
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A shortfall in cash flow for which it would cause difficulty for your organization to meet its operating expenses;
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Failure to list socially responsible investing strategies or prohibited investments such as options, unlisted securities and unregistered securities;
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Failure to identify risk tolerance;
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Failure to monitor performance and to rebalance the portfolio when market conditions dictate;
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Failure to account for investment fees and expenses;
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Failure of the Board to identify members as either “independent” or “non-independent” directors;
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Failure to state a minimum total rate of return when measured against benchmarks such as the S&P 500 Index or the Dow Jones Industrial Average.
It is important to have clear and well-documented procedures. Once your organization develops and implements the IPS, reviews should be conducted annually to ensure that the IPS remains consistent with the goals and objectives of your organization.
Among the many benefits of having an IPS in place, one in particular may enable your organization to negotiate a lower insurance premium for Errors and Omissions coverage. Also, donors will feel more confident that their gifts will be properly invested.
An IPS compels your organization to be more disciplined in its decisionmaking, but should not be too restrictive as to affect the overall rate of return of your investment portfolio. There is no perfect IPS and before it is implemented, you should have legal counsel review it before it is approved.
What is written here is by no means all inclusive, but rather a brief summary of what might be considered best practices when your organization is considering developing an investment policy statement. If your organization has an investment portfolio, it should definitely have an investment policy statement.
Johanna A. Frighetto is a Vice President, Financial Advisor with JPMorgan Chase located at 1 Chase Manhattan Plaza, 33rd Floor, NY, NY 10081.
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