Investment Policy Statement Construction

Core Concepts

Investment Policy Statement (IPS)

The IPS is the governing document for all investment decisions. It specifies objectives (return and risk), constraints, asset allocation ranges, rebalancing policy, benchmark selection, and review schedule. Every portfolio action should be traceable back to IPS provisions.

Return Objective

The required return is the rate that funds all future liabilities and goals.

• Required return: Solve for the discount rate that equates the present value of assets to the present value of future liabilities/spending needs.
• Spending rate (endowments/foundations): Typically set as a percentage of a rolling average of portfolio value (e.g., 5% of 3-year rolling average AUM). The required nominal return must cover spending + inflation + fees.
  • Required nominal return = spending rate + expected inflation + investment management fees

Risk Tolerance

Risk tolerance has two dimensions that must be assessed independently: