When investment discussions begin, the conversation often starts in the wrong place.
Which fund should we invest in? Which stocks should we buy? What return can we expect? Should we increase our exposure to equities? These are important questions.
But for families, founders and institutions managing meaningful pools of capital, they should not be the first questions. Before deciding where capital should be invested, there should be clarity about why the capital exists, what it needs to accomplish, and how investment decisions should be made. That clarity is the role of an Investment Policy Statement, or IPS.
An IPS is more than an investment document. It is a framework for governing capital over time. Building one means understanding the capital, defining its purpose, establishing an appropriate investment framework, determining decision rights, selecting and overseeing implementation, monitoring risk and performance, and reviewing the strategy as circumstances change.
What does an Investment Policy Statement do?
An IPS sets out the principles and parameters within which investment decisions should be made. Depending on the circumstances, it typically addresses five areas.
1. Investment objectives
What is the capital intended to achieve? Is the priority capital preservation, income generation, long-term growth, or some combination of these? Objectives provide the starting point for the investment strategy.
2. Time horizon
Not all capital has the same investment horizon. Money required in twelve months should not necessarily be managed the same way as capital intended to remain invested for twenty years. An IPS makes those horizons explicit.
3. Liquidity requirements
A portfolio can look attractive on paper and still be inappropriate if the investor cannot access sufficient cash when it is needed. The IPS sets out liquidity requirements and helps distinguish between capital that must remain readily accessible and capital that can be invested for longer periods.
4. Risk parameters
The IPS addresses a central question: what investment risks are appropriate, given the purpose, obligations and circumstances of the capital? It provides a framework for considering and documenting those parameters.
5. Strategic asset allocation
Once objectives, horizons, liquidity and risk have been considered, the portfolio’s strategic allocation can be established. This gives a framework for how capital may be allocated across relevant asset classes, rather than making each investment decision in isolation.
Governance
Beyond these five areas, an IPS is also about governance, one of its most important aspects, and one that is sometimes overlooked. Investment management is not only about what is invested. It is also about who makes decisions, how those decisions are made, and how they are reviewed.
For family and institutional capital, several people are often involved: family members, trustees, directors, investment committees, external investment managers, professional advisers, custodians and other specialists. Without clarity around responsibilities, investment decisions can become fragmented. An IPS establishes decision-making responsibilities, governance structures, reporting requirements and review processes, so that everyone involved understands their role.
Keeping the policy current
An IPS should evolve as the capital and the circumstances around it change. A significant shift in family circumstances, business ownership, liquidity requirements, investment objectives, obligations, risk capacity, portfolio structure or governance arrangements may call for the policy to be reviewed.
In this sense, the IPS is not a one-time document. It becomes part of an ongoing investment governance process.
How Greenthos Capital approaches this
At Greenthos Capital, our investment advisory approach begins with understanding a client’s circumstances, objectives, investment philosophy and existing arrangements. Where appropriate, these findings are translated into an Investment Policy Statement that provides a framework for investment decision-making and ongoing oversight.
From there, the investment process can extend to asset allocation, investment selection, implementation, governance, reporting, risk management and periodic review. For families and institutions with more complex arrangements, the IPS can also serve as a basis for coordinating existing advisers and investment managers around a shared investment framework.
The questions that open most investment conversations, which fund, which stock, what return, are rarely the wrong questions. They are simply premature. An Investment Policy Statement makes sure they get asked in the right order.