A n Investment Policy Statement (IPS) is a document, generally agreed between the trustees and the investment manager to whom investment powers have been delegated, its purpose is to accurately record the agreement the two parties come to with regard to how funds are to be managed.

To assist both parties, the wording of c 29 Part IV 15 the Trustee Act 2000 leaves little room for interpretation as to its intent. Clear guidance is given to trustees and investment managers alike, as to how the trust’s investment objectives are to be documented:

‘15. – (1) The trustees may not authorise a person to exercise any of their asset management functions as their agent except by an agreement which is in or evidenced in writing.

(2) The trustees may not authorise a person to exercise any of their asset management functions as their agent unless –

(i) the policy statement, or

(ii) if the policy statement is revised or replaced under section 22, the revised or replacement policy statement.

(3) The trustees must formulate any guidance given in the policy statement with a view to ensuring that the functions will be exercised in the best interests of the trust.

(4) The policy statement must be in or evidenced in writing.

(5) The asset management functions of trustees are their functions relating to –

(a) the investment of assets subject to the trust,

(b) the acquisition of property which is to be subject to the trust, and

(c) managing property which is subject to the trust and disposing of, or creating or disposing of an interest in, such property.’

The existence of an IPS also assists the trust’s investment committee in establishing and recording its policies in order to assist in future decision making or to help maintain consistency of its policies by future committee members, equally, it helps to clarify the trustee’s expectations of prospective money managers who may be hired by the committee in the future.

Thus, the presence of an IPS helps to clearly communicate to all relevant parties, the procedures, investment philosophy, guidelines and constraints to be observed by the parties. It can be seen as a directive from the client to the investment manager as to how money is to be managed, but at the same time the IPS should provide guidelines for all investment decisions and set out responsibilities to be borne by each party. As a policy document, rather than an implementation directive, the IPS should provide guidance on how investment decisions will be made; it is not nor should it be seen as, a list of the specific instruments which may or may not be used within the portfolio.

Use of an IPS with investment clients is now considered best practice for investment managers and should be expected by clients hiring a professional investment manager.

• The presence of an IPS helps to create an environment of openness and transparency in the relationship between client and advisor
• The IPS offers clients a better understanding of what to expect from their advisor
• That clarity generally helps to build trust and respect and it helps ensure the investment manager is aware of the expectations of the client.

The IPS is intended as a comprehensive statement which incorporates all of the areas where the investment manager has responsibility to act and report. The following therefore represents an insight into the construction of an IPS and may assist trustees and practitioners in formulating investment policy and in giving unambiguous instructions.

This part of the document outlines the history behind the trust and gives a high level overview of the trust is may also go on to give general direction as to the application of income and capital.

The financial profile should include the last three years accounts as minimum, together with the most up to date interim (management accounts).

Investment managers will be looking to ensure that total income being generated is sufficient to meet normal outgoings, or if not, what the root cause of this might be.

Assets must be invested in accordance with the Trustee Act 2000 or Charities Act 2006 and the trust instrument. Whilst perhaps a statement of the obvious, clearly defining source statutory provisions protects both parties to the agreements.

With regard to the investment mandate, a statement of key investment principles can usually be given in short form, for example.

‘Where possible, investment managers will look to ensure that the value of the assets held are enhanced so as to at least keep pace with longer term inflationary trends.’

Or

‘Investment managers will look to ensure that the investment rate of return is x per cent greater than the XYZ benchmark over a three (or other defined period) year inflation adjusted average.’

Clearly, investments must be managed in such a way as to provide sufficient income to enable the entity to carry out its purposes effectively both in the short and long term.

5.1 Balance between capital growth and income requirements Trustees will need to consider what balance is to be maintained between the enhancement of capital and the generation of income.

5.2 Acceptable risk

Defining risk has been much written about and many and various techniques are used to articulate and recorded ‘acceptable risk’. Whatever measures are employed, they must be fully understood and agreed by both parties.

5.3 Functions delegated to the investment manager

Are investments to be managed on an ‘advisory’ or ‘discretionary’ basis or, as is the recent trend, on a ‘part advisory basis’.

5.4 Cash flow

Working capital will generally constitute up to x per cent of the charity’s assets, and reserves a further y per cent.

A proportion of the overall assets will generally be held by the trustees, although in this regard advice may be sought from time to time on cash deposits and short dated bonds. The remainder of the portfolio will be subject to the guidelines detailed in ‘investment parameters and exclusions’.

5.5 Investment parameters and exclusions

Bonds held in the portfolio should be of investment grade.

The trustees should be consulted in the event of the average yield on the portfolio falling below x per cent.

No investment at the time of its acquisition should exceed x per cent of the overall value of the portfolio, and those investments that account for more than y per cent of the total portfolio value combined should not exceed z per cent of the total funds under management.

5.6 Ethical restrictions

The trustees may wish to restrict investments held within the portfolio such that the portfolio should not include any investments in companies where more than say, 25 per cent of total turnover is accounted for by tobacco products.

Furthermore, trustees may wish to reserve the right to exclude investments whose presence may prove damaging, directly or indirectly, to the purposes or reputation of the trust.

The performance of the overall portfolio should be monitored against an agreed matrix, which may include a combination of absolute, relative and benchmarked returns. It should however be noted that performance benchmarking in and of itself is only one measure of the success of the relationship that the investment manager and the trustee are a part of and investment performance benchmarking should not be viewed in isolation.

Interest earned on cash deposit should be subject to a reasonable rate of return and whatever that rate may be, it should be recorded within the cash statement of the IPS. Generally, interest rates will be linked to a benchmark, Bank of England +0.5 per cent, for example.

The basis of remuneration together with the notice period for removal or renewal of the investment mandate should be included. It is also worth noting what view is to be taken on any third party payments, as these are often used to bolster investment managers’ income streams.

Evidence of the investment managers’ insurance cover should be provided to the trustees together with detailed explanations of any claims.

A contract note and detailed explanatory letter, the ‘Advice Note’, should be provided at the time that each transaction is undertaken. At the end of each reporting period a valuation and accompanying report should be provided encompassing the following.

10.1 A list of all investments held together with their respective book costs, current market value, and estimated income and yield

10.2 A performance analysis for the period covered providing the statistics necessary to comply with the performance requirements detailed in the investment policy statement

10.3 A transaction schedule detailing both purchases and sales (cash movements inclusive)

10.4 Details of any non-market transactions and rights issues, capitalisations or other corporate actions

10.5 A detailed review of the market environment for the period including specific comment on the individual holdings in the portfolio and any other economic considerations that are relevant.

The trustees should also require the nominated investment manager attend a face-to-face meetings at least every 12 months.

The investment policy statement will be subject to reviews as required by the trustees and any amendments should be agreed with the investment manager at the relevant review meeting.

In any event, the IPS should be reviewed at least every three years to ensure that it remains compatible with the trust objects and its requirements.

In addition to complying with the specific requirements detailed in the IPS the appointed investment manager must pay heed to the general power of investment embodied in relevant regulation and statutory provisions. All investments should be suitable and in combination, constitute a degree of diversification.

Used properly the IPS can simplify the life of both investment managers and trustees who have been given responsibility for investment. It is a powerful document, which, when drafted by both parties, clearly articulates process, procedure, benchmarking and reporting is an invaluable tool in setting specific objectives, measuring performance and managing client expectations.