Do you have an investment policy statement?

Whenever I review an endowment for a seminary, I always ask permission to read the school’s investment policy statement. The ease — or difficulty — with which the board produces the document speaks volumes. Too often this critical tool, which helps ensure the long-term success of an endowment, either doesn’t exist or is tucked away in a file and forgotten. Sometimes only the seminary’s investment advisor has a copy.

Simply put, the investment policy statement is a formal document that the governing board adopts to establish the seminary’s investment policies. It indicates how the endowment will be managed and provides guidelines for board members as they execute their fiduciary responsibilities. Although most investment advisors will draft an investment policy statement for the seminary, every board needs an investment committee that helps create and monitor the document, working alongside the advisor to oversee the endowment. Unfortunately, that isn’t always the case. 

 

A recent Auburn Study asserts that “most boards still do not have sufficient expertise in the areas most important for their schools’ survival” (See bit.ly/governancethatworks, p. 4). And what is essential to a seminary’s survival? According to this same report, the most important goal is achieving financial stability. A healthy endowment is one key contributor to that stability.

 

For an investment committee to be effective, it’s not necessary that one of its members be a professional money manager, but its makeup should include people with enough experience to choose, monitor, and evaluate the investment manager it hires. Individuals who have successfully interacted with personal financial advisors or have a financial or legal background are likely recruits. There’s also something to be said for ensuring diverse points of view: Pessimists, optimists, cautious people, and risk-takers make for lively (and balanced) conversations! 

 

Regardless of the collective expertise of the committee, it’s the investment committee chair’s job to ensure that the committee regularly reviews the endowment portfolio, that members do their homework, and that constructive discussions occur. If the investment advisor is pushing the process, trying to set regular meetings, and otherwise attempting to keep the investment committee engaged, then you’ve got it backwards. Instead, the investment committee should set meetings, develop the agenda, and hold the investment advisor accountable for providing appropriate data, following asset allocation guidelines, and delivering sufficient performance under the market circumstances. 

 

Whether you are creating an investment policy statement from scratch or updating an existing one, make sure it contains these six components:

 

1. Definition of roles and responsibilities

The governing board is ultimately responsible for overseeing the endowment assets, but, as noted, it may delegate its authority to an investment committee. Other key players include an investment advisor and possibly the school’s chief financial officer, treasurer, or president. 

 

2. Outline of processes

This is the most underutilized section, but one that deserves attention because it can connect the seminary’s mission, principles, and expectations with the committee’s function. How often will the committee meet? Do all meetings begin with reflection, devotion, or prayer? What are the expectations of committee members’ behavior (like regular attendance and review of certain materials before the meetings convene)?

 

3. The portfolio’s objectives

Generally, the overall objective of an endowment is to provide sufficient financial resources to support the seminary’s mission and achieve its vision in perpetuity. After stating an overall objective, the investment policy statement should address specifics. Does the seminary simply want a return significantly greater than the rate of inflation? Or does it want to define performance goals in greater detail, such as stating a percentage goal? 

 

This section also should address risk. What risk metrics does the investment committee want to use to measure the appropriate amount of acceptable volatility? Will it rely solely on standard deviation, or will there be more sophisticated risk metrics? Risk metrics are generally less understood than return measurements, but a good investment advisor can teach the basics, which is helpful in arming the investment committee with the information it needs to assess this issue. 

 

4. Investment policies

A variety of questions need to be answered to fill out this section: 

  • What types of investments are permitted? If it is a relatively small and simple portfolio, the investment policy statement may want to limit investments to mutual funds and exchange traded funds. 

  • Are actively managed funds permissible or only passive index funds? 

  • Are individual stocks and bonds permissible? 

  • Will structured notes, options, or hedge funds be allowed? 

  • What is the overall allocation target for the portfolio, and what are the permissible maximum and minimum percentages for each investment type? For example, a target of 20 percent in large-cap U.S. stocks, with no less than 10 percent and no more than 30 percent. 

  • Will the seminary have an allocation in alternative assets?

  • Does the seminary want some sort of socially responsible investing policy in place? This may cause additional cost and make consistent performance more challenging to attain; but is it important enough to include? 

These decisions require give-and-take with the advisor, who can educate the board on investment vehicles that are not within the current knowledge base of the members of the investment committee. Here an old adage is applicable: Never invest in something you don’t understand.

 

5. Spending policy 

What will be the annual draw on the endowment for purposes such as scholarships or transfers to the seminary’s operating fund? This can be defined as a percentage, such as 5 percent. It often is set as a percentage of the total return for either the past year or the prior three or five years. Setting it as equal to a portion or all of the return for the prior year can lead to results where the distributions are volatile. This will make planning difficult.

 

The General Institutional Standards of the Association of Theological Schools warn that seminary budgets should only be balanced using a “prudent endowment spending rate” (see paragraph 8.2.1.3). Too many seminaries fall into the trap of letting their spending rate float higher and higher — to 6 percent, 7 percent, 8 percent, or more — in order to present a “balanced budget” for board approval.

 

6. Procedures for ongoing monitoring

How often will the investment advisor provide performance reports? What will the performance report contain? The investment advisor can provide as much data as you want, but beware of information overload. The investment committee should receive a consistent report that provides information that allows members to quickly assess whether the portfolio is appropriately allocated and performing in a manner in keeping with the current market conditions. How often will the investment advisor formally review the portfolio with the investment committee? 

 

An investment policy statement should be a dynamic document, and the investment committee should follow the advice of not letting the perfect get in the way of the good. Do not spend an inordinate amount of time with the document. Get a draft from another institution, or have the seminary’s investment advisor produce one. Edit it so it is appropriate for this particular endowment and it reflects the mission and vision of the seminary. Next: Adopt it.

 

Be diligent in not letting the investment policy statement end up in a dust bin. Have it available at every meeting so all attendees can refer to it. Require the investment advisor to proactively advise if the portfolio allocation ever falls out of compliance with the investment policy statement, and expect an explanation if this occurs. Require the investment advisor to seek an amendment to the investment policy statement if changes are desired, and do not depend on meeting minutes to memorialize the change. Grow accustomed to this document playing a pivotal role in every meeting.

 

When new members join the investment committee, provide them with your investment policy statement as a way to educate them on their responsibilities. If the board engages a new investment advisor, the investment policy statement can provide a seamless transition from one to the next.   

 


A policy statement isn’t optional

The General Institutional Standards of the Commission on Accrediting of the Association of Theological Schools require schools to have an investment policy statement and note that such statements should be reviewed regularly.

 

Endowments (including funds functioning as endowment) are frequently a major source of revenue for schools. A theological school (or the larger organization of which it is a part) should adopt a prudent endowment spending formula that contributes to the purpose of the institution while enhancing the stability of revenue for the school. A school shall demonstrate evidence of adequate plans to protect the long-term purchasing power of the endowment from erosion by inflation. The school (or university, diocese, order, or other larger organization of which it is a part) shall have formally adopted statements of investment policies and guidelines that set forth for trustees and investment managers the conditions governing the granting or withholding of investment discretion, investment goals of the institution, guidelines for long-term asset allocation, a description of authorized and prohibited transactions, and performance measurement criteria. Trustees should review these policies regularly.

 

— General Institutional Standard 8.2.1.4

 
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Article from: Summer 2017

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