Interest rates, energy prices, unemployment rates and major U.S. market performance are some of the fundamental indicators about the health of our economy.
What has happened to investments the last 10 years?
The last ten years have been an interesting ride for all investors. It has now been a full decade since the horrific acts of terrorism in our country. During the period we have endured two recessions, a real estate collapse, and a financial market near meltdown.
Consider the S&P 500 which is often viewed as one of the best single guages of the US Large Cap equities market and represents approximately 75 percent of the value of all US stocks. It ended 2001 at 1148.08. Ten years later, at the close of 2011, it had risen to 1257.60 representing less than a 10% overall gain. However, the average annual return, including dividends, was 2.92%.
All of the other asset classes in our table of returns (except International Real Estate) had BETTER average annual returns over the same ten year time period. Therefore, creating a diversified portfolio that included a broader mix of fixed income, equity, domestic, international, and alternative asset classes would have likely resulted in better overall returns.
For example, a diversified portfolio consisting of 40% US Aggregate Bond, 20% S&P 500, 15% International Large Cap, 10% US Large Cap Value, 10% US Small Cap, and 5% US Real Estate had an average annual return of 5.20%. (NOTE: You cannot invest in an index. Past performance is not an guarantee of future returns).
Not all organizations have the same investment objectives so no single asset allocation model can be considered ideal. What is important is to take some time to clearly document your organization's investment objectives in an Investment Policy Statement. The future remains unpredictable, yet diversification has proven to be an appropriate course of action in the past.
Investment Policy Structure
A thorough Investment Policy Statement (IPS) is among the most important documents that a Board of Directors, as fiduciaries, should keep up-to-date. The IPS defines the investment objective, strategy, and process in sufficient detail to guide the actions of all parties, safeguard the organization's assets, and fulfill the statutory fiduciary obligations of the Board. The following is an example of the important sections that should be considered in an IPS.
- Contact Information: Provides basic information like name, address, telephone number, key contact, email address, etc. for the organization and key third parties (like investment advisors).
- Executive Summary: Quick reference for type of organization, fiduciary standard of care, tax-id, assets, investment pool name(s), time horizon, targeted rate-of-return, and strategic asset allocation tables.
- Purpose: Briefly describes the organization's background and states the overall purpose of the IPS (i.e., document a prudent investment process and affirm fiduciary duty of trustees) and the investment funds (donor intent, purpose, beneficiaries, spending/giving goals, etc.).
- Statement of Objectives: For organizations with multiple investment pools, this section may include a separate description for each pool describing important guidelines such as portfolio description, investment time horizon, risk tolerance, targeted rate-of-return, and spending goals.
- Restrictions on Use: Define as appropriate.
- Spending/Withdrawal Policy: Even if this policy is documented in a stand-alone document or as part of an operational plan, it should be restated in some form here for completeness.
- Portfolio Management Rules: This section defines the processes to be used for managing the portfolio after implementation. It addresses items such as how to support liquidity needs, how to handle new contributions, special needs, investment earnings, and establishing criteria for transfer of funds between portfolios. It may also addess extraordinary circumstances arising from extreme market volatility, such as how to adjust withdrawals in periods when the portfolio has negative returns.
- Asset Class Guidelines: Provides the written documentation to guide the investment process. It includes descriptions for allowable asset classes, restrictions on investments, asset allocation, asset selection, and rebalancing guidelines.
- Implementation Guidelines: Establishes the due diligence criteria for selecting each investment manager or fund within each approved asset class.
- Monitoring: Defines the performance objectives and benchmarks to be used to measure progress against those objectives. Also can establish the report types, required content, and frequency. It may also specify watch-list criteria for monitoring the ongoing suitability of investment holdings and details the process for regularly measuring and reviewing the various expenses of the investment program.
- Duties and Responsibilities: Clearly delineates the responsibilities of the organization's board, sub-committees and staff. Also defines the responsibilities of any third parties.
- IPS Review: Defines the schedule for periodic review of the IPS to ensure it accurately represents the organization's needs, goals, and investment process.
- Approval: Signatures of organizational leaders, effective dates, and revision history.
Some organizations may also choose to have the IPS reviewed by an attorney knowledgeable in this specific area of law. The final document will likely be 15 to 20 pages in length.
|
