Imperial Column Investors’ Notebook

Preparing an investment policy statement

By Reuben Alberto

THIS week we take a look at one of the most crucial factors in portfolio management – the preparation of an investment polic

y statement.


Simply put, an investment policy statement can be defined as a guideline or plan relating to the way that a fund is to be managed. A fund without an investment policy statement can be compared to an aeroplane flying without a flight plan, which carries a high risk of being involved in an accident. A full package of an investment policy statement (IPS) comprises of a number of factors as shown below.

Components of an IPS

A well-structured in-vestment policy statement should include a purpose and background of the fund. This will clearly spell out things such as the objectives of the portfolio, its legal status and tax status. This information will be useful to the fund manager in issues relating to the paying out of benefits among others;

Statement of objectives – The IPS should clearly state the goals and objectives of the portfolio/fund. For example, in case of a pension fund management, the objective of investing the funds may be to minimise the current contributions in the next three years to a set level. Stating the objectives will help the fund manager in coming up with a portfolio that will try to match the objectives of the fund;

Guidelines and investment policy – It is under the IPS that operating boundaries are set for the portfolio in terms of the time horizon of investments, the risk appetite of the fund and the expected return among other things. It is under these guidelines that the IPS also spells out its required asset allocation mix as well as the regularity of portfolio rebalancing exercise;

Securities guidelines – This section defines the types of stocks/assets to be selected for the portfolio for example property, cash equivalents and international equities In case of any restrictions on such securities and positions, these should be clearly highlighted. For example, trustees of the fund may not be willing to take positions in some specified assets because of the nature of their risk;

Selection of asset managers – It’s expected that the issue of selecting fund managers is done according to some specified guidelines. The IPS will thus clearly spell out the selection criteria as well as the set performance benchmarks. Factors such as staff turnover and experience, fund managers’ adherence to style and philosophy and the fees being charged are all considered in the selection of fund managers; and

Control procedures – In order for the fund to meet its objectives, there is need to monitor the performance of the fund manager.

The IPS should thus indicate the control mechanisms that have been put in place, these will include periodic review of markets performance and a review of the performance of fund managers.

An investment policy statement that encompasses most if not all of the above factors and specifically designed for a targeted fund will result in the fund manager performing his duties in line with the wishes of the investor. This will mean there will be limited risk to the funds and more of value adding to the fund than anything else.

In the coming week we will dwell on the subject of stock selection in portfolio management.

Reuben Alberto is the general manager (investments) for Imperial Asset Management Company and can be reached on ralberto@imperialasset.co.zw.