Effective investment policies for a smoother ride

Investment markets have provided investors with many challenges during the past few years.

For many not-for-profits (NFPs), their capacity to both build and maintain a corpus of assets, to assist with the operation of the organisation, as well as to deliver to key stakeholders has been seriously tested. Further complicating the impact of the market volatility has been the increased pressure on many NFPs to compete for the fundraising dollar.

As a result, many NFPs have been forced to revisit their investment strategies and consider their financial plans to ensure the stability of their future in an increasingly competitive market.

A well-developed investment policy acts like an investment ‘road map’ for an organisation and remains critical to providing it with help to the value of its cash and investment reserves.

We have seen many different approaches during the decade that Macquarie Private Portfolio Management has been assisting NFPs to develop investment policies. Some commonalities exist between approaches that may maximise the probability of an organisation meeting its long-term investment objectives.

These include:

• Defining a suitable investment objective
• Correctly identifying your organisation’s liquidity requirements – i.e. the amount of liquid funds held to meet short-term requirements
• Recognising the potential impact from inflation on the asset base
• Stress-testing the sustainability of real income.

Importantly, the successful implementation of a long-term investment policy may not solely revolve around the design of the policy. Any policy – investment or otherwise – needs to be matched to a robust corporate governance platform to ensure that the policy is successfully executed.

A well-defined review and decision – making framework is critical. To determine how robust your governance framework is, the following questions might be worth considering:

• Do you have a well-defined review timetable for your investment policy?
• Does your organisation have a sub-committee of the board to focus on the organisation’s investments?
• Does your organisation have all the correct documents in place to delegate the investment decision-making to the chosen portfolio manager?
• Is there a structured review timetable to ensure that key issues are considered at each meeting in a rigorous manner?

While these questions may seem relatively obvious, it is not unheard of for an investment policy to be signed off by an organisation’s board and remain in place for many years without being reviewed. As organisations are typically evolving with changing cash flows, commitments, and office bearers, an investment policy should reflect contemporary issues.

Moreover, while by no means an exhaustive list, these questions highlight that no matter how well developed an investment policy may be, without a supportive structure it does not guarantee a positive outcome. Instead, it is the disciplined execution of the policy through a consistent approach and through structured governance that can offer the greatest success.

This combination is never more important than during periods of extreme market volatility, when an investment policy or ‘road map’ can help organisations to assess the impact of changing dynamics and to take action if required. It also helps organisations maintain a focus on their longer-term objectives.