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| Path: Main Street > Resources/Library > Research Articles > Feature Article |
Investment policies and practices
By David Michaels
May 5, 2008Over the last few months, we’ve looked at some specific ideas about how charities can invest funds, ranging from short-term techniques to long-term strategies, in relation to time horizons, asset classes and risk and return. Of equal importance are the guiding principles that charities must pay attention to regarding investing. A Statement of Policies and Procedures will guide the organization and provide the transparency that is required by various stakeholders, directors, staff and others.
Developing a Statement of Investment Policies and Practices (SIPP)
Your organization may already have or be party to a SIPP. For example, if you offer a defined contribution and/or defined benefit retirement plan, chances are there is a SIPP in existence and, if not, there certainly should be. In Ontario, for example, the regulations of the Pension Benefits Act stipulate that there must be a SIPP that meets federal requirements. If your organization offers a group registered retirement plan, it is best practice to have a SIPP (reference should be made to the Guidelines for Capital Accumulation Plans, May, 2004).While the nature of a SIPP for a retirement benefit plan is particular to that plan and often developed by, or in conjunction with, the plan sponsor, it is incumbent on organizations that offer those plans to be very conversant with that SIPP. This can be a very useful starting point when crafting a SIPP that specifically addresses investments.
Briefly, any SIPP should address, at a minimum, the following:
1. PURPOSE
The purpose can be thought of as the guiding principle or investment philosophy under which the organization adopts and clearly states the reasons for the SIPP. For example, “ABC Charity has reserved funds, deferred revenue and/or cash balances throughout the year, which may or may not be needed for use within the fiscal year. In order to maximize the investment earnings potential of deferred revenues and/or cash, this policy sets out the guidelines and restrictions for the use of those funds.” Such a statement clearly spells out the reasons for investing, in a general way.2. OBJECTIVES
The objectives elaborate upon a number of items of critical importance, such as:
- Time horizon
- Risk characteristics
- Asset types
- Liquidity requirements
The objectives should complement the purpose, without getting into too many specifics or details. It may be sufficient to have an objective that simply states that, overall, the SIPP seeks to ensure that investment returns exceed the rate of inflation over a certain period of time and at an acceptable level of risk.
3. INVESTMENTS OBJECTIVES
At this point, the SIPP becomes much more tangible and addresses, in more detail, items outlined above. Depending on the amount of funds to be invested, time horizon, risk profile and other matters, the investment objectives can be fairly lengthy. Below is an example of topics included in the objectives section:
- Time Horizon
- Allowable Investment Instruments:
Cash
Near Cash Equivalents
Fixed Income
Equities
- Investment Policy Portfolio (for example):
* Equities may be further broken down by geographic regions: Canada, U.S. and International
Cash Near Cash Equivalents Fixed Income Equities* 4. RESPONSIBILITIES
The various responsibilities of all parties involved should be clearly outlined.Board
The board of directors has the ultimate responsibility for the acceptance of the SIPP, as well as reviews and modifications. Most often, the board will delegate policy formulation and maintenance to the finance committee. The board is also ultimately responsible for all matters related to investments. The board, on recommendation of the finance committee, approves designating responsibility for the day-to-day management of investments to the CEO or delegate.Committee(s)
The board gives the finance committee the task of establishing the SIPP. The committee is then given responsibility for bringing to the board the investment policy and any amendments, updates and revisions. The committee can be expected to monitor performance of the investment portfolio and provide regular reporting to the board, as it does for other financial matters.Depending on the level of investment activity, size and complexity, it may be prudent for the organization to have a separate investment committee, with cross-representation to the finance committee. A separate investment committee is appropriate for organizations that have single-employer defined benefit pension plans and/or large investment portfolios.
Chief Executive Officer
The CEO (or his/her delegate) is responsible for the day-to-day management of investments. He or she will interact directly with the investment firm or advisor and report to the board via the appropriate committee.Advisory Firm
The board may enter into an arrangement with an advisory firm to assist in the management of investments and to give advice relating to the investment of funds.5. REPORTING
The SIPP must outline the various reporting requirements of all parties responsible for the development, approval, implementation and day-to-day management of the investment portfolio. Typically, the finance (or investment) committee will receive its information from the CEO or chief financial officer and take that to the full board, at least on a quarterly basis.If the organization has a large and more sophisticated portfolio, there should be reporting requirements that have been agreed upon with the advisory firm. Reporting will include performance measures against expectations, an update regarding portfolio asset allocation and any changes to the asset mix, and updates regarding general economic matters and outlooks. Reporting also includes requirements regarding the safekeeping of documentation.
Investments and returns are also reported in the annual audit and, depending on the complexity of the investments, the Notes to the Audited Statements will often detail the nature of the investments and performance. It may also be prudent for the organization to disclose, in some detail, the investment activity for the year in its annual report.
SUMMARY
The investment potential of charitable organizations ranges from those that have surplus funds from time-to-time that can be invested in a more efficient manner, to complex situations characterized by a variety of options and requirements, especially when it comes to pension plans. Regardless of where your organization finds itself, a Statement of Investment Policies and Procedures is a necessary starting point for the formulation of a systematic way to meet fiduciary and other obligations and desired outcomes.Considerations that should be taken into account when formulating a policy for investments include general economic conditions and effects of inflation, how each investment strategy fits into the overall picture of the organization’s financial well-being, expected returns and risk tolerances, and any constraints that may be brought about from ethical and/or moral concerns.
Depending on the level of expertise that might be present among current staff and/or board members, organizations may find that enlisting the services of a qualified individual who has an understanding of charity and trust considerations in the province(s) in which your organization operates, may be a prudent first step in developing your policies and procedures.
David Michaels is an Investment Advisor with BMO-Nesbitt Burns, Exchange Tower branch, in Toronto. Before joining Nesbitt-Burns, David was in charge of the finances of three legally separate but related medium-sized charitable organizations in Toronto where he used a cash management and fixed income strategy to significantly improve interest earnings.
David can be reached at (416) 365-6038, or via his website at www.davidmichaels.ca.
Opinions are those of the author and may not reflect those of BMO Nesbitt Burns. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is an indirect wholly-owned subsidiary of Bank of Montreal. Member CIPF.
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