Portfolio planning can be defined as a program developed in advance of constructing a portfolio that is expected to define the client’s investment objectives. The written document governing this process is the investment policy statement (IPS).
The IPS is sometimes complemented by a document outlining policy on responsible investing—the broadest (umbrella) term used to describe principles that typically address one or more environmental, social, and governance themes that an investor requires to be considered when evaluating whether to invest in a particular company, as well as during the period of ownership.
The Investment Policy Statement
Major Components of an IPS
There is no single standard format for an IPS. Many IPS and investment governance documents with a similar purpose (as noted previously), however, include the following sections:
- Introduction. This section describes the client.
- Statement of Purpose. This section states the purpose of the IPS.
- Statement of Duties and Responsibilities. This section details the duties and responsibilities of the client, the custodian of the client’s assets, and the investment managers.
- Procedures. This section explains the steps to take to keep the IPS current and the procedures to follow to respond to various contingencies.
- Investment Objectives. This section explains the client’s objectives in investing.
- Investment Constraints. This section presents the factors that constrain the client in seeking to achieve the investment objectives.
- Investment Guidelines. This section provides information about how policy should be executed (e.g., on the permissible use of leverage and derivatives) and on specific types of assets excluded from investment, if any.
- Evaluation and Review. This section provides guidance on obtaining feedback on investment results.
- Appendices: (A) Strategic Asset Allocation and (B) Rebalancing Policy. Many investors specify a strategic asset allocation (SAA), also known as the policy portfolio, which is the baseline allocation of portfolio assets to asset classes in view of the investor’s investment objectives and the investor’s policy with respect to rebalancing asset class weights. This SAA may include a statement of policy concerning hedging risks such as currency risk and interest rate risk.
