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The Importance of an Investment Policy Statement in Asset Allocation

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Learn how LPs are navigating changing market conditions with new tools and resources for stronger portfolio allocation.

a diverse group of financial professionals discussing investment strategies in a modern office setting, with charts and graphs displayed on a large screen in the background.

Asset allocation is a crucial aspect of investment management, as it involves spreading investments across various asset classes to achieve a balance between risk and return. To effectively manage asset allocation, institutional investors often rely on an investment policy statement (IPS). An IPS is a comprehensive document that outlines an investor's objectives, constraints, and guidelines for making investment decisions. By establishing clear parameters for investment management, an IPS helps investors stay on track and make informed decisions in line with their long-term goals.

TRS performs asset-liabilities studies periodically to set a strategic asset allocation. Asset class performance is monitored through regular reviews and adjustments to ensure that the portfolio remains aligned with the investor's objectives. By setting specific targets for each asset class, investors can maintain a diversified portfolio that reflects their risk tolerance and return expectations.

By a unanimous vote Thursday, members approved the investment policy prioritizing four investment principles—low-cost investment options, open architecture, diversification, and risk management. These principles guide the investment decision-making process and help investors achieve their long-term financial goals. By adhering to these principles, investors can build a robust portfolio that is resilient to market fluctuations and economic uncertainties.

Once created, an investment policy statement can help contextualize the client's spending outlook. Ultimately, the document enables OCIOs to provide a full picture of the client's financial situation and tailor investment strategies to meet their unique needs. By aligning investment decisions with the client's objectives and constraints, OCIOs can help clients achieve their financial goals and secure their financial future.

State and local pension funds collectively hold more than $5 trillion in assets to pay for promised benefits to workers and retirees. These funds rely on investment policy statements to guide their asset allocation decisions and ensure that they can meet their long-term obligations to beneficiaries. By following a disciplined investment approach outlined in their IPS, pension funds can effectively manage risk and generate returns to support their funding requirements.

Our November issue of the Investment Management Update covers regulatory developments from the third quarter of 2023 impacting the investment management industry. These developments include updates on regulatory requirements, market trends, and industry best practices that can influence investment decision-making. By staying informed about these developments, investors can make well-informed decisions and adapt their strategies to changing market conditions.

On 28 November 2023, the UK's Financial Conduct Authority ('FCA') published its 'Sustainability Disclosure Requirements ('SDR') and highlighted the importance of sustainable investing in the financial industry. These requirements aim to promote transparency and accountability in sustainable investing practices and encourage investors to consider environmental, social, and governance (ESG) factors in their decision-making process. By incorporating ESG considerations into their investment policies, investors can contribute to a more sustainable and responsible financial system.

A report from Bridgespan Social Impact and Capricorn Investment Group makes a case for “redefining what philanthropy can achieve” by leveraging impact investing strategies. This report highlights the potential for philanthropic organizations to generate social and environmental impact through strategic investments that align with their mission and values. By adopting a more proactive and intentional approach to investing, philanthropic organizations can maximize their impact and drive positive change in society.

Every investor needs a written Investment Policy Statement. Here are a few pieces out of mine and ideas for what you ought to consider when creating your own IPS. An IPS serves as a roadmap for investors, guiding their investment decisions and ensuring that they stay focused on their long-term objectives. By outlining clear goals, constraints, and guidelines for making investment decisions, an IPS can help investors navigate market volatility and achieve their financial goals with confidence.

investment policy statementasset allocationportfoliorisk managementasset classesinstitutional investorsfinancial goalsmarket conditionsesg factorssustainable investing

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