What is an Investment Policy Statement?

If you were listening in on the recent Board meeting, you may have heard that we had a significant, positive variance in our 2024 annual financial results due to gains on investments. The 2024 budget anticipated investment income of $800,000 for the year and the actual for 2024 was $1,001,130 or $201,130 better than budget. These investments are of the reserve accounts that we have in order to be prepared for known, and some unknown, expenses that we may incur. Since these reserves are largely for future expenses, we invest them to try to at least partially offset the cost of inflation from construction materials to build roads and bridges, for example.

Anyone who has invested in the financial markets knows that gains and losses are part of that process. Most well-run nonprofits use something called an Investment Policy Statement (IPS) to help guide how their money is invested. An IPS is a crucial document that outlines the investment goals, objectives, and strategies for an individual or institution. It serves as a roadmap for managing investments and helps ensure that decisions are made in a consistent and disciplined manner.

Key components of an IPS typically include:

Investment objectives: Clearly defined goals, such as capital preservation, income generation, or long-term growth.
Risk tolerance: The level of risk the investor is willing to accept in pursuit of their objectives.
Asset allocation: The strategic distribution of investments across different asset classes, such as stocks, bonds, and real estate.
Investment guidelines: Specific rules and restrictions on investment choices, such as diversification requirements or limits on certain types of securities.
Performance measurement: Benchmarks and metrics used to evaluate the success of the investment strategy.
Review process: How often the IPS will be reviewed and updated to ensure it remains aligned with the investor’s goals and circumstances.

Benefits of having an IPS:

Clarity and focus: Provides a clear understanding of investment goals and how to achieve them.
Discipline: Helps avoid emotional decision-making during market fluctuations.
Accountability: Establishes a framework for evaluating investment performance and making necessary adjustments.
Communication: Facilitates clear communication between the investor and their investment manager.

PDPOA has an IPS, and it was most recently updated in 2024. The two most important changes that were made in the IPS were to recognize that various reserve accounts have different time horizons and that we would like to de-risk the portfolio by making asset allocation decisions, but not individual stock decisions.
For example, the Operating Fund is meant for expenses in year and so is completely in short term investments, like money market accounts. The Repair and Replacement and Community Enhancement Funds are for expenses that will mostly come in the future, so these have a portion of their investments in things like S&P or NASDAQ ETF’s. These investments usually have higher returns and benefit from a longer time horizon.

In the past, we had a portfolio made up of about 70% fixed income, 20% equities and 10% cash. The equities were invested in individual dividend paying stocks. When we recognized the different time horizons, this changed our mix to closer to 50% fixed income, 40% equities and 10% cash. We also moved from individual equities to ETF’s that represent broad markets to avoid individual stock risk.

An investment policy statement is an essential tool to manage risk and achieve our financial goals. It provides a framework for making informed decisions and helps ensure that investments are managed in a way that aligns with our needs and circumstances.

—Bob Talbot, Treasurer