The Investor Policy Statement

The IPS is the document that governs how an investor’s portfolio is managed.

  • Designing an IPS is a critical part of the Planning phase of the portfolio management process.
  • The IPS will bring together an investor’s objectives and constraints (see below) to create a logical investment strategy.

Investment Objectives

  • The investment objectives of an IPS are specific and quantified statements regarding risk and return for the portfolio's investment time horizon.

  • Risk Objective

  • The Risk Objective is commonly quantified by standard deviation of returns and this value is based on both the investor's willingness and ability to bear risk.

  • Even though a client may be very willing to assume risk, he/she may be unable to bear risk.

  • Risk factors include: spending needs to be funded by the portfolio, the client's level of wealth, and the client's overall financial situation.

  • Return Objective

  • A relationship exists between risk and return, so the Return Objective is a realistic goal for returns based on the degree of risk that a client is willing and able to absorb.

  • It will be important for a portfolio manager to consider: current spending in relation to long term wealth accumulation needs; the inflation impacts on spending needs; and whether or not the expected return is sufficient based on the client's needs.

Investment Constraints

  • The Investment Constraints of an IPS outline any client specified (internal) or external constraints or considerations for the portfolio.
  • The 5 Types of Investment Constraints
  1. Investment Time Horizon
  2. Taxes
  3. Liquidity Needs
  4. Legal and Regulatory Constraints
  5. Investor Unique Circumstances

Importance of Capital Market Expectations

  • Formulating capital market expectations is a critical component of the Planning Phase.
  • The portfolio manager will forecast expected returns and standard deviations for the asset classes and the correlations between asset classes.
  • Capital markets expectation data will help inform the strategic asset allocation and will be considered within the context of the objectives and constraints of the portfolio.

Investment Time Horizon

  • The time horizon is the period over which the portfolio objectives are to be achieved.
  • An investor's time horizon can consist of multiple periods.
  • While there are exceptions, a longer time period typically increases the investor's ability to absorb risk.
  • Directionally, less than three years could be considered a short time horizon and greater than ten years could be considered a long-term time horizon.

Please login to view this lesson.

With our free registration, you can access to all the lessons on finance, risk, data analytics and data science for finance professionals.

Sign in free