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.