Investment Policy Statement Construction

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Developing a Sample IPS Document Template

 [By Clifton McIntire; CIMA, CFP®]

[By Lisa McIntire; CIMA, CFP®]fp-book

Here is an abbreviated sample Investment Policy Statement [IPS] template for a healthcare entity, clinic, private physician or hospital endowment account; posted by “Ask-a-Consultant” subscriber request. 

Introduction

An IPS typically contains the following sections, at a minimum. It may be a 5-15 page document for a single physician investor, or a 50-100 page tome for a hospital endowment fund.

Statement of Purpose

The purpose of this section is to guide and direct physician managers in the investment of hospital endowment funds. You want details about goals and objectives, as well as the performance measurement techniques that will be employed in evaluating the service rendered by the physician managers. 

Realizing that your overall objective is best accomplished by employing a variety of management styles, you will adjust your asset tolerances and permissible volatility to incorporate specific doctor-manager styles. 

Statement of Responsibilities

To achieve overall goals and objectives, you want to identify the parties associated with your accounts and the functions, responsibilities, and activities of each with respect to the management of fund assets. 

Physician managers or financial consultants [FC] are responsible for the daily investment management of Plan assets, including specific security selection and timing of purchases and sales. 

The custodian is responsible for safekeeping the securities, collections and disbursements and periodic accounting statements. The prompt credit of all dividends and interest to our accounts on payment date is required.  The custodian shall provide monthly account statements and reconcile account statements with manager summary account statements. 

The physician executive or financial consultant [FC] is also responsible for assisting us in developing the investment policy statement and for monitoring the overall performance of the Plan. 

Investment Goals and Objectives

The asset value of the funds, exclusive of contributions or withdrawals, should grow in the long-run and earn through a combination of investment income and capital appreciation a rate-of-return in excess of a specified market index for each investment style, while occurring less risk than such index. 

It is recognized that short-term fluctuations in the capital markets may result in a loss of capital on occasion, commonly expressed as negative rates of return. The amount of volatility and specific frequency of negative returns shall be detailed for each investment style. We will provide specific numeric targets by which we will measure whether or not objectives have been met.  

The investment policy of the Plan is based on the assumption that the volatility of the portfolio will be similar to that of the market.  A specific index or combination of indexes will be assigned to each manager based on the class of securities and style of selection to be employed. The physician consultant or FC will determine an overall index for volatility and asset allocation within the Plan as a whole.

It will be the duty of the physician or FC to monitor this section closely and advise us of necessary changes to comply with our overall policy. We expect that the accounts in total will meet or exceed the rate of return of a balanced market index comprised of the S&P 500 stock index, Lehman Brothers Government/Corporate Bond Index and U.S. treasury bills in similar proportion to our asset allocation policy. 

Recognizing that short-term market fluctuations may cause variations in the account performance, we expect the combined accounts to achieve the following objectives over a three-year moving time frame:   

  1. The account’s total expected return will exceed the increase in the Consumer Price Index by 7.0 percentage points annually.  Actual returns should exceed the expected returns about half the time.  Expected returns should exceed actual returns about half the time (i.e. if the CPI increases from 5.0 percent to 7.0 percent, then expected return should exceed 9 percent).
  2. The total annual return of the account is expected to exceed the average CPI for the year by an absolute of 3.0 percentage points (i.e. if the average CPI is 5.0 percent, then the expected annual return should exceed 8.0 percent).
  3. The average total expected return will exceed 10 percent annually. 

Suggested Performance Comparison Indexes

Style Index
Small Cap Growth Russell 2000 Growth
Medium Cap Value Russell Medium Cap Value
Small Cap Value Russell 2000 Value
Growth Russell 1000 Growth
Value Russell 1000 Value
Tax-Free Bonds Lehman Brothers Municipal
Taxable Bonds Lehman Brother Govt/Corp
Blended Account S&P 500/ Lehman Brothers Govt/Corp

Proxy Voting Policy

The physician manager or FC shall have the sole and exclusive right to vote any and all policies solicited in connection with securities held by us.

Trading and Execution Guidelines

Trading shall be done through a brokerage firm.  However, this request should in no way at any time affect the performance of accounts.

Instruction to execute transactions through a brokerage firm assumes that their service is equal to, and the rates are competitive with, other nationally recognized investment firms.

Additionally, it is understood that block transactions or participation in certain initial public offerings might not be available through a primary broker. In this case the manager should execute those trades through the broker offering the product and service necessary to best serve our account. 

Social Responsibility

No assets shall be invested in securities of any organization that does not meet the standard for socially and morally responsible investments we establish and communicated separately in writing to our physician investment manager. 

It is the responsibility of the physician or FC to maintain a list of such prohibited investments with us and to inform the respective managers of this list. 

Asset Mix Guidelines 

It shall be the policy of the foundation to have the assets invested in accordance with the maximum and minimum range for each asset category stated below.

This section applies to our overall account as monitored by the physician consultant.  Separate asset category guidelines will be provided for multiple physician managers, according to specified style and standard deviation tolerances.  

ASSET MINIMUM TARGET MAXIMUM REP
CLASS
WEIGHT
WEIGHT WEIGHT INDEX
         
Equities 50 60 70 S&P 500/FRC 2000 Index
Fixed Income 25 40 55 LB Muni/LBGC Inter
Cash & Equiv 0 0 30 90 Day Treasury

Portfolio Limitations

The following are general requirements of the account as a whole.  These specific limitations would be adjusted for a different medical manager or FC whose performance expectation would make it necessary for us to expand on our definitions. 

Equities: 

Equity securities shall mean common stock or equivalents (American Depository Receipts plus issues convertible into common stocks). 

Preferred stocks with the exception of convertible preferred share are considered part of the fixed income section. 

The equity portfolio shall be well diversified to avoid undo exposure to any single economic sector, industry group, or individual security. No more than 5 percent of the equity portfolio based on the market value shall be invested in securities of any one issue or corporation at the time of purchase. No more than 10 percent of the equity portfolio based on the market value shall be invested in any one industry at the time of purchase.

Capitalization/stocks must be of those corporations with a market capitalization exceeding $250,000,000. Common and convertible preferred stocks should be of good quality and listed on either the New York Stock Exchange [NYSE], American Stock Exchange [AMX] or in the NASDAQ System with requirements that such stocks have adequate market liquidity relative to the size of the investment. 

Fixed Income Investments: 

Types of securities of funds not invested in cash equivalents (securities maturing in one year or less) shall be invested entirely in marketable debt securities issued either by the United States Government or agency of the United States Government, domestic corporations, including industrial and utilities and domestic bank and other United States financial institutions.  

Quality: only fixed income securities that are rated BBB or better by Standard and Poor’s or Baa by Moody’s shall be purchased.  

Maturity: the maturity of individual fixed income securities purchased in the portfolio shall not exceed thirty years.

No more than 30 percent of the fixed income portion of the portfolio may be placed in these lower rated issues.  The average quality rating of the fixed income section shall be grade A; or better. 

Restricted Investments:  

Categories of securities that are not eligible without prior specific written approval of the physician investor, healthcare entity, clinic or hospital foundation include:     

  • Short Sales
  • Margin purchases or other use of lending or borrowed money
  • Private placements
  • Commodities
  • Foreign Securities
  • Unregistered or Restricted Stock
  • Options
  • Futures

Administration

The custodian will be responsible for settling trades executed by the physician manager in our accounts. From time to time, we will request disbursements from the accounts. Checks covering these requests must be mailed to us on the date of the request providing telephone notification is received before 2:00 pm; EST. 

Performance Review and Evaluation

 Performance results for the physician manager or FC will be measured on a quarterly basis. Total fund performance will be measured against a balanced index posed of commonly accepted benchmarks weighted to match the long-term asset allocation policy of the Plan.

Additionally the investment performances specific for individual portfolios will be measured against commonly accepted benchmarks applicable to that particular investment style and strategy.

The physician investor or FC will be responsible for complying with this section of our policy statement.  The managers or FCs shall report performance results in compliance with the standards established by AIMR (Association for Investment Management and Research); now the CFA Institute.  Reports shall be generated on a quarterly basis and delivered to us with a copy to us within four weeks of the end of the quarter. 

Communications 

Copies of all transactions will be maintained on a daily basis and will conform to our Investment Policy Statement. Monthly statements for each of the accounts will detail each transaction and summarize the account identifying unrealized and realized gains and losses. 

A formal meeting will be prepared quarterly by the consultant and delivered to us within six weeks from the end of the quarter.  The report will review past performance and evaluate the current investment outlook and discuss investment strategy of the physician manager.  These reports will compare the performance of the manager with the respective market benchmarks measuring return and volatility and compare the managers with their respective peer groups. 

Conclusion 

Of course, an IPS can include or exclude almost whatever you – or your institution’s governing board – may wish.

Finally, any professional financial manager or FC will be required to forward to you the SEC Form ADV Parts 1 and 2 annually, or at any interim point the ADV is substantially revised.

Remember to use a fiduciary financial consultant and/or physician-focused and/or appropriately degreed and/or licensed CPA, CFA, RIA or CMP™.  Investment results should never be guaranteed!

QUESTION: Does your hospital institution, medical practice, clinic or healthcare business entity have an ISP; more importantly – do you?  Please comment.  

Conclusion

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2 Responses

  1. Dean William Inge, a 19th century cleric and author, aptly noted that: “Worry is interest paid on trouble before it is due.”

    ”When managing an endowment, it is important that the institution focus its attention on those items that it can control rather than worrying about those it cannot control. Successful endowment managers seem to agree that there are at least two major areas subject to the endowment’s control; asset allocation (also known as investment policy) and payout policy.”

    Hope Rachel Hetico; RN, MHA, CMP
    [Managing Editor]
    http://www.HealthcareFinancials.com

    Like

  2. Clifton and Lisa
    From my point of view, the IPS does not matter at all; but results always do.
    Leslie Hill

    Like

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