Why have an Investment Policy Statement?

10 November 2014

As at Monday,10 November 2014

In an earlier blog I discussed the excessively liquid financial market and commensurate low interest rate environment in which we operate. In the quest to better deploy surplus cash in today’s financial market one MUST be strategic. This strategic intent is clearly laid out within an Investment Policy Statement (IPS) enabling an investor to engage financial markets without fear for its vacillations.The IPS clearly outlines the investor’s goals, philosophy, objectives preferred asset allocation strategy and how they treat with investment income and losses:-


Investment goal

The investment goal outlines the primary reasons for engaging financial markets. Investors may be interested in preserving the value of their dollar (inflation protection) and/or seeking to maximise return on investment.A clear definition of this goal enables the investor or their advisor to determine the investor’s risk profile and a reasonable expectation of investment returns.

Investment philosophy

The investment philosophy details the role the investment portfolio will be asked to perform. In the case of most high net worth individuals, corporate entities and credit unions the portfolio is intended to complement their core business operations.For a fund manager or some individuals, investment management is their core business and the primary driver for their profitability.In either case the investment philosophy in consideration with stated investment goals outline the time horizon for the portfolio as well as its financial market preferences (equities, fixed income and/or derivatives).

A clear investment philosophy ensures investors stay within their preferred asset classes and time horizons and not be easily swayed by market changes.

Investment objectives

Investment objectives enable an investor or advisor to clearly establish a quantifiable baseline return for the portfolio and an external benchmark by which portfolio performance should be measured.Utilisation of a third party benchmark as a measure of performance is important to ensure investment funds are being astutely deployed and as a gauge for fund performance.

Asset allocation

Asset allocation ensures the investment portfolio has a strategic mix of asset classes which produce the highest expected investment return within a prudent risk framework.Each asset class should not be considered alone, but by the role it plays in a diversified portfolio. Diversification among asset classes has historically increased returns and reduced overall portfolio risk. How asset classes relate to each other is the key to making asset allocation decisions within the context of overall portfolio risk and return.The major asset classes within an investment portfolio could include:-

Equity securities – represent investment opportunities whereby investors take an ownership stake in a firm. Equities are considered the most risky investment as there is no guarantee of an investment return. However, they may provide the biggest payoff if successful via dividends to shareholders and capital appreciation (increasing value of the firm).

The most accessible equity investments are on publicly traded stock exchanges. Equity investment opportunities are also available via private transactions or venture capital funds.

Fixed Income securities – these securities pay a fixed rate of return for a specified period of time. Securities within this asset class include bonds, mortgages and fixed deposits. Fixed income securities are primarily IOUs and its major risk factors are credit and interest rate risks. Fixed income assets may be traded on exchanges as well as on the over the counter (OTC) market.
Mutual Funds – mutual funds offer participation in collective schemes designed to meet a specific investment philosophy. Mutual funds also offer value in the pooling of funds to gain market access at the least costs possible. A variation of the mutual fund class of assets would be Exchange Traded Funds (ETFs or ETNs).

Real Estate – presents an investment opportunity in property plant and equipment. The payoff from this asset class originates from the increase in the value of land and buildings or rental income generated from third party use of the asset.

Derivatives – offer an investor the opportunity to hedge against unfavourable changes in the market or take outright speculative positions providing it is included as part of their investment philosophy and objectives.Cash – each portfolio should maintain cash or near cash balances to meet liquidity needs as well as be able to capitalise on investment opportunities as they present themselves.
Dependent on an investor’s risk assessment, portfolio holdings would be weighted appropriately between asset classes. An investor willing to take risk in search of increased returns may structure a portfolio heavily in equities, real estate and speculative fixed income securities. Whilst a more conservative investor may limit equities and favour investment grade fixed income securities.


Investment Income

Investment income refers to dividends, interest income, rental income and other benefits derived from the investment portfolio. An important detail for an IPS is to capture how  an investor prefers to treat with their investment income.Utilisation of investment income is dependent on an investor’s current income earning ability. An investor with limited income may find it necessary to keep their investment income to meet their immediate needs whilst an investor in less need of liquidity could easily reinvest into their portfolio.

Portfolio Performance Measurement & Reporting

The final stage of the IPS involves portfolio performance measurement and reporting. The portfolio must be measured against it key benchmarks to determine under / over performance and these results relayed to the investor.The portfolio may need rebalancing during intervening periods subject to the parameters set out in the IPS which may be executed by the Manager directly or after consultation with the investor.
The portfolio’s performance may then determine if the investor wants to retain their existing strategy or revise their investment goals, philosophy and objectives.Portfolio reporting closes the investment management process. A process which must be continuously reviewed to ensure the IPS and the decisions made meet the expectations of the investor.


In concluding I wish to reiterate the importance of preparing a proper investment policy statement before engaging financial markets that have grown increasingly volatile. Firstline Securities Limited is prepared to offer guidance and consultation in an effort to help you customise an IPS and portfolio to suit your needs, risk preferences and target return.
Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@firstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.
Osmond Prevatt
Portfolio Manager 


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