Practical analysis for investment professionals
28 March 2012

Bankable Insights: What Every Investment Trustee Needs to Know

Consider this scenario: a college alumnus starts a successful technology company, cashes out and donates a big chunk to his alma mater. In return, the school asks him to serve on the board of directors of the endowment fund. The entrepreneur is a respected professional in the tech industry but isn’t a professional investor and has never served as a trustee. Now what?

Fortunately there is good news for newly appointed investment trustees who find themselves in a position of responsibility outside of their expertise: In 2011, the Research Foundation of CFA Institute published a handy primer that covers all the essential topics. It’s a go-to resource for information on governance structure, investment policy, the fund’s mission, investment objectives, risk tolerance, investment assets, performance evaluation, and ethics in investing.

According to the authors, the most valuable contribution a trustee makes is establishing and maintaining the fund’s investment policy (a combination of philosophy and planning). “Although you don’t manage the fund on a day-to-day basis, you do determine the key strategic priorities for the fund that are encompassed in the investment policy,” they write. “Others may assist you in drafting that policy, but only trustees can establish it as the road map for the fund.”

With that in mind, here’s a cheat sheet of what every trustee should know:

  • A comprehensive investment policy addresses:
    • the fund’s mission,
    • risk tolerance (this will be covered in more detail in a subsequent blog post),
    • investment objectives,
    • the policy asset mix and rebalancing policy, and
    • performance evaluation.
  • The investment policy statement (IPS) formalizes investment policy in a written document, summarizing a fund’s key policy decisions and explaining the rationale for those decisions.
  • The IPS serves three primary functions:
    • to facilitate communication of investment policy,
    • to ensure continuity of policy during periods of trustee and staff turnover, and
    • to provide a baseline against which to evaluate proposed policy changes.

And some questions every trustee should ask:

  • Do we have a formal written IPS? If not, why not? If so, may I have a copy to review?
  • Does our IPS discuss the underlying rationale for the policies that we have adopted?
  • Is our IPS broadly disseminated to key stakeholders?
  • What duties do I have as a trustee under our investment policy?
  • As a group, do the trustees understand our investment policy well? Is the investment policy thoroughly covered in new trustees’ orientations?
  • What are the key factors that could cause us to rethink and revise our investment policy?

For a full list of questions, consult the A Primer for Investment Trustees

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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