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Investment Policy Development


General Comments


There are many issues that a charity must consider when developing its investment policy.  The purpose of this document is to explore the issues that a charity (charitable organization, public foundation, private foundation) should address when developing or revisiting its investment policy.  This document is not necessarily a comprehensive one and charities should seek the advice of their independent legal and financial advisors before formalizing their policies.


An Investment Policy (sometimes referred as “Statement of Investment Policies”) is an important part of an organization’s overall governance plan.  It represents a comprehensive summary of an organization’s approach to its investments.


A strong Investment Policy is comprehensive and clear, providing appropriate guidance to Board Members, Staff and investment managers.  The Investment Policy must address a number of factors including risk and must account for the fact that the composition of the Board and Investment Committee may change over time.


While many charities refer to their long-term investments as their endowments, this definition is often too narrow as it does not capture all aspects of an organization’s investment management criteria.  For this reason, this document will adhere to a broader definition of investment management that captures the organization’s short and long-term approaches.


It is clear that an organization’s approach to investment management must reflect the organization’s broader approach to governance and its mission.  These assets are ultimately designed to support the optimization of the organization’s mission and must ultimately be seen in this context.


Those who govern over an organization’s assets must weigh several issues that ultimately translate into its investment policy.


These issues may include:


  • The role of the investment in supporting the organization’s mission
  • The return goals from investments
  • The additional donations that can be expected
  • The legal and regulatory context
  • Liquidity and spending requirements
  • Risk tolerance
  • The decision-making process
  • Special characteristics and limitations


Ultimately, the organization’s mission is the most important consideration and the manner in which this is translated into investment policy makes a fundamental difference in its strategy.  Finding the appropriate balance between outside expertise and the fundamental responsibility of the organization’s governing board is critical.


Background Section – Purpose of Investment Policy


This section may include general information about the charity’s incorporation and by-laws, especially those relating to investment management.  It may also state that the charity will invest its assets in consideration of its regulatory requirements (e.g. provincial Trustee Act) and its annual disbursement quota obligations as set out in the Income Tax Act.


This section may also outline specific factors that are relevant to the charity’s investment needs.


It is also common for this section to provide a brief profile of the organization, its history, mission and vision.


Example Clause


The purpose of Investment Policy is to document the investment principles and policies of the Foundation for the Operating and Endowment Fund. It is a management document that is not designed to satisfy any specific legislation, but is expected to demonstrate prudent management of the Fund and provide a framework for investments. The authority and responsibility of the decision-making entities are also documented.


The Foundation is incorporated under the Canada Non-Profit Corporations Act.


  • The Foundation will invest such donations for the production of income and capital appreciation.


  • The Foundation will make grants to “qualified donees”, as defined in the Income Tax Act, other than private foundations (“Eligible Charities”).


  • The Foundation will invest its assets in consideration of:


  • the investment standards set out in Section 27 of the Trustee Act (Ontario; and


  • its annual disbursement obligations as set out under the definition of “disbursement quota” under Section 149.1(1) of the Act.


Statement of Investment Policy


The document may also contain a broader, overarching Statement of Investment policy which outlines the intentions of the policy, most notably the prudent and effective management of the charity’s investments.



Example Clause


This Statement of Investment Policy has been prepared to provide guidelines for the prudent and effective management of the charity’s assets.  The prudent and effective management of the assets has a direct impact on the achievement of the charity’s goals.


The Board of Directors has assigned responsibility for the management of the assets to the Investment Committed of the charity.  The Committee initially adopted this Policy as of January 1, 2012.


General Objectives


This section may provide some overriding comments regarding the Foundation’s investment objectives such as:


  • Income production
  • Capital appreciation
  • Disbursement requirements and frequency
  • General goals and objectives


It may outline the short and long-term objective for the organization’s funds.  The section may also capture the impact of inflation on the investment portfolio and need for liquidity.


Example Clause


The Foundation will invest in assets that seek to produce a stream of income and achieve growth of capital over the long term.


Annually, the Foundation will seek to earn an amount of income and capital gains that exceeds the amount of grants and fees that it must disburse and meet the following obligations:



To earn a minimum real rate of return of 5% per annum over the long

term which is intended to represent an appropriate balance between the need to generate investment revenue and an acceptable level of risk.


To earn the return produced by the asset mix policy, based on the return of the market indices, plus a premium to reflect active portfolio management.


The premium should at least cover the cost of active management.


Pay an annual allocation to the Operating Budget, subject to availability.


When investment returns exceed the above allocations for spending, and are in excess of the reserve requirements the Board of Directors may make additional allocations in relation to the Foundation’s priorities


General Investment Arrangements


This section may outline if the Foundation has entered into any specific arrangements with respect to its investment management.  It may also describe the Foundation’s position on certain types of securities including mutual funds and insurance.


Typically, this section would also include a more detailed reference to the charity’s regulatory requirements.  It may, for example, lay out the criteria established in the provincial Trustee Act or other relevant legislation.


Example Clause


Under normal market conditions, the Foundation may invest in mutual fund securities that are primarily comprised of Canadian balanced, Canadian income and balanced and Global balanced funds.


The board of directors of the Foundation shall have responsibility for the management of the Charity’s investments;


(a)  The Board shall act prudently in making investment decisions for the Charity and in so doing shall specifically consider all relevant criteria, including the following:


  • general economic conditions;


  • the possible effect of inflation or deflation;


  • the expected tax consequences of investment decisions or strategies;


  • the role that each investment or course of action plays within the overall portfolio of the Charity;


  • the expected total return from income and the appreciation of capital;


  • needs for liquidity, regularity of income and preservation or appreciation of capital;


  • an asset’s special relationship or special value, if any, to the purposes of the Charity; and


  • any need to diversify the investments.


(b)                   Because of the size of the Charity’s investment assets, the Board may decide to retain investment managers or investment counsel to advise with respect to the management of the investments;


(c)                   The Board should ensure that no conflict of interest is created by retaining any Investment Managers;


(d)                   The Board may appoint an Investment Advisory Committee (“IAC”) to assist it in the management of the Charity’s investments and the initial members of the Committee shall be comprised of no fewer than three (3) directors or officers of the Charity


Specific Investment Plans (see also General Investment Arrangements)


This section explains the relationship between policy and specific investment plans and outlines which document prevails if there is a conflict.  It would also list the required contents of a specific investment plan.  This section may include any legal restrictions, contractual obligations or unique preferences including socially responsible investing.


This section may also provide a reference for long-term requirements, asset mix parameters and risk parameters.


Specific Return Objective


This section outlines the specific return objective for the portfolio.  It may also state the rational for wanting to achieve this objective


Example Clause


The portfolio is expected to earn a return of 5% over ten years after management fees and before the impact of active management.  However, in any one year, the annual real rate of return may be significantly above or below this rate.


Asset Mix (see also Rebalancing)


This section provides the general asset mix policy for the organization, generally in both qualitative and quantitative terms.  It may also make reference to rebalancing or a rebalancing policy.  It may also provide targets and allowable ranges around those targets.


Asset allocation is the process of deciding how to apportion the organization’s resources among the different asset classes.  In addition to the three traditional asset classes (Equities, Fixed Income, Cash) there are other specialized alternative asset classes that provide the opportunities to enhance returns but may also carry a different risk exposure.


The asset allocation decision must reflect the organization’s objectives and constraints, risk tolerance and expected return.


Example Clause


The Investment Committee reviews the asset mix policy on an annual basis to maintain, over the long term, the best balance between investment returns within an acceptable level of risk. The current asset mix policy is 60% publicly traded equities, 25% fixed income and 15% alternative investments. The asset mix policy is based on an optimization model generated by an investment consultant to the Committee and this model projects investment return and risk based on historic relationships among the asset classes. To achieve the return objective, the portfolio has a substantial weight in equities.


The Investment Committee is permitted to deviate from the approved asset mix policy by up to plus or minus 5% for each category, i.e., equities may range from 55% to 65% of the total Fund, fixed income may range from 20% to 30% and alternative investments may range from 10% to 20%. Changes to the asset mix policy beyond these ranges would require the approval of the of the Investment Committee.


The Committee is required to establish a rebalancing policy to ensure that the actual asset mix of the Fund is adjusted to the asset mix policy when required as a result of differences in market performance among the various asset classes and investment managers.




This section would explicitly outline asset class parameters (typically minimum, target, maximum) and outline the process for realigning the portfolio with its stated objectives.  It would also outline the frequency of the rebalancing.


Example Clause


Based on information provided by the custodian, the investment committee shall review quarterly the asset mix of the portfolio in order to ensure that the proportion of the assets (on a market value basis) allocated to each asset class falls within a series of prescribed ranges.


The policy would then typically outline the ranges for each asset class (cash, fixed income, domestic equity, global equity and others)


At the end of each quarter, if the allocation to one or more asset classes falls outside the permitted ranges, the overall allocation should be rebalanced such that the allocation to such asset classes is brought back within the permitted range.


Time Horizon and Liquidity Requirements


This section would outline specific expected cash flow requirements as far as outlay and timing.  It is important to recognize the timing and size of potential outlays of funds in order to determine annual return requirements and degree of liquidity needed to make those disbursements.


Funds required in the near term are invested in more conservative instruments such as money market or short-term bonds with maturity dates that often coincide closely to the date the obligation is due.


The time horizon of any investment plan has a direct influence on risk and expected returns.


This may also be outlined under Cash Flow Management (see below).


Cash Flow Management


This section outlines the objective of the organization’s cash flow management process, in order to ensure that the liquidity needs of the organization are being met.


Example Clause

The objectives of the charity’s cash flow management process are as follows:


To maximize the funds that are available for external, professional management in the Operating and Endowment Fund, while maintaining sufficient short-term

investments outside of the Operating and Endowment portfolio to meet the

Foundation’s working capital requirements.


To generally maintain a positive cash balance throughout each year in order to meet the Foundation’s liquidity needs, investing temporary excess cash in money market funds and short term fixed income funds to provide cash as required for working capital needs. The Investment Committee shall approve the investment managers for such funds.


To ensure, as much as reasonably possible, that the funds allocated to external

managers are not subject to short-term seasonal variations as a result of seasonal

variations in the Foundation’s cash flow.


Acceptable risk


This section would provide general comments about the level of risk acceptable to the Foundation.  It may also provide quantitative acceptable levels of volatility and risk.


Example Clause


The portfolio must satisfy the specific investment objectives of the charity at an acceptable level of risk.  Investment risk is controlled by diversification among asset classes and within asset classes.


Annualized returns and probabilities have been calculated using assumptions for real return standard deviations and correlations for the selected asset classes.


The estimated future expected real returns, standard deviations and correlation factors have been determined on the basis of expected developments in the markets given available historical data.


Parameters and exclusions


This section would outline certain parameters within the portfolio.  For example, bonds must be of a certain grade or mutual funds must be of a certain rating.  It may also create parameters on the amount of cash (or cash equivalents) that may be held in the portfolio.  Occasionally, a list may be provided that outlines the securities in which the investment manager is allowed to invest.


Other potential parameters and exclusions include:


  • Geographical classification
  • Asset classes
  • Discretion of IM versus asset mix (i.e. how much they can deviate from prescribed mix)
  • Use of derivatives
  • Minimum ratings of various asset classes
  • Bond/fixed income types – e.g. Corporate versus government
  • Mortgage investments
  • Securities lending
  • Equity parameters – e.g. geographic, capitalization, etc.


Ethical Restrictions

This section can outline any ethical restrictions such as tobacco, alcohol or gambling companies


Example Clause


The Foundation may not purchase securities of companies that manufacture or distribute tobacco and/or alcohol products.


Reporting, Evaluation and Review


This section would typically provide the basic structure for fiduciary oversight (e.g. Board of Directors, Investment Committee) of the Foundation’s investments including the minimum number of required meetings, frequency of reporting, frequency of meetings, and recording of meetings and decisions.


It should also outline the specific performance measurement criteria and may attention to benchmarks, frequency of reviews and frequency of searches.  The performance must be reviewed to ensure a comparison of results with the appropriate benchmark (see Benchmarking).


The investment strategy must be reviewed to confirm that the right decisions regarding investment policy and manager selection have been made.  It may also speak to the need for review of the policy itself.  The investment manager must be evaluated against relevant benchmarks and other targets.  Three to five years typically provides an investment manager with enough time to demonstrate results.


Example Clause


The Board shall review this Investment Policy annually to ensure that it continues to meet the Foundation’s objectives and all applicable legal requirements.


The Board should meet to discuss the results and performance of the Foundation’s investments at least four times per year.


(A specific mention of benchmarks may also be relevant)



This section outlines the benchmarks that should be used as a means of evaluating the performance of the portfolio.


Example Clause


To evaluate the performance of the portfolio and the contribution active management makes to investment performance, there will be an annual analysis of the total performance.  This will involve comparisons of the actual return of the investment manager to the return that would have been earned if the assets had been passively managed.


The policy may then outline the actual assets classes (e.g. S&P/TSX Total Return Capped Index for Canadian Equities) used to benchmark performance.




This section would name the portfolio custodian and the process for changing the custodian.


Manager Selection


This section outlines the process for selecting and changing the portfolio’s investment manager.  Please see our “Guide for Selecting and Reviewing an Investment Manager” for more details on this process.


Delegation (of Voting Rights)


This section includes provisions explaining when delegation of investment decision making would be permitted and would outline the steps that the Board must take before delegating investment decision making to an investment manager.  It may also include some general parameters on the Investment Committee’s roles and responsibilities.


Example Clause


The investment manager is delegated the responsibility of exercising all voting rights acquired through the investment.  The investment manager shall advise the committee when a vote is on a matter of exceptional nature.


If a conflict of interest is disclosed after the committee has made a decision, the committee may reconsider its decision


Allocation of Responsibilities (see also Delegation)


This section would broadly establish the roles and responsibilities of the Investment Committee, Investment Manager, Trustees and other fiduciaries and stakeholders.


Example Clause


The Investment Committee manages the risk profile of the Fund by establishing the asset mix policy. The Committee hires investment managers with specific asset class investment mandates as opposed to balanced investment mandates and the Committee is thus able to manage the actual asset mix of the Fund.


The Investment Committee may hire either active or passive investment managers. Passive management is preferred in markets where active managers have not been able to generally outperform the market indices such as the current case in Canadian fixed income securities.


Active managers are required to earn a prescribed amount over the appropriate index return to cover their fees and to compensate for the greater risk of active management.


Conflict of Interest


While the organization may have a broader policy on this subject, the Investment Policy may define the terms of a potential conflict as well as identify to whom the policy would apply.   It may also suggest a procedure on the disclosure of a potential conflict.


Example Clause


If a member of the Investment Committee, or any agent of an advisor to the Committee, has any material pecuniary interest, direct or indirect, in any matter in which the fund is concerned, and becomes aware of such a conflict, that person shall, without delay, disclose this interest in writing and shall not take part in any debate or vote on such a matter. It is noted that agents and advisors are permitted to present items to the Committee and it is understood that such agents and advisors may benefit in the event that the Committee adopts the items.


The Investment Committee shall include in the mandate of each investment manager the requirement to comply with the Code of Ethics and Standards of Professional Conduct adopted by the CFA Institute.


Disbursement Policy


This important section (sometimes documented in a separate policy) outlines how much of the investment portfolio should be allocated annually to support the annual operation of the organization.  It may be either percentage-based, return-based or discretionary.   This section should be crafted with the knowledge of the organization’s legal spending requirements that are established for registered charities in the Income Tax Act.


In order to develop an appropriate Disbursement Policy, the organization must evaluate the organization’s specific budgetary requirements for the next few fiscal years and account for other parameters including legal distribution requirements, donor-directed parameters and special requests.


Endowment spending or disbursement should clearly be linked to the organization’s short, medium and long-term goals.  Furthermore, the disbursement policy will impact the organization’s future investment growth.  Since strategic goals differ among organizations, each organization’s disbursement policy must reflect its unique goals.


Example Clause


The Board of Governors establishes policy for endowment spending polices


Such policies are designed to ensure that current and future generations share equally in the benefits of the endowments.



Review and Amendment of Investment Policy


This section outlines the details for reviewing and amending the IPS.


Example Clause


The Board shall review this Investment Policy annually to ensure that it continues to meet the Foundation’s objectives and all applicable legal requirements.


The Board should meet to discuss the results and performance of the Foundation’s investments at least four times per year.