A Guide to Instituting an Investment Policy - J.P. Morgan Asset Management

A Guide to Instituting an Investment Policy

A well-written investment policy is not merely an option—it is a necessity—for corporate and institutional investors striving to meet critical cash objectives. Compelling an organization to put its goals and strategy in writing ensures a more consistent, rigorous approach to investing.

Please consider the following questions:
  • Are the liquidity features and risk characteristics of the policy’s permissible investments understood by the treasury organization, investment committee and board of directors?
  • When a security falls out of compliance with the investment policy, what happens? Are there procedures that outline who must be notified? What drives the decision to keep the security or sell it? Who makes the ultimate decision? If the security is kept, how is it tracked and monitored going forward?
  • Is portfolio duration tracked? (Interest rate duration is a measure of risk that is typically defined as the price sensitivity of the portfolio to a given change in interest rates.)
  • Does the organization’s reporting provide the necessary data to update financial reports and senior management on a regular basis? Are the reports timely and Financial Accounting Standards Board (FASB) and/or International Accounting Standards Board (IASB) compliant?
  • Is diversification among different security types addressed within the portfolio?
  • How are pooled investment vehicles, such as money market mutual funds, evaluated?

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A well-written cash investment policy: a solid foundation for future cash investment decisions
With markets ever changing, a well-written cash investment policy (hereinafter ‘investment policy’) is a must for corporate and institutional investors striving to meet critical cash objectives. By compelling an organization to put its goals and strategy in writing, it ensures a more consistent, disciplined approach to investing and provides a sound foundation on which to build a portfolio.

An investment policy provides important internal clarity that allows everyone — from the investment team to the board of directors — to share a common and clear understanding of the organization’s objectives and permissible investments. When markets are fluctuating an investment policy helps an organization avoid making impromptu investment decisions and focuses attention on long-term goals. It also provides financial transparency and serves as a mechanism for internal control.

"Constructing an investment policy should be a dynamic process”
Constructing an investment policy should be a dynamic process. Once implemented, it is important to regularly review and update the investment policy to ensure that it is current and provides the flexibility needed to quickly respond to changing events.

More than likely your organization already has an investment policy — 80% do.1 But it is also possible that your investment policy is not up to date with current market trends and thinking, contains vague or contradictory language, or may not reflect all market risks.

We hope you will begin implementing or updating your organization’s investment policy today. Now more than ever, an organization needs a clear investment policy to help bridge the gap between shifting market circumstances and investment goals.
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1 2015 AFP Liquidity Survey, July 2015.