In the report, “Investment Policy Statements for the Current Environment,” Tony Werley, Chief Strategist for JP Morgan’s Endowments & Foundations Group, provides fresh perspective on the link between spending policy and asset preservation. He proposes that asset allocation take into account the volatility of individual asset classes.
He also proposes that investment policy statements give the same prominence to measures of expected investment risk—forecast standard deviation, illiquidity and drawdown potential—as to measures of expected investment return.
This “enabling policy” stands in contrast to more restrictive clauses of conventional investment policy statements. The report makes the case that enabling policy is more effective in achieving long-term goals and in avoiding risks and capturing tactical advantages that surface in a turbulent and uncertain environment. One of the policy’s strengths is its help in framing expectations. By emphasizing risk metrics, it can give policymakers and stakeholders a clearer sense of the tradeoffs between the risks on either extreme. These include higher risks associated with reaching aggressively for returns as well as the risks of sacrificing potential returns by playing it overly safe.
Recommendations include:
• Build future assumptions from forward-looking return and risk asset class    
  projections, rather than historical results.
• Factor portfolio spending breakeven levels when determining spending policy.
• Take risk metrics into account along with return expectations.
• Use allocation variance bands that reflect expected volatility within each asset class 
  and allow for flexible investment mandates within broad policy guidelines.
This “enabling policy” approach makes particular sense given today’s outlook for modest returns and higher-than-normal risk.