What Small Foundations Often Overlook in Their Investment Policy Statement
Quick Take
A strong Investment Policy Statement (IPS) should function as an active governance tool, helping foundations—especially smaller institutions—make consistent, objective investment decisions during both stable and volatile market environments.
There are four areas where many IPS documents fall short: rebalancing procedures, practical risk definitions, spending guardrails, and benchmark alignment.
Make the IPS more precise and actionable, so boards can reduce ambiguity, improve oversight, and better protect long-term mission outcomes.
For many foundations and endowments, the Investment Policy Statement (IPS) starts life as a “set it and forget it” document—approved, filed away, and dusted off only when the committee changes or the markets get bumpy.
But that’s exactly when a strong IPS matters most.
IPS as a strategic guide for planning and implementing an investment program—and, critically, a policy guide that can help decision-makers stay objective during periods of market disruption, when emotional reactions can otherwise drive less prudent actions.
For smaller foundations—especially in the $5–$50 million range—an IPS has to do a lot of heavy lifting. These pools often face meaningful annual spending needs, limited staffing, and governance that rotates as board members cycle in and out. Clarity isn’t a “nice to have.” It’s your operating system.
Below are four areas we frequently see smaller foundations unintentionally under-specify—creating avoidable risk, confusion, and friction when it’s time to act.
Rebalancing protocol clarity: “Rebalance periodically” isn’t a plan
A surprising number of IPS documents contain a line like: “The portfolio will be rebalanced periodically.” That may sound reasonable—until a real-world scenario hits:
Public equity rallies, pushing equity exposure well above target.
A market drawdown suddenly shifts allocations outside ranges.
Your private investments lag in valuation updates, masking drift.
A large grant or contribution hits the account at an inconvenient time.
If the IPS doesn’t spell out who does what, when, and how, committees can waste weeks debating mechanics instead of making decisions.
For a foundation, “good” usually looks like simple, enforceable language:
Targets and allowable ranges for each asset class (e.g., “Public Equity 55–65%, Fixed Income 20–30%)
A trigger (time-based, threshold-based, or both)
Time-based: review monthly or quarterly
Threshold-based: rebalance when an allocation breaches its range
An execution window. How quickly action is taken once a trigger is met (e.g., “within 10 business days”)
Authority and delegation. Who can initiate trades? Who approves? What must be reported to the committee?
Cash flow integration. Are distributions and contributions used as the first rebalancing lever before trading?
Illiquid asset treatment. If private holdings can’t be traded on demand, the IPS should state how the portfolio is monitored and what is rebalanced “around” those positions.
Rebalancing is one of the few risk controls you can reliably enforce regardless of market conditions. A clear protocol helps boards avoid two predictable mistakes: letting winners run unchecked (risk creep) and freezing during selloffs (range drift). Even a decision not to rebalance should be documented as an intentional choice, not an accident.
Risk definitions: “Moderate risk” is not helpful
Many IPS documents contain a risk sentence that reads well but doesn’t function well: “The Foundation seeks moderate risk consistent with a long-term horizon.”
The issue isn’t that “moderate” is wrong. The issue is that it’s undefinable. When markets fall (or surge), “moderate” turns into interpretation—and interpretation turns into debate.
The CFA Institute recommends that the IPS describe the investor’s philosophy regarding risk tolerance and acknowledges that relevant risks can be myriad, including liquidity, legal, political, regulatory, and business risks (among others).
It also notes an important real-world point: for some institutions, volatility may be less relevant than an absolute level of loss that would derail the portfolio’s purpose.
Here are practical ways to make risk “operational”:
A. Define risk in mission terms (not market terms)
Examples:
“Risk is the probability of failing to fund the grant budget over rolling 3-year periods.”
“Risk is the chance of a drawdown that would force an unplanned reduction in program spending.”
B. Separate risk tolerance from risk capacity
Tolerance is willingness (governance comfort with uncertainty).
Capacity is ability (financial reality: spending obligations, donor concentration, liquidity needs).
A foundation may be willing to take equity-like volatility—but have low capacity if it must fund a stable grant budget without other operating reserves.
C. Pick a small set of risk metrics the board will actually use
Consider metrics like:
maximum drawdown expectations (range, not a promise),
funded spending coverage (e.g., “years of spending in liquid assets”),
liquidity coverage ratios,
policy range breach reporting,
scenario tests (e.g., inflation spike + equity drawdown).
D. Connect risk directly to spending
Risk doesn’t live in a vacuum. It shows up as spending stress: higher volatility mixed with weak guardrails often equals reactive grantmaking decisions.
Spending guardrails: Your payout policy needs “rules for the road”
Spending is where investment policy meets real-world impact. Yet, many IPS documents state a spending rate without answering the hard questions:
What happens if markets drop 20%?
What happens if inflation runs hot for several years?
What happens if a large one-time grant is proposed?
What happens if the portfolio becomes “underwater” relative to prior values?
Many endowment rules are built around a simple idea: decisions about spending should be made carefully and with the long term in mind. In practice, that means foundation leaders are often expected to weigh several factors before approving spending, including the need to preserve the fund over time, the organization’s mission, current economic conditions, inflation, expected investment returns, other financial resources available, and the foundation’s overall investment strategy.
Guardrails that make a spending policy resilient
A stronger IPS spending section often includes:
A clear formula (not just a percentage)
Example: “4.5% of the trailing 12-quarter average market value,” often paired with a review cadence.
A definition of what spending includes
Grants only? Grants and administrative expenses? What about fees? (This matters for setting return requirements.)
Explicit exception authority
Who can approve spending outside policy? Under what conditions? What documentation is required?
Stabilizers (floors/ceilings)
Some funds use practical guardrails to prevent whipsawing budgets (e.g., limit year-over-year changes to a defined range).
Liquidity minimums
What amount should be held in cash/short duration to meet near-term grants and operating needs?
A down-market playbook
If the portfolio experiences a significant drawdown, what sequence of steps will the committee consider (e.g., pause spending increases, revisit timing of large grants, review risk posture, re-underwrite return assumptions)?
Specifying investment objectives often incorporates funding needs and their relationship to key factors like inflation and spending rate—exactly why spending language can’t be an afterthought.
When spending isn’t bounded, the portfolio becomes the shock absorber for governance decisions. Guardrails protect the mission from the most common behavioral pattern: increasing commitments in good times and being forced into painful cuts after markets reprice.
Benchmark misalignment: The wrong yardstick creates the wrong conversation
Benchmarks are supposed to answer a simple question:
“Did we earn an appropriate return for the risks we chose—relative to our policy?”
But many foundations end up with benchmarks that are mismatched to how the portfolio is actually built. Common examples:
Comparing a diversified pool to a single equity index.
Using a “60/40” benchmark when the portfolio includes meaningful alternatives.
Using peer universes as the primary benchmark (which can be hard to interpret and may not be investable).
Forgetting to rebalance the benchmark weights—creating an apples-to-oranges comparison over time.
A Better Benchmark Framework
Benchmarks should be investable, definable in advance, representative of the exposure, and readily measured with widely available historical data.
For multi-asset portfolios, the most board-useful benchmark is usually a policy benchmark that matches the strategic asset allocation (with specified rebalancing). That creates cleaner accountability:
The benchmark reflects the policy decision (asset allocation).
The portfolio reflects implementation (manager selection, fees, execution, rebalancing discipline).
And if a custom or blended benchmark is used, the disclosure and construction details matter. When a custom benchmark or combination of benchmarks is used, the components, weights, and rebalancing process and calculation methodology should be disclosed.
It also highlights that for blended benchmarks, rebalancing frequency can meaningfully affect the benchmark’s behavior—and that the blend’s components, weights, and rebalancing process should be established and disclosed.
The board-level “so what”
Benchmark misalignment doesn’t just create messy reporting. It can drive bad decisions:
A portfolio may look like it’s “underperforming” simply because it’s being compared to the wrong thing.
Or it may look like it’s “outperforming” in a way that masks unintended risk.
Either way, the benchmark sets the tone of the governance conversation. A misaligned benchmark quietly undermines the IPS.
A quick IPS self-check for your next committee meeting
If your foundation’s IPS hasn’t been pressure-tested recently, here are four questions worth asking:
Rebalancing: If markets move sharply next month, do we know exactly who acts, within what bands, and on what timeline?
Risk: Have we defined risk in terms that match our mission and spending realities (not just “moderate/aggressive”)?
Spending: Do we have guardrails for down markets and inflationary periods—and a documented process for exceptions?
Benchmarks: Does our benchmark structure reflect how the portfolio is actually allocated and managed (including rebalancing)?
Investment policy statement templates can sacrifice factors that are highly relevant to the investor, because a useful IPS must be tailored to the investor’s objectives, restrictions, tolerances, and preferences.
In our experience working with foundations and endowments, the best IPS documents aren’t necessarily longer—they’re clearer. They reduce ambiguity when it matters most and help boards make consistent, mission-aligned decisions through a full market cycle.
Contact us at 865-584-1850 or info@proffittgoodson.com
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