Question

Define Portfolio Policy Statement (IPS) and Discuss its major components with Examples.

Answer 1

Portfolio Policy Statement (IPS)

It is a document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as risk tolerance,asset allocation and liquidity requirements are included in an investment policy statement.

In other words, an investment policy statement outlines how a portfolio manager is to manage the clients money. An IPS provides guidens to portfolio managers when making portfolio decisions and helps keep clients from making emotional decision related to their portfolio.

IPS major components

1. Scope and Purpose

• Establishing and building context regarding the investor’s source of wealth
• Identifying and defining the investor
• Setting forth roles and responsibilities of the portfolio manager
• Identifying a risk management structure
• Assigning responsibility for portfolio monitoring and reporting.   

.2. Investment, Return, and Risk Objectives

• Describing the overall investment objective
• Stating the return, risk, and spending assumptions (outflows in the portfolio)
• Defining the investor’s risk tolerance
• Describing relevant constraints (liquidity requirements, tax considerations, restrictions on certain investments, legal constraints)
• Describing any other considerations that may be relevant to the investment strategy

. 3.Risk Management

• Establishing performance measurements and reporting accountabilities
• Specifying metrics used to measure and evaluate risk
• Defining the process for portfolio rebalancing and target asset allocations

4.Governance

• Specifying responsibilities in determining, executing, and monitoring the results of the implementation of the investment policy statement
• Describing the process related to reviewing the updating the IPS
• Describing authority in the hiring and firing of vendors associated with the portfolio
• Assigning responsibility in determining the asset allocation of the portfolio, including inputs used and the criteria used to develop the inputs
• Assigning responsibility for risk management monitoring and reporting