In part three of his ‘Good governance’ series, Melville Jessup Weaver (MJW) principal, Mark Weaver, sheds light on a key trustee board document: the SIPO
SIPO stands for Statement of Investment Policy and Objectives – and every board should have one.
The SIPO documents trustees’ investment policies, setting out the investment governance and management framework.
For trustees who outsource the management of their trust’s investments, having a SIPO can seem somewhat irrelevant as their focus moves to monitoring the results, say, quarterly and comparing the performance with other managers.
But in fact the SIPO is the key fund document irrespective of how trustees implement their investments.
And SIPO’s need to be reviewed at least every three years – or more regularly if markets are subject to major changes.
A good SIPO should include the following core components:
- A clear description of the purpose of the trust’s overall objectives. For example, ‘to provide regular funds to meet the desired annual donations’;
- A statement describing the roles of the different parties, including the delegation of certain decisions by the trustees. For example, ‘the trustees are looking for clear recommendations on which stocks to invest in’ – a statement that would enable the trustees to properly hold the adviser accountable for the investment outcomes;
- Quantification of the objectives including secondary objectives such as asset sector targets. Information on the trade-off between risk and return. For instance, ‘the trust is targeting a real return of 4% per annum after fees and expenses over a five-year period’;
- A statement of the trustees’ investment philosophy and beliefs – ie the thinking that is going to drive the implementation of the investment strategy. For example, do the trustees believe that the investment strategy is best implemented by active or indexed investment management?
- The strategic asset allocation including whether the trust will make any tactical investment decisions. A table with the asset sectors, the benchmark allocations and the agreed ranges;
- Statement of the different policies regarding the investment of the funds. For example, liquidity and cash flow management, including the currency management policy and the benchmark level of hedging for global shares together with whether or not the trustees want to actively manage the currency exposure;
- Statement on the mandate for each asset sector covering any investments which are not permitted. Even where all the assets are allocated to fund managers and managed in accordance with a fund’s prescribed mandate it is important for the trustees themselves to set broad limits for each asset sector;
- Reporting, including how any breaches of the SIPO will be reported. The frequency and content of reporting, including setting up a peer group to judge the overall performance.
The new Financial Markets Conduct Act (FMC) requires retail investment schemes to have copies of their SIPO available to investors on the web. The regulator will be publishing good practice guidelines on how SIPOs are disclosed. This increased transparency is likely to result in more interest from all parties in the SIPO for any trust.
How should trustees get the best out of a SIPO? They need to work hard to fully understand the basic document when it is written or revised.
The first draft of the SIPO will be written by the adviser but trustees must fully understand its content before sign-off. Any new trustee should ask for a copy as a matter of priority, rather than a copy of the latest investment report.
More time should be spent on the document rather than talking to the managers. Perusing a SIPO may not be as interesting listening to market news but for trustees it is more important to understand how and why their funds are invested.
As noted before, the SIPO should be reviewed regularly, which will generate questions from trustees on how the assets are invested. Better questions will arise for the investment advisers and the managers of the funds.
The SIPO can be used to formally record the basis on which the trustees make their decisions. For example, just as the SIPO should state the trustees’ investment beliefs it should also record the basis on which advisers and managers are appointed. This will help trustees clarify the skills they want from these parties and will allow them to easily revisit these appointments in a regular and timely fashion.
Once trustees have updated their SIPO they should be in a good position to answer any question that might arise in regard to the trust and management of the investments.
An example of this occurred during the GFC. It was a very difficult and challenging time for trustees with markets falling and uncertainty as to the future value of investments held. Those trustees who had a complete understanding of the aims and policies of their trust were able to make better decisions while retaining more confidence in the future.
A key point here is that trustees have important responsibilities to their beneficiaries and while they cannot guarantee good future outcomes they should at least be able to guarantee that, with the help of a solid SIPO, they can make good decisions for the trust.