Building a Solid Investment Foundation

In May, several Treasury conferences from Oregon to Massachusetts had well-attended sessions on investment policy design and construction. This interest may have been sparked by upcoming regulatory changes affecting bank deposits and money market funds, as the risk/reward nature of these investments is under review and likely to change.

A robust investment policy enables controlled exposure to a variety of securities, which provides a greater selectivity of credits and diversification than money market funds or deposit products currently offer. At the same time, an investment policy that provides the flexibility to increase maturity limits beyond money market funds can increase yield opportunities while targeting liquidity needs.

Though some of the conference attendees may have been interested in developing a policy for the first time, anyone with an existing policy should consider reviewing it annually to reflect the changing investment landscape and new or evolving asset classes. Even with a well-written policy in place, one must understand an investment policy should only be used as a secondary level of risk control and it never should be relied upon as the sole means for risk management.

Implementing an investment policy is just the first step in portfolio risk management and it should be combined with a disciplined credit process that both selects and monitors credits within the constraints of an investment policy to achieve the greatest effectiveness. While it’s nice to view daily compliance, investment policy compliance will not capture spread widening due to deteriorating credit fundamentals until after the ratings are adjusted outside of investment policy parameters.

Since an investment policy is an important document for establishing broad risk parameters, this month we thought we would take an in-depth view of the best practices for investment policy design.

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Best Regards,

Ben Campbell
President & CEO