Shaping Investment Policies for a Safer Cash Portfolio

2 min read

Executive Summary

We set out to answer 10 of the most common questions related to investment policy statement writing for cash portfolios. In doing so, we will provide a number of peer group data comparisons to further add helpful insight in the process.
The questions address the following investment subjects:

  1. Maximum liquidity limits
  2. Minimum credit ratings
  3. Concentration limits
  4. Percentage of portfolio in overnight liquidity
  5. Benchmark selection
  6. Appropriateness of ABS and MBS in cash portfolios
  7. Prohibited transactions
  8. Addressing conflicts of interest
  9. Monitoring portfolio performance
  10. Resolving out-of-compliance items

Careful implementation of a well-crafted policy statement is an important part of a successful cash investment strategy which may also improve investor-manager communication.

Introduction

Investment policy statements (IPS), also known as investment guidelines, are widely used as important control documents in investment accounts. A recent industry survey showed that nearly 20% of corporate cash investors do not have written investment policies. Of those that do, many contain vague over-permissive or prohibited practices. It is also quite common for investors to permit wholesale adoption of policy guidelines recommended by outside investment managers, even though such recommendations may not always be in the best interest of investors.
In our 18+ years of helping clients develop and review investment policies, we have come to understand the delicate balance between allowing the manager the flexibility to realize higher return potential and the important risk management function of an IPS. Instead of producing a “how-to” manual on writing investment policies, we will focus on some of the common issues faced by cash investors in the policy development process. Wherever applicable, we will provide peer group data from corporate cash investors. Some of the information comes from our own client database and some from third-party surveys. We hope that such peer group data will add helpful insight to the process.
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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