Writing an Investment Policy Statement, Step by Step

Writing an investment policy statement runs in a fixed order: the purpose of the money and the date it is needed, then the return objective and the risk objective together, then the constraints, then who may change any of it. Every line has to reduce to something a person can check today without asking the drafter what it meant. A line that cannot be checked cannot govern.

The drafter is writing a document that will still be read after everyone in the room has moved on. The whole design problem starts there. The people who will use it are a manager reading it on a busy morning, a committee reading it after a bad quarter, and an outsider reading it cold two years from now. None of them can ask the drafter what was meant.

So the drafting runs as a sequence, and the sequence is not a matter of taste. Each section is derived from the one above it. A document that opens with an allocation has begun in the middle. Everything below is the order, one step at a time, worked on the Anantara Multi-Asset Portfolio, an invented Rs 500 crore mandate run for an invented charitable endowment.

Where does the drafting actually start?

Drafting starts with two sentences that nothing else in the document can supply: the purpose of the money, and the date it is needed. Not the size of the portfolio, not the appetite for risk in the abstract, and certainly not a table of weights.

The household case comes before the endowment. Two neighbours have the same savings to the rupee. One is putting a daughter through a five year course starting next June. The other has no call on the money at all and would like to leave it to a trust. Nobody would expect those two to write down the same instructions, and nobody would think the difference had anything to do with how much they had. The purpose and the date are the only inputs to a policy statement that cannot be derived from anything else. Two holders with identical wealth end up with genuinely different documents.

For the Anantara Multi-Asset Portfolio the two sentences are that the money supports the endowment's spending in perpetuity, and that a fixed share of it is drawn each year with no single large call foreseen. The two sentences go down before anything else. The rest of the document is an argument that follows from it, and a drafter who skips this step ends up defending weights that cannot be traced back to a reason.

Why do the two objectives have to sit together?

Step two writes the return objectiveThe statement of what the money is being asked to earn, expressed against something, such as a rate of spending or a stated comparison. and the risk objectiveThe statement of how much movement in value the holder is prepared to live with while the return is being pursued.. Both of them. In the same sentence, or in two sentences that touch.

Putting them together looks like a formatting preference and is not. A return objective separated from its risk objective by three sheets of paper gets read on its own, and a return objective read on its own is a target that can be hit by simply taking more exposure. Physical placement changes how a document is read. Put them side by side and neither one can be quoted without the other. Keeping the two objectives adjacent is the entire reason for the rule.

For the Anantara Multi-Asset Portfolio the pair reads as one line: the portfolio pursues a long term return sufficient to sustain the endowment's annual draw and its purchasing power, and it does so accepting the movement in value that a majority holding in equities produces over a full cycle. One sentence, two objectives, and nothing separating them. How each objective should be worded for a particular holder is settled under the return objective and the risk objective themselves.

Where do the constraint lines come from?

Step three writes the constraints. A constraintA written limit on what may be held or done inside the portfolio, as distinct from an objective, which states what the portfolio is trying to achieve. is not invented at the desk. A constraint is collected, by asking four questions in turn and writing down whatever comes back.

The four questions are what the law requires of this holder, what cash is needed and on what date, what the holder's tax position does to a realised gain, and what is true of this holder and nobody else. Ask them in that order, write the answers, and stop. A borrowed list produces lines nobody needed and quietly leaves out the one that mattered, so the drafter writes constraints from the four sources instead.

The pull to explain any of them at this step is worth resisting. A drafting step that starts describing what a liquidity requirement is has stopped drafting and started teaching, and those explanations are covered separately. At this step the four questions are a collection instrument, nothing more.

What test does every drafted line have to pass?

Step four is the centre of the drafting sequence. At this point the draft is a list of sentences and nothing more. Before any of them is allowed to govern anything, each one gets handed to a person who was not in the room, along with the portfolio record, and that person is asked one question. Can this line be shown as satisfied today, using the portfolio record alone?

The question has a name, the checkability testA single question put to each drafted line: can an outsider, holding only the portfolio record, state today whether the line is satisfied.. A line that survives it governs. A line that needs somebody to explain what the drafter had in mind does not govern, however sensible the idea behind it is, and however carefully the sentence was built.

Notice what is being tested. Not the idea. The writing. A committee can be completely right that concentration is the thing to watch and still produce a sentence that settles no argument. The test does not ask whether the worry was real. The test asks whether the words can be resolved against a record, by somebody with no memory of the meeting.

What does a surviving line get turned into?

Step five converts. Every line that passed the test is rewritten as the thing the manager will actually look at on a screen. A percentage of the portfolio becomes a rupee figure. A range becomes two rupee figures. An exclusion becomes a yes or a no, asked once per holding.

A conversion left to whoever reads it later is a conversion two people will perform differently, so the conversion is done at drafting time, inside the document. The arithmetic is trivial, which is exactly why it gets skipped. On a Rs 500 crore portfolio, a policy weightThe share of the portfolio a document sets for an asset class as its standing position, before any drift caused by prices between one rebalancing and the next. of 60.0 per cent in equities is Rs 300 crore, being Rs 3,00,00,00,000/-. The conversion takes four seconds and removes an entire category of later argument.

There is a second reason, and it is about the reader rather than the arithmetic. A percentage has to be applied to a base before it means anything, and a document that leaves the base unstated invites two readers to pick different bases in good faith. Writing the rupee figure fixes the base in ink.

What happens when the five lines are actually tested?

The Anantara Multi-Asset Portfolio is governed by five lines, drafted by a committee chaired by Rukmini Deshpande and run by Faiz Ahmad Ansari. Here they are, run through the checkability test one at a time, with the conversion done.

Four of the five lines pass unaided and the fifth converts to nothing, and presenting this mandate as uniformly well drafted would teach a reader to stop looking. So look at the fifth. Why would a committee that got four lines right write the fifth one loosely?

The honest answer is that the alternative was worse. Write the line as a rating symbol and the document has borrowed somebody else's scale, along with whatever methodology sits behind it. If that scale is revised, or the meaning of one of its symbols shifts, then what the mandate permits has changed and nobody in the room decided anything. The document quietly means something new on a morning when no committee met.

A line written as a borrowed symbol lets a governing document change meaning without anybody having decided, a worse failure than a line that needs one more paragraph. So the resolution is neither the symbol nor the vague phrase: it is that the document supplies its own definition of the standing, inside itself, where the committee can be held to it. Rukmini Deshpande's committee accepted that as a drafting cost rather than an error, and the count stays four of five until that definition is written.

How tight should a line be written?

Step six is where drafters reach for a principle and there is arithmetic available instead. The question is how wide to write a tolerance rangeThe corridor a document allows a weight to sit inside, stated as two edges around the standing weight, rather than a single point., and the honest way to answer it is to compute what each candidate range hands over.

On the Anantara Multi-Asset Portfolio, one percentage point of the portfolio is Rs 5 crore, being Rs 5,00,00,000/-. The mandate's equity corridor of 50 to 70 per cent is twenty points wide, so it gives Faiz Ahmad Ansari Rs 100 crore of equity exposure to move without asking anyone. Narrow it to 55 to 65 per cent and the same portfolio, unchanged in every other respect, gives Rs 50 crore, exactly half. Narrow it again to 58 to 62 per cent and it gives Rs 20 crore, one fifth of the original.

The width of a range is a rupee figure, and a committee that writes a range without computing that figure has decided how much authority to hand over without knowing how much it was. That is the finding, and it cuts both ways. A tighter range is not automatically better discipline: it takes back delegated discretionThe room a document gives the manager to act inside without returning to the committee for permission each time., and prices move the weights on their own, so it also makes a breach more likely on days when nobody traded at all. The arithmetic is fixed by the size of the portfolio. The width itself is the committee's decision, and a different committee will write a different one.

Who signs it, and what may change it?

Step seven closes the document. Record who signed it and on what date, and then write the change routeThe written path by which a line in the document may be altered: who may propose it, who must agree, and how the change is recorded.: who may propose an amendment, who must agree to it, and where the amendment is written down.

Step seven reads like administration and is not. A document with no change route gets changed informally, and an informally changed limit can never afterwards be told apart from a limit that was simply crossed. Picture the conversation two years out. The equity weight sat at 72 per cent for a quarter. Was the corridor widened by agreement, or was it breached and nobody wrote it down? With a change route the record answers. Without one, the two possibilities are indistinguishable, and the document has lost the one thing it existed to produce.

For the Anantara Multi-Asset Portfolio the closing line records Rukmini Deshpande's signature as chair of the investment committee, the date of adoption, and that any change to a governing line requires a written amendment carried at a meeting of the committee and attached to the document itself.