We look after and protect our homes, families, jobs and cars. So why be any different with our investments? A Statement of Investment Policy and Objectives (SIPO) will help protect your investments and make your investing intentions clear for future generations.

When you are considering your personal investments it’s important you have clear goals, processes, and targets. Having these will help you convey your investment hopes to your family as well as to any financial professionals managing your portfolio. One of the most efficient ways of communicating your investment goals is to complete a Statement of Investment Policy and Objectives (SIPO) document.

Creating a SIPO does require you to do some groundwork, and the suggestions below are extensive. But it is well worth the effort. A customised SIPO gives all parties associated with your investments clear processes, and it sets expectations. The document can be used, and expanded on, for generations, and provides a great platform for starting discussions around suitable investments and advisers.

Contents of a SIPO

A SIPO needs to contain as much detail as possible, in order for a third party to be able to easily step in and execute your investment strategy. Yet it should not be so complex that a manager gets bogged down in unnecessary information.

A well-written SIPO keeps the overall portfolio focused on the longer-term objectives. It can also help the investment manager avoid the temptation of chasing the latest investment idea.

1. Investment time frames: how long do you want to invest for?

2. Income requirements: do you need your investments to generate a steady income over time?

3. Capital needs: do you anticipate the value of your capital growing?

4. Appropriate risk profile: are you a conservative investor or do you take a more aggressive stance?

5. Asset allocations: how do you wish to spread your money between different investments?

6. Preferred investment themes: are you inclined to favour particular types of investment or market sectors?

7. Restrictions: do you have any constraints or limitations?

8. Reporting and rebalancing frequencies: how often do you want your advisers to review your investment portfolio with you? And how often should the portfolio be realigned to reflect the original asset allocation you have specified?avoid the temptation of chasing the latest investment idea.

CUSTOMISING A SIPO

A SIPO can be easily customised to clarify an investor’s wishes. The following topics are a guide to help you think about what might, or might not, be important to you in future-proofing your investments.

Governance and protocols

It’s important to put some thought into the continued management of your investment beyond your own lifetime. In some cases, it’s good to create an investment committee to consider and debate possible solutions. A committee can be made up of family, and trusted professionals such as accountants or lawyers.

Once an investment committee has been established, it’s worth considering how future issues may be addressed. Issues such as who’s responsible for ensuring the correct process is followed, or changed, if objectives become unachievable or outdated?

It’s also important to define policies for hiring and firing an adviser, committee member or fund manager from the management of your portfolio.

Aspirations and objectives for the investment portfolio

A SIPO should state the targeted level of return or investment objectives. This enables the investment manager to provide a suitable portfolio, outlining the outcomes that can be expected. Alternatively, it gives them an opportunity to offer feedback around any unrealistic goals. You should consider:

• Income expectations of the portfolio. Is there a need to produce a sustainable income and, if so, how much and for how long?

• Maximum and minimum terms of the investments. For example, if you’ve given an adviser a 30-year time frame, they may have recommended investments that are locked in for 10 years. So it would create problems if you reduced the investment term to five years.

• Expectations around income and capital growth. Are you striving for capital growth to outstrip inflation over the medium term? Or would you accept a decline in capital in favour of producing income?

Preferred investment approach

Let the SIPO remain flexible as to whether you take an active or a passive approach to investment. Your adviser may well have a preference, but future circumstances could dictate that a different approach is needed. At Private Wealth Advisers, we have seen SIPOs that stipulate only a passive investment approach should be followed. This sort of limitation can prove difficult for advisers, if they don’t believe it will generate the best returns for their client.

Be clear about the types of companies you want to invest in. For instance, do you want to limit your investments to ‘ethical funds’ and avoid buying shares in ‘unethical’ companies such as those selling guns or cigarettes? Or would you be open to an investment manager who selects investments using Ethical, Social & Governance (ESG) criteria? Or are you simply happy to invest in any company, with no limitations at all?

Think about how flexible you want to be in the allocation of your funds to different types of investment. Your advisers may recommend that you have, say, 35 per cent in international shares. Would you be prepared to adjust that allocation by plus or minus 10 per cent depending on share market performance?

Consider as well whether you need the ability to convert your investments to cash. Do you want to be fully invested in the share market at all times, in the belief that the markets will work themselves out after a period of volatility? Or do you want to be able to exclude certain assets if they have a high risk of capital loss?

Realistic expectations around performance and volatility

In the past we have seen a number of SIPOs that have included unrealistic targets. These desired long-term returns have usually been set by an adviser. But they may have simply been the return the investor needed to achieve other goals. We advise you to consult with an expert independent of the investment manager – for example research houses, such as Morningstar, Lonsec, or Mercers – to get an accurate forecast of expected market returns and volatility.

If you’d like to complete a SIPO document before making an investment, your investment adviser or other financial professional will be able to supply you with one.

DEFINITIONS

ACTIVE INVESTMENT: an investment-management strategy that tries to outperform the equity market (or benchmark index) through buying specific shares at favourable prices and selling them again when they have climbed in value.

PASSIVE INVESTMENT: an investment-management strategy that does not involve active buying and selling of shares. The aim is to mirror market performance, and index funds are often used as a means of doing this.

First published 14 September, 2016

By Jack Powell

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.