IPS: a practical guide for trustees

Insights

Why an IPS is the foundation of investment governance, and how Enhance turns the policy parameters trustees set into the mandate compliance checks Monitor runs every quarter

4 mins

Topics

Foundations Monitor Connect

Author

Tom Wiseman

CEO

Tom is the Chief Executive Officer of Enhance Group overseeing our multi-jurisdictional Monitor and Select solutions from our Jersey headquarters.

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A trust company’s investment governance process should start with an investment policy statement (IPS) for every portfolio. Without one, the trustee has no documented framework against which to evaluate the investment manager and limited defence if challenged. This article explains what an IPS should cover, how the parameters it sets translate into the mandate compliance checks Enhance runs every quarter, and where the IPS gaps that hurt trustees most often lie.

Why an investment policy statement is non-negotiable

The legal duty trustees owe in respect of investments is to act with the care of an ordinary prudent person of business and to keep the trust’s investments under regular review. The principle was set out in Bartlett v Barclays Bank Trust Co Ltd [1980] and reinforced in Nestlé v National Westminster Bank plc [1993]. STEP, the global professional body for trust and estate practitioners, treats the IPS as a baseline of best practice. A trustee operating without an IPS is on the wrong side of all three.

What an IPS should cover, return & risk, holdings, tax

An IPS is not a marketing document and it is not a market commentary. It is a structured statement of the parameters that govern how a portfolio is to be managed and against which the manager will be held to account. Parameters fall into three extended families, return and risk, holdings, and tax, and each family translates directly into the checks an independent monitoring service can run.

Return and risk parameters set the financial expectations against which the manager will be measured, and the appetite for risk that comes with pursuing them. They typically include a target real or nominal return, a primary benchmark or composite (see Benchmark selection), an explicit volatility ceiling, a maximum drawdown limit (see Maximum drawdown) and a risk-adjusted return measure such as Sharpe ratio. Together they define what the trustee considers success: not just absolute performance, but performance relative to a defined benchmark, within a defined risk envelope, tested independently and reported consistently every quarter.

Holdings parameters define the shape of the portfolio itself, what it can hold, in what proportions and within what limits. They typically cover asset-class allocation bands, single-security and single-issuer concentration caps (see Concentration risk), single-counterparty exposure limits, currency mix and hedging policy (see Currency risk), sector and geographic diversification limits, and liquidity floors. Holdings parameters are what stop a manager from quietly converting a balanced mandate into a high-conviction concentrated one. They are the most directly testable family of parameters for an independent monitoring service.

Tax parameters in an IPS articulate the trust structure’s tax position and the constraints that flow from it. They typically cover the situs of permitted holdings (for example, excluding US-situs securities from non-US trusts to avoid US estate-tax exposure), income and capital separation requirements, withholding tax considerations on dividends and coupons, and the use or avoidance of specific fund domiciles. Tax parameters are jurisdiction-specific, structure-specific and unforgiving: when the manager misses one, the consequence is borne by the beneficiary, not the manager.

From IPS to mandate compliance, the checks Enhance runs

An IPS is only useful if the parameters it sets are tested. That is what Monitor’s mandate compliance checks do. Each quarter, every portfolio under monitoring is independently assessed against a comprehensive suite of return, risk and holdings tests calibrated against the trustee’s IPS parameters. Enhance can accommodate most parameters trustees include in an IPS: performance benchmarks, volatility and drawdown limits, concentration tests, currency exposure ranges, liquidity floors and holdings-level filters. Where a check fails, the result is an action point, captured, classified and tracked through to resolution inside Connect.

When Enhance can’t check it directly, the action point fallback

A small minority of IPS parameters cannot be directly tested by an external monitoring service. They depend on data only the manager holds, or on representations only the manager can give. Enhance does not let these parameters drop. For every IPS parameter we cannot test directly, we raise a recurring action point asking the trustee to confirm compliance with the manager, with the response captured and time-stamped in Connect.

Route	How the IPS parameter is tracked
Tested directly	Most return, risk and holdings parameters, mandate compliance check run by Enhance every quarter against independent data sourced through Connect. Breaches generate an immediate action point.
Chased actively	Parameters that depend on manager-only data or jurisdiction-specific representations, a recurring periodic action point asks the trustee to confirm compliance with the manager, with the response captured and time-stamped in Connect.

Where IPS gaps hurt most, drawdowns and situs

Most IPS reviews focus on the return side of the return-and-risk pillar because returns are the most visible and most discussed dimension of a portfolio. But the IPS parameters that have produced the largest trustee losses are usually elsewhere. Two recur often enough to deserve specific attention.

Drawdowns. Large peak-to-trough losses are the single most common cause of beneficiary complaint and trustee challenge. A portfolio that loses 35% in a quarter without an explicit drawdown limit in the IPS leaves the trustee defending a loss that was never bounded in the first place. Setting a maximum drawdown ceiling for every mandate, calibrated to the risk profile, gives Monitor something specific to test against (see Maximum drawdown).

Situs. The geographic location in which a security is treated as held for tax purposes. Failure to comply with situs restrictions can produce tax consequences that dwarf the underlying investment performance. Excluding US-situs securities from non-US trust portfolios is a common example; the estate-tax exposure on a single oversight can cost a trust more than several years of performance.

Both are governance failures more than investment failures. A robust IPS, paired with mandate compliance checks that test for both directly where possible and via action point follow-up where not, takes them off the trustee’s exposure list.

The bottom line

An investment policy statement is the foundation document of investment governance for trustees. The legal duty, professional best practice and practical reality all point to the same conclusion: a trust company operating without an IPS for every portfolio is operating without a compass. With your IPS in place, Enhance’s Monitor service translates every parameter into a quarterly mandate compliance check or a recurring action point, leaving no IPS parameter unchecked or unchased. The result is documented, defensible governance aligned with what you are responsible for.

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