Fundamentals of investment management: Design of the investment policy

The importance of a comprehensive and up-to-date investment policy cannot be overstated. The investment policy provides strategic guidance for the company and treasury teams charged with navigating the dynamics and complexities of cash, and the investment ecosystem. Only by ensuring that all the stakeholders understand and adhere to the same objectives and guidelines can the company successfully manage its cash investments.

Key practicalities

  • Creating a solid approach for cash investments;
  • Providing investment teams with a consistent vision across the organisation for effective decision-making by means of a proportional investment policy, reflecting the business, culture and market characteristics; and
  • Alignment with corporate strategy, risk appetite and treasury policy for coherent investment performance.
In today’s changing regulatory and interest-rate environment, it is essential that investment policies continue to meet the needs of evolving market conditions. A cash investment policy statement is an important part of corporate governance to support sound cash investment decisions.

The key component of a strong governance framework is an effective investment policy. An investment policy (statement) provides consensus, transparency and control for all key stakeholders, enabling organisations to deploy agreed and appropriate investment strategies. While affirming common investment objectives, and depending on the corporate culture, the policy may provide some degree of flexibility and adaptability to take advantage of market dynamics and emerging opportunities.

Key benefits of an investment policy

  • Provides clarity across the organisation and allows the board to exercise control. The board is accountable for overseeing the implementation of the policy.
  • The treasury department may be able to use the company-wide acceptance of the policy when seeking control over operating companies throughout the group.
  • Serves as a strategic guide for the treasury department in the planning and implementation of cash investment by prescribing:
    • The agreed short-term investment parameters and limitations;
    • Discipline and control; and
    • Means to optimise cash.


The main objective of the investment policy is to affirm and institutionalise the cash management objectives of the company. Depending on company priorities, cash utilisation patterns, business outlook, state of the economy and the industry in which the organisation functions, corporations will have several objectives for the management of their cash. Ultimately, these objectives will guide the investment strategy and assist to appropriately segment cash assets.

Common objectives include:

  • Principal preservation;
  • Sufficient liquidity/meeting forecasted cash-flow requirements;
  • Provide yield/income;
  • Provide tax-advantaged returns; and
  • Seeking above-benchmark returns.

Ideally, the policy objectives should also reflect duration, specifically indicating whether the maturity of assets should be actively adjusted to remain within a stated range or whether a buy-and-hold strategy is preferred.

Designing an investment policy

1. Risk identification, assessment and evaluation
The first step in designing an investment policy is clearly articulating the parameters of the policy:
  • Describe the overall investment objective;
  • Define risk tolerance and appetite;
  • State any minimum return, maximum risk and spending assumptions; and
  • Note any relevant constraints such as liquidity requirements, local tax considerations, restrictions on certain investments, legal constraints, etc.
2. Treasury policy – risk response
Having defined the parameters of the risks, there are a number of ways in which the risks can be managed:
  • Avoid the risk, adjusting business strategy where possible;
  • Transfer the risk, outsourcing key aspects;
  • Reduce the risk, introducing controls or other mitigation;
  • Accept the risk, where risk is negligible – organisation has high risk appetite through expertise, or where risk is too complex to mitigate; and
  • Manage the risk through internal controls. Internal controls help manage risk by means of a defined, common classification used to help create the right mix of controls: directive, preventative, detective and corrective.
3. Risk reporting
Once the parameters and approach have been defined, it is important for the policy to define how the risk owners (typically the board) will ensure that whoever the risks have been delegated to (for investments, typically the treasury team) are performing in line with their delegated authority. It should therefore:
  • Specify the various roles and responsibilities in carrying out any necessary actions in line with the investment policy;
  • Assign responsibility for risk management monitoring and reporting;
  • Ensure that risks and performance are regularly reported on and assessed to ensure exposures are within the risk appetite of the organisation; and
  • Describe the process related to reviewing and updating the policy.

How to develop an investment policy

It can be tempting to look at publicly available examples of investment policies and to combine these when designing your own. However, the key to making sure any policy is useful is to understand the scale and complexity of the business to ensure it is relevant and proportionate. A large multinational, for example, with subsidiaries spread over continents managing different currencies, will consequently have a relatively complex investment policy.

The following checklist is useful in designing a policy and also when reviewing existing ones:

Who is responsible for governance, oversight and maintenance of the investment policy?
  • Who will set the investment objectives?
  • Is there third-party involvement?
  • Who has authority over governance?
  • Who will make investment management decisions?
  • Who will evaluate how well the investment programme meets its objectives?
What is the scope of the policy?
  • Does it cover just investments or does it also include cash management?
  • Is it for guidance or mandatory purposes?
  • Does it cover all business units, subsidiaries, joint ventures or just head office?
Which activities are centralised?
  • Are surplus funds centrally remitted, leaving little/nothing to invest locally?
  • Where some funds are kept locally, is there a de minimis limit for local units? Is it the same amount for all local units or does it depend on local conditions?
What is the order of importance for investments?


  • Will we see interest earnings back?
  • Will the principal be returned?


  • Where is the workable balance between liquidity and long-term investments for the organisation?
  • What is a sensible level of contingency for liquidity planning? Is it based on business activity or is it a fixed amount? Does it vary according to the season (ie may be higher for a clothing business, which is weather dependent, during the summer).


  • Is the yield sufficient to cover the risk?
  • Prudence (for example, AAA only) or some other minimum level of credit rating?
"Once defined, one would not expect to see regular material changes to investment policies because they are in place to outline the investors’ appetite, which shouldn’t expect to change - unless of course there is a material change in the business or entity. However, as we do with our investment policy and/or guidelines, such as those we have for our money market funds, we have to adapt to market changes. That doesn’t mean we are continually materially changing our investment and risk policy, but it is about being responsive and adaptive to significant change. There may be specific market conditions that change over time that mean that we need to adapt either temporarily - as the was the case during the height the COVID-19 pandemic in 2020 as markets became increasingly illiquid prompting us to increase daily and weekly liquidity levels where secondary market liquidity was highly compromised, or more permanent changes. A good example of that would be the period post the global financial crisis, where the supply of investments available for us to invest, or any other MMFs to invest, changed. New banking regulation reduced demand for short-term funding, so we needed to adapt to that change and the policy reflected that. Investment policies are a requirement of good practice, but must be responsive to material change, unless the risk appetite of the business or investor materially changes."
Jonathan Curry
Global CIO of HSBC Global Asset Management (USA) Inc and global CIO for liquidity


All investment decisions should be subject to a regular appraisal and reporting process. Regular reporting enables the board and stakeholders to understand how policy and risk appetite has been translated into actions and detail the resulting risks.

Typical reports may cover:
  • Investments held with respective counterparts (parent and subsidiary company level) showing the approved limit (based on its credit rating) with any stipulation as to headroom;
  • Counterparty limits and notification as to when the credit rating was last changed;
  • Duration of investments compared with any pre-agreed limits;
  • The maximum duration of any single investment; and
  • Country risk based on the sovereign credit rating and where the financial counterparties are domiciled.
Reporting variety and frequency will depend on economic environment and/or the level of risk for a company. Consider the following:
    1. During the early stages of the pandemic in 2020, many organisations increased the levels of liquidity held. This action would have increased the counterparty risk (notably when the credit rating of financial counterparties may have been at risk) and as a result regular weekly or daily updates were required on available liquidity, forecast cash flows and bank counterparty risk.

    2. A business experiencing a shortage of liquidity may upgrade to daily updates of available cash and the due dates of material customer receipts.

    3. Consider a country (for example, Greece 2007/8), which represents a significant source of revenue, is experiencing extreme economic pressures. It may be important to assess and monitor the credit ratings of the local banks more frequently, supplemented with additional research, or even radically update the policy to restrict investments with counterparties domiciled in that country.
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