Endowment Investment and Spending Policy.doc


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Endowment Investment and Spending Policy.doc

  1. 1. VIRGINIA STATE UNIVERSITY Section: Board of Visitors Policy Number: 104 Policy Name: Investment and Spending Policy for Endowment Effective Date: January 2006 Review Date January 2008 INVESTMENT AND SPENDING POLICY FOR ENDOWMENT The Board of Visitors of Virginia State University is responsible for establishing and maintaining the corporate policies by which the Board will conduct its affairs and operations. As cited in the Bylaws, the Development Committee shall operate within a broad framework of policy set by the Board of Visitors and shall have direct responsibility for the oversight and management of the endowment funds and for the establishment of related investment policies and practices. This Investment and Spending Policy for Endowment documents the philosophy and practices employed by the Board in the role of managing the Board’s endowment. It is the duty of the Development Committee to conduct a formal review of this document not less than once every three years and submit to the Board a recommended updated policy. The Investment and Spending Policy for Endowment was last amended by the Board of Visitors at its meeting on April 15, 2005. The Development Committee has undertaken a thorough examination of this policy and updated the document to reflect its current recommendations. Accordingly, be it RESOLVED, That the Board of Visitors of Virginia State University accepts the recommendations of the Development Committee and approves the Investment and Spending Policy for Endowment as herein written and presented. I. STATEMENT OF PURPOSE AND OBJECTIVES A. This policy is issued by the Development Committee of the Board of Visitors of Virginia State University. The purpose of the document is to not only foster clear understanding of the Board’s investment objectives and practices, but also to provide clear guidelines for action. B. This statement applies to those pooled endowment funds for which the Board has investment responsibility (hereafter called the “Endowment”). The following is a list of these pooled funds, which have differing guidelines and restrictions:
  2. 2. Page 2 Pooled Investments The Pooled Investments portfolio is the general investment depository for gift contributions to the Endowment. Eminent Scholars The Eminent Scholars portfolio consists of funds which by donor restriction support named faculty professorships. The Commonwealth of Virginia’s Eminent Scholar Program provides matching dollars to a portion of the disbursement from these funds. Investment and accounting considerations require that Eminent Scholar funds be invested in a portfolio separate from Pooled Investments. Virginia Assistance Program The Virginia Assistance Program is an investment portfolio consisting of scholarship funds that have been contributed after the eligibility date of July 1, 1991. The Commonwealth of Virginia provides matching dollars to a portion of the disbursement from these funds. Investment and accounting considerations require that Virginia Assistance scholarship funds be invested in a separate portfolio. C. This document can be modified as necessary by the full board upon recommendation by the Development Committee and should be formally reviewed by the Committee not less than once every three years. II. DEFINITIONS Endowment Funds are contributions given to the Board with a donor-imposed restriction that the funds are not to be expended but are to be invested for the purpose of producing income. Unless otherwise stated by the donor the principal of the funds is to be maintained in perpetuity. The donor may also place restrictions on the purpose or purposes for which the income may be expended. Funds functioning as endowment (quasi endowments) are funds that the Board of Visitors has designated are not to be expended but are to be invested for the long term purpose of producing income. Quasi endowments can be either unrestricted or donor restricted for a particular purpose. Total return is the sum of capital appreciation (or loss) and current income achieved in the form of interest, dividends, and rents. Real total return is total return adjusted for inflation as measured by the Higher Education Price Index (HEPI). Real growth in the endowment is real total return less that of annual spending and management fees.
  3. 3. Page 3 III. FIDUCIARY RESPONSIBILITIES (Replaces the former Appendix A) Visitors who are appointed to the Development Committee shall have oversight responsibility of the Board’s endowment funds. This Committee also has the standing responsibility to establish management policies; monitor investment performance; periodically review investment guidelines; and upon thorough evaluative means recommend to the full Board decisions regarding the retention and dismissal of investment counsel. Upon the recommendation of the Development Committee, only the Board of Visitors, or the Executive Committee acting between meetings of the Board, shall have the power to employ or discharge investment counsel. Members of the Board of Visitors have a fiduciary responsibility to comply with the restrictions imposed by the donors of endowment funds not to expend the principal of such funds and to expend the income only as directed. Members of the Board of Visitors also have a legal responsibility to manage funds in compliance with The Uniform Management of Institutional Funds Act (herein after referred to as “the ACT”), passed by the Virginia Legislature in 1973. Chapter 15 of Title 55-268.6 of The Code of Virginia (1950 as amended) addresses the Act and outlines the appropriate standards of conduct: “In the administration of the powers to appropriate appreciation, to make and retain investments, and to delegate investment management of institutional funds, members of a governing board shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision, and in so doing they shall consider long- and short-term needs of the institution, in carrying out its educational, religious, charitable, or other eleemosynary purposes, its present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. (1973, c. 167)” Employees of the Board, University, or others engaged by the Board in any business or advisory capacity are expected to uphold these same high standards of responsible and ethical behavior. IV. INVESTMENT OBJECTIVES A. The Board seeks to achieve maximum long-term total returns within prudent levels of risk. Returns are expected not only to preserve but enhance the real value (inflation- adjusted purchasing power) of the Endowment after funds are released for current use. To meet these goals, the investment objective is to achieve real growth of 2.0% over the long term, i.e., real total return less that of annual budgeted spending and management fees. The measure of inflation to be used in adjusting for real purchasing power should be the Higher Education Price Index, a measure of college and university costs.
  4. 4. Page 4 B. Risk should be reduced with a broadly diversified portfolio of asset classes, which may include the following: public domestic and foreign common stock, public domestic and foreign fixed income, cash, public and private real estate investment trusts, venture capital, oil and gas limited partnerships, domestic and foreign private equity, and other private market investments. Investment risks are considered with the context of the whole Endowment portfolio. C. All investment portfolios will be managed and evaluated from a basis of total return. All management fees will be born by the individual portfolios either from interest income, dividends, or realized capital gains. V. ENDOWMENT SPENDING POLICY A. The Pooled Investments portfolio and the Virginia Assistance Program portfolio shall have annual spending rates no higher than 4.7% of the average market value of the portfolio calculated over the preceding three calendar year-ends. B. The Eminent Scholars portfolio shall have annual spending rates no higher than 6.2% of the average market value of the portfolios calculated over the preceding three calendar year-ends. C. The spending rates that the Investments Committee recommends to the Board will be reviewed annually. These payout percentages and the annual overhead expense for internal management costs will be reviewed and adjusted as deemed prudent by the Development Committee as the annual budget of the Board of Visitors is prepared. VI. PORTFOLIO COMPOSITION AND ASSET ALLOCATION A. Asset allocation is the single most important component of investment strategy. For purposes of investment policy, the endowment assets shall be considered as two parts: an “equity fund” and a “fixed income fund”. The Committee will establish for equities and fixed income a long-term policy range or band, as well as long-term target allocation. B. The “equity fund” is intended to provide long-term capital appreciation and a growing stream of income. It is recognized that the “equity fund” by itself will likely entail the assumption of greater price variability than the “fixed income fund”. The purposes of the “fixed income fund” are to provide a hedge against deflation to provide a source of current income, and to help diversify the total endowment. C. Asset allocation ranges for each portfolio’s investments in each asset class are established by the full Board and listed below. Within the approved ranges, the Development Committee may change target allocations whenever it deems necessary or desirable; such changes may be enacted by a simple majority of the full Development Committee (active voting members) at an announced meeting which attains a quorum. Allocations can also
  5. 5. Page 5 be changed between announced meetings of the Development Committee when a simple majority of the full Committee (active voting members) approves said action as detailed in an official mailing or telephone ballot distributed to the full Committee. Normative policy allocations are noted below as long-term neutral positions which reflect the Development Committee’s long-term strategic objectives. Some variance to set allocations may occur because of the delay between the time funds are committed to and then called for investment in illiquid alternative strategies. ASSET ALLOCATION FOR PORTFOLIO GROUPS Group A: Pooled Investments, Virginia Assistance Program Group B. Eminent Scholars Group A Group B LONG - TERM LONG - TERM NEUTRAL NEUTRAL TARGET RANGE TARGET RANGE Equities 80% 40-85% 80% 40-85% U.S. Common Stock 45% 30-70% 45% 30-70% Foreign Common Stock 20% 5-25% 20% 5-25% Alternative Investments*: 15% 10-20% 15% 10-20% Fixed Income 20% 15-55% 20% 15-55% Cash 0% 0-25% 0% 0-25% *Alternative Investments is a general term referring to equity investments with longer investments horizons and less liquidity. Such investments may include, for example, private equity investments, public and private real estate investment trusts, venture capital and oil and gas partnerships. Alternative Investments by definition will also include hedge fund investments. D. New cash flow shall be forwarded to investment managers on a quarterly basis, or when sufficient contributions are received. As a general rule, new cash will be used to rebalance the total fund in the direction of the long-term targets currently in place. E. Commitments to illiquid private capital strategies will be at a $ ____ minimum (per pool) as commitments short of this amount will not significantly enhance the return which is expected from the investment. By their nature, private capital investments are very labor
  6. 6. Page 6 intensive and hence this minimum level of investment is required to justify the extra work involved. Hence, the smaller investments pools may at any time reflect a greater allocation in traditional equity investments and less in alternative strategies. MANAGER GUIDELINES When securities are commingled into investment pools with multiple participants, the Development Committee will evaluate the investment pool as a whole for its overall asset quality, stability, and historical performance. In such cases, if the Board of Visitors decides to participate, the investment policies and practices of the commingled pool will override the Board’s policies and guidelines required of actively managed separate accounts. However, where applicable, the Development Committee will measure its commingled pool investments according to equity and fixed income guidelines established for separately managed accounts. When active investment management responsibilities are delegated to an investment advisor for a separately managed account the Development Committee will establish guidelines regarding the quality and suitability of assets allowed in the portfolio. These guidelines are as follows: VII. GUIDELINES FOR THE “EQUITY FUND” A. The overall investment objective of the “equity fund” is to outperform the appropriate benchmarks (see Appendix A) by at least one percentage point, net of fees, as well as a peer group of managers. Individual managers may be expected to outperform other indices, or hybrid indices, which more closely parallel the manager’s investment style. Such indices will be determined on a case-by-case basis in consultation with the manager. B. “Equity fund” common stock managers may at their discretion hold cash equivalents or bonds without limitation, with the understanding that their performance will be measured against equity benchmarks (as detailed above in Appendix A). C. No more than 5% of a portfolio’s market value may be invested in the securities of any one company at cost except by written exception. D. Financial futures, option contracts, and other financial derivative instruments may not be employed without the Committee’s prior permission. VIII. GUIDELINES FOR THE “FIXED INCOME FUND” A. The investment objective of the “fixed income fund” is to outperform the appropriate benchmarks (see Appendix A) by at least one percentage point, net of fees, as well as a peer group of managers. Individual managers may be expected to outperform other indices, or hybrid indices, which more closely parallel the manager’s investment style. Such indices will be determined on a case-by-case basis in consultation with the manager.
  7. 7. Page 7 B. Money market instruments may be used, but equities are excluded. C. Securities in the fixed income portfolio must be rated a minimum of “A” by Moody’s or Standard & Poor’s. The weighted average of each fixed income portfolio shall be “A” or higher. The prospect of credit risk or risk of permanent loss must be avoided. The investment manager shall inform the Chair of the Development Committee if a held security has been downgraded below investment grade by both rating agencies and the Chair shall decide whether the security is retained or sold. D. In general, the “fixed income fund” must be well diversified with respect to economic sector, financial sector, and issuer in order to minimize risk exposure. No more than 5% of the fund may be invested in the securities of any single issuer, with the exception of the U.S. Government or its agencies. IX. GUIDELINES FOR TRANSACTIONS Except under unusual circumstances, all transactions should be entered into on the basis of best execution, which means best realized net price. Notwithstanding the above, commissions may be designated for payment of services rendered to the endowment in connection with its management; however, under normal business conditions it shall be the standing policy of the Board not to direct brokerage, and such practice will be directed only with prior approval from the Chair of the Development Committee. X. MONITORING OF OBJECTIVES AND RESULTS A. If at any time any manager believes that any policy guideline inhibits investment performance, it is that manager’s responsibility to communicate this view to the Committee. In the event that an investment manager believes that circumstances warrant immediate exception to any standing instructions or guidelines cited in this policy, the manager will so notify the Chair of the Development Committee, or, in his (her) absence, the Rector. If the request be verbal it will be necessary for the manager to later document the request in writing to include the reason for exception and its prospective duration. The Chairman of the Development Committee will have the authority to use his (her) best judgment in deciding the matter unilaterally or deferring the decision to the Rector. The issue of the exception and the decision rendered would be reported to the Committee at the next scheduled meeting of the Board. B. The investment manager(s) will provide a performance report at the end of each calendar quarter of the organization’s administrative staff and to each member of the Development Committee. This report will include relevant historical performance data and sufficient commentary to explain current strategy and investment returns. The manager(s) will also provide detailed information to the administrative staff regarding unit valuation, capital
  8. 8. Page 8 appreciation, realized gains or losses, income earned, and income distributed back to the Board. C. The investment manager(s) will meet with the Development Committee at least on an annual basis. The manager(s) will be expected to include the following in presentation to the Committee: 1. Review performance of the respective portfolios (or commingled fund pools) owned by or in which the University participates. Performance review will include the latest quarter, six-months, year, and since inception. Relevant statistical benchmarks as requested by the Committee will also be provided for comparison purposes (see Appendix A). 2. Explain to the Committee’s satisfaction how and why performance differed from the relevant benchmarks. 3. Disclose to the Committee the level of market risk inherent in the portfolio (the beta of the portfolio) and the means and methodology by which risk is monitored and controlled. 4. Discuss investment strategy (or that of the firm) and relate how such strategy complies or conflicts with the Committee’s established investment guidelines. Review the current and prospective economic climate and discuss what implications this has on the Board’s invested endowment. 5. Recommend to the Committee any modifications to further improve the performance and efficiency of assets under management. D. The Committee will periodically review the related services provided to the Endowment including custody services, performance evaluation and consulting.
  9. 9. Page 9 APPENDIX A BENCHMARKS FOR PERFORMANCE MEASUREMENT In order to measure and evaluate the individual investment performance of the Board’s retained investment advisor(s), and that of investment performance in the aggregate, the Development Committee has established the following benchmarks by which the advisor(s) will be evaluated: A. For domestic common stock investments, the policy benchmark will be the Russell 3000 Index. For international equities, the policy benchmark will be the MSCI World Ex-US Index. Where domestic and international equities are employed in a commingled fund approach an appropriate weighting of these two indices will measure fund performance. Other benchmarks may be specified by the Committee which weighted appropriately would constitute a blended equity benchmark. B. For fixed income investments, the benchmark will be the Lehman Brothers Aggregate Bond Index. C. For investments in emerging markets, the benchmark will be the IFC Investable Index. D. For investments in real estate, the benchmark will be the Russell NCREIF Property Index (as developed by Frank Russell and the National Council of Real Estate Investment Fiduciaries). E. For investments in venture capital, private equity, and energy partnerships, one benchmark will be the pooled mean return (net to limited partners) of all comparable equity partnerships formed in a given year, or over a series of years, as compiled by Cambridge Associates. Another benchmark for private capital returns will be the S&P 500 return + 500 basis points. F. Individual managers may be assigned substitute benchmarks for their individual styles of management. Individual commingled funds within an investment pool may be assigned specific benchmarks. These various benchmarks may be weighted appropriately to render a tactical blended benchmark for the total investment pool. The Board will also make use of appropriate peer manager medians for asset classes or investment style categories. Other statistics may be utilized for additional comparative purposes.