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  1. 1. The James Madison University Foundation Statement of Investment Policies, Objectives and Guidelines This statement of Investment Policies, Objectives and Guidelines ("Statement") is to establish policies, objectives and guidelines for supervising, implementing, evaluating and monitoring the investment portfolio of The James Madison University (“JMU”) Foundation. The Investment Committee ("IC") is responsible for ensuring that investment fund assets of the Foundation are managed with care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and like purposes. This Statement lists the primary responsibilities of various parties related to the investment fund assets of the Foundation. Additional descriptions of the legal responsibilities of various parties are found in Foundation agreements, investment management and advisory agreements. Purposes The James Madison University Foundation’s purpose is to support the University’s programs at a level equal to about six percent of the Foundation’s three-year (trailing) average assets, assuming that there are sufficient funds available from newly contributed unrestricted funds and from interest earnings, dividend payments, and realized gains. To do so without encroaching on the restricted endowment funds and while observing donor restrictions. The overriding strategy shall be the preservation of the Foundation's purchasing power through sustained growth over the long term to assure its capability to meet the needs of The JMU Foundation. Investment Committee Duties and Responsibilities The IC is responsible for managing the Foundation's investment fund assets in the best long-term interests of the Foundation with prudence and diligence; and to obtain an optimal rate of return at an acceptable level of investment risk consistent with the following overall objectives: • Preservation of capital • Preservation of purchasing power • Ability to fund programs • Growth of assets
  2. 2. Charged with the authority and responsibility as follows: 1. To develop an investment program with diverse risk characteristics across a variety of asset classes. 2. Subject to approval by the Board of Directors, to periodically recommend amendment of this Statement defining the responsibilities, objectives, policies, guidelines and procedures applicable to the management of Foundation investment fund assets. 3. To hire, supervise and terminate investment advisors, investment manager, financial consultants and custodians. 4. To approve contracts with financial service providers. 5. To direct investment and management of the Foundation investment fund assets as follows: a. Recommend approval of asset allocation ranges and targets. b. Authorize periodic asset rebalancing. c. Approve investment performance benchmarks. d. Evaluate investment performance. 6. To delegate signatory authority to implement the IC's decisions; and to negotiate and execute agreements relating to the investment fund assets. 7. To delegate its proxy voting authority to the Investment Advisor; and in accordance with said delegation of authority: a. The IC retains responsibility to periodically monitor the proxy voting decisions, policy and procedures of its investment advisors or investment managers. b. Consistent with the interest and objectives of the Foundation, the IC retains the right to indicate its views on specific proxy proposals to its investment managers recognizing that advocacy is not prohibited influence or coercion, per se. Caution will be exercised to avoid any implication that the IC is directing the vote on any particular proposal. The IC shall meet on call of its Chairman, and maintain a record of its activities. The Committee will report to the Board of Directors as deemed necessary. Management The IC delegates to Management the day-to-day monitoring, supervision and administration of the Foundation investment fund assets and recommend policies, procedures, strategies and performance benchmarks for the investment portfolio.
  3. 3. The IC authorizes Management on behalf of the Foundation to do the following: 1. Negotiate, sign and administer approved contracts with service providers. 2. Monitor investment portfolios and implement approved strategies. 3. Monitor and control expenses and pay vendor fees. 4. Administer the flow of funds. 5. Monitor the activities of out source advisors, investment managers, actuaries, consultants, and legal advisers. 6. Ensure that all financial aspects of the Foundation's investment activity comply with applicable laws and regulations. At least annually, Management will meet with the IC; and report on the composition of portfolio assets, the performance of all portfolios and investment managers and any other significant matters concerning Foundation investment fund assets. Investment Advisor The Investment Advisor, when designated by the IC and identified in Attachment A, shall do the following: 1. Advise the IC on matters relating to the design, construction and implementation of investment portfolios, including performance measurement benchmarks, volatility of performance as measured by standard deviation of return, and the allocation of assets. 2. Implement the portfolio consistent with the directives set out in Attachment A; and manage the assets in accordance with the policies, objectives and guidelines expressed in this Statement or as expressed in a separate written instruction from the IC when deviation is deemed prudent and desirable. 3. Promptly inform Management regarding all significant matters pertaining to the following: a. Material changes in investment strategy and methodology, portfolio structure, and market value of managed assets. b. The investment advisor's progress in meeting the investment objectives set forth in this documents c. Material changes in the ownership, affiliations, organizational structure, financial condition, and professional staffing of the investment management organization, as well as the gains/ losses of clients and assets under management.
  4. 4. 4. Periodically rebalance assets of the portfolio to maintain asset allocation within guidelines. 5. Measure and report performance of portfolios. 6. Meet with the IC as requested. 7. Invest with the care, skill and prudence and diligence under the circumstances then prevailing that a prudent professional investment manager, acting in a like capacity and familiar with such matters, would use in the investment of such funds. Objectives of the Investment Committee The Objectives of the IC are as follows: 1. Invest portfolio assets over a long-time horizon in order to earn a return net of fees in excess of the following: a. The rate of anticipated inflation. b. The rate of spending. c. Cushion to provide for a shortfall and ensure the growth of assets. 2. Diversify the portfolio among various asset classes with the goal of reducing volatility of return (risk), and among various issuers of securities to reduce principal risk. 3. Maintain a long-term perspective on asset allocation (10-15) yrs; therefore, a 70-100% equity allocation is warranted. 4. Active management should exceed an unmanaged passive index, on an after fee basis, by an amount set by the IC and mutually agreed upon with the Investment Advisors. 5. Flippin Bruce & Porter, The London Company and Gryphon Capital are the sole responsibility of the IC. The Investment Advisor shall report performance on these mangers and take them into account in setting the over all asset allocation. 6. All significant cash flows will be communicated to the investment manager’s in sufficient time as to not create a liquidity problem. (10 business days) 7. Over a full market cycle, each manager should be expected to consistently rank in the top half of the appropriate active manager universe.
  5. 5. Investment Program Structure Regular Review The IC shall meet with the investment advisor at least annually, or when market conditions significantly change, to review the selection of relevant asset classes; and to review portfolio performance. Future Return Goal for the JMU Foundation - Risk/Return Tradeoff Given the Foundation's perpetual life, the goal is to achieve the highest return available at a specific level of risk. The return should be adequate to provide for the spending needs of the Foundation, compensate for inflation, and provide a cushion that both ensures for growth of investment fund assets and establishes a reserve for periods of disappointing market experience. The long-term (10-15 years) goal of the investment fund is to sustain or build the purchasing power of its assets, net after all spending. A reasonable estimate of the required return is as follows: CPI 2.5 – 3.0% Spending 6.0 Cushion 1.0 9.5 –10.0% The Foundation's required high rate of return necessitates an asset allocation comprised primarily of equities. An allocation to fixed income securities, in particular high yield bonds, could dampen volatility without unduly comprising expected further return. Investment Guidelines and Benchmarks The following guidelines are to be followed in managing the Foundation's investment fund assets:
  6. 6. Use of Derivative Financial Instruments "Derivative" is a generic term used to categorize a wide variety of financial instruments whose value depends upon or is derived from the value of an underlying asset, reference rate or index. The IC does not authorize the use of derivatives except those, which are designed to hedge (i.e., reduce or neutralize investment risk) investment portfolio transactions or assets; are used to equitize the cash position of equity managers; and meet the following requirements: 1. The notional amount of a derivative instrument does not exceed the amount of the transaction (i.e., purchase, sale or exchange of securities) being facilitated or asset being hedged. 2. Derivatives do not involve leverage. 3. Derivatives bear a direct and substantive relationship to the transactions being facilitated or asset being hedged. 4. The investment managers will not write derivative contracts without specific written approval of the IC. 5. Derivative contracts are entered into only with banks or brokers approved by the IC. U.S. Equity Investments Performance of individual managers will be measured against an index and universe corresponding with the particular style/size category of each manager. Over a full market cycle after fees, each large cap manager is expected to exceed its benchmark by 100 basis points (annualized), each mid capitalization manager by 150 basis points and each small capitalization manager by 200 basis points. Each manager is also expected to achieve this return objective while accepting a level of risk less then or equal to that of the benchmark. To provide proper diversification, individual investment management firms within the U.S. equity class will be categorized and selected on the basis of their style (value/growth) and size (large/mid/small capitalization).
  7. 7. Investment managers will observe the following guidelines: Portfolio Diversification Issue/Issuer Diversification 1. An individual issue shall constitute no more than 10% of the market value of the portfolio at time of purchase. 2. The portfolio shall not hold more than 5% of a single issuer’s total outstanding equity capital. 3. A minimum of 15 individual stocks should be held in each portfolio. 4. Commissions will be monitored to assure that they are reasonable. Non-U.S. Diversification 1. The portfolio may hold non-U.S. securities in the form of American Depository Receipts and Shares (“ADRs and ADSs”) and New York Shares for those countries included in the Morgan Stanley Capital International Europe, Australia, Far East Index plus Canada (EAFE + Canada). The aggregate market value of all such securities shall not exceed 10% of the market value of the portfolio. Permissible Investments 1. Marketable common stocks 2. ADRs and ADSs 3. Preferred stocks convertible into common stocks 4. Fixed income securities convertible into common stocks 5. Managers may invest in cash equivalents from time to time. Restricted Investments 1. Commodities 2. Venture Capital investments 3. Foreign securities except as noted above 4. Direct investment in oil, gas, or other mineral exploration or development programs.
  8. 8. 5. Direct investments in real estate or interest in real estate except purchase of marketable securities of real estate investment trusts and other companies holding real estate or interests in real estate. 6. Fixed income securities except for short term fixed income securities as noted above. 7. The use of derivatives is strictly prohibited. Derivatives are defined as an investment instrument whose value is derived or determined by another security. In general, these securities have a contractual requirement, which may entail further action at some future date, if certain conditions prevail. Securities, which fall under this guidance, include puts, calls, futures and forward contracts. Convertibles (both debt and equity) are excluded from this definition. The purchase of When Issued (WI) securities or new issues (IPO’s) is also excluded from this definition. Commitments for long purchases at a future date are acceptable, so long as the sum of the current assets and the commitments does not exceed 100% of the assets managed at the time of the commitment or provided that the cash liquidity is sufficient to fund these commitments. 8. Short sales. 9. Margin transactions 10. Hot issues 11. Section 144A Securities Non – Equity Investments 1. The portfolio is expected to be fully invested in common stocks at all times 2. The investment manager is permitted to invest in short term fixed income instruments, defined as maturities less then one year. The Investment manager may not invest in any short-term security whose rating is below A2/P2 (or equivalent) or any short-term instrument in any corporation whose senior debt is rated below BBB/Baa (or equivalent). With the exception of U.S. Treasury securities and bank commingled Short Term Investment Funds (STIF), the manager shall not hold any position in any single issuer greater than 10% of the portfolio’s aggregate market value. 3. Non-equity investments, which fall below the specified, acceptable rating, will be sold as soon as practicable.
  9. 9. Revisions and Review 1. The investment manager is prohibited from deviating from any guidelines herein set forth without prior written approval of the IC. 2. The investment manager is encouraged to introduce new investment ideas in the interest of improving overall investment results. 3. Recommendations for guideline revisions shall be provided to the IC in writing and shall include the rationale for the change and all relevant research. 4. Guidelines shall be presented and reviewed by the Advisor at each portfolio review meeting. High Yield Investments Expectations for the total return net of fees on this asset class over a full market cycle are to exceed the Lipper High Yield Index by 50 basis points at no higher level of portfolio risk. Investment managers will observe the following guidelines: 1. There are no liquidity requirements. 2. There are no restrictions on the following: a. Turnover b. Realized gains and losses c. Portfolio allocation to cash/cash equivalents d. Income arrangements (coupon, zero's, floating rates, etc.) 3. The Account is generally expected to be invested fully in below investment grade bonds at all times. With the exception of residual cash, there are no investment grade restrictions on the securities owned. 4. An individual issue shall constitute no more than 10% of the market value of the Account. 5. With the exception of the U.S. Government, its agencies and instrumentalities, the securities of one issuer will not exceed 5% of the market value of the portfolio. 6. The Account may not hold any non-U. S. Securities. International Equity Investments Expectations for the total return on this asset class over a full market cycle are to exceed the annualized return of the Morgan Stanley Capital International Europe, Australia, Far East ("EAFE") Index by 200 basis points after fees.
  10. 10. Allocations to non-index countries shall not collectively exceed 20% of the portfolio. The following securities and types of transactions are prohibited: 1. Short sales of securities. 2. Purchase/sale of physical commodities or commodity futures. 3. Securities without a readily determinable market value or with restricted marketability. 4. Direct investments in oil, gas or mineral exploration or development programs. 5. Direct investments in real estate or interest in real estate (except investments in marketable securities of REITs or companies holding real estate or interests in real estate). 6. Margin transactions, except issues of "part paid" or "when issued" securities. 7. Borrowing money or engaging in any transaction which would cause the manager to realize "unrelated business income" within the meaning of Section 512 of the Internal Revenue Code. 8. Holding more than 5% of any class of securities of any single issuer other than the U.S. government. 9. Holding more than 10% portfolio assets in all classes of securities of a single issuer other than the U. S. government. Other Investment Classes Allocations to additional asset classes would require amendments to be made to this document. To date, an existing venture capital investment should be added.
  11. 11. Attachment A To the Statement of Investment Policies, Objectives and Guidelines dated ____________________ 1. The IC approved this Attachment on ____________________ 2. Northern Trust Company of Connecticut, Inc. has been designated as Investment Advisor to the IC under terms of an agreement signed ____________________ 3. The following targets are to be applied to the allocation of Foundation investment fund assets until such time as the IC revises this Attachment. Asset Class Target Allocation Expected Alpha U.S. Large Cap 40.0% 100 bps. U.S. Mid Cap 10.0 150 bps. U.S. Small Cap 12.5 200 bps. International Equity 12.5 200 bps. U.S. Fixed Income (Investment Grade) 10.0 25 bps. High Yield Fixed Income (Non-Investment Grade) 10.0 50 bps. Venture Capital 5.0 500 bps. Total 100.0 4. The portfolio will be rebalanced periodically to reflect the +/- 10% target allocation. 5. The Venture Capital target allocation is 5%. The current allocation is significantly less but is expected to increase over time. In the interim the unused allocation will be added to the U.S. Small Cap equity allocation.