Approved by: 

Executive Committee of the Board of Trustees

History:

Issued

-- March 14, 2002

 

Revised

-- December 14, 2020 by the Board of Trustees

Last Reviewed

-- December 14, 2020

Related Policies:

Endowment Management Policy

Additional References:

Responsible Official:

Treasurer

I. PURPOSE

 

This Investment Policy Statement (together with its Appendices, the “Statement”) provides the guiding principles for the Catholic University of America (the “University”) and sets forth policies and procedures that shall guide the Board of Trustees (the “Trustees”) and any of its delegates in supervising, implementing, evaluating and monitoring the investment of its financial assets to optimize returns within appropriate risk parameters. The Statement does not establish policy with regards to University spending. Controls and procedures for University spending are established in separate policies.

II. DEFINITIONS

Endowment consists of donor-restricted and quasi-endowment funds.  Donor-restricted endowments are funds established in accordance with donor restrictions to exist and maintain its value in perpetuity.  Quasi-endowments (sometimes called “board designated funds functioning as endowment”) is a fund that is voluntarily created by the Board of Trustees from unrestricted funds that functions like an endowment, but without any legal or donor restriction to hold the fund in perpetuity. Thus, the principal and any accumulated earnings may be used at the direction of the Board of Trustees.   The management of these funds on a consolidated basis permits a pooled total return investment approach with a long term investment horizon. Endowment is defined as institutional funds and, under the terms of the gift instruments, are not wholly expendable by the institution on a current basis. 
  • Financial Reserves consists of non-endowed funds of the University managed to support long term objectives and provide a base of liquidity. The Financial Reserves may be added to by a transfer of funds from Operating Capital, by a transfer of funds from the Endowment made according to Endowment Spending requirements, or by a transfer of funds from other unrestricted sources. Financial Reserves may be used by a transfer of funds to Operating Capital at the discretion of Finance Staff. The Treasurer will report to the Finance Committee at appropriate times during the year the aggregate Financial Reserve account balances and the amounts of all transfers in and transfers out of Financial Reserve accounts.
  • Operating Capital consists of all funds available for current use in support of the University's academic programs and support functions. These funds are the operating financial resources of the University and are managed so as to preserve principal and ensure liquidity. All general transactional needs of the University will be met from these funds. Operating Capital in excess of near-term liquidity requirements can be transferred to Financial Reserves at the discretion of Finance Staff.
  • Debt Service and Construction Funds represent proceeds of bond issues or appropriations for specific purposes which are being temporarily invested until needed to fund construction projects or to fund debt service. The investment of such funds shall be governed by parameters as set forth in applicable bond indentures.
  • Separately Invested Funds are separately invested by the University in instances where the funds belong to another agency or entity; donor or legal restrictions prevent commingling; or it is in the best interest of the University not to commingle the funds. Separately invested funds are invested in accordance with the funds’ objective, duration and investment restrictions. All revenue earned by these investments is separately maintained for expenditure in accordance with guidelines.  Separately invested funds may include agency funds, endowment funds, split interest agreements and planned gifts, debt service and construction funds, and real estate held for investment.
  • Invested Assets is the collective investment of all funds; Endowment, Financial Reserves, Operating Capital, Debt Service and Construction Funds, Separately Invested Funds, and other funds.  The actual investment approach and the return objectives will vary for each of these types of funds. The funds will be invested in a manner commensurate with intended use of the funds by the University, and performance benchmarks will be established accordingly. In all cases, the funds will be invested consistent with prudent investor standards. The University may pool assets whenever possible in order to provide efficient administration and investment flexibility.
  • Investment Pool is the collective investment of the Endowment and Financial Reserves.  Funds included in the investment pool carry no donor constraint on how monies may be invested.

III. DELEGATION OF RESPONSIBILITIES

 

The Board of Trustees has delegated the responsibility for ensuring the implementation of the policies and procedures outlined in this Investment Policy Statement to the Finance Committee of the Board of Trustees (the “Committee”). The Committee shall implement the management process and monitor the Invested Assets in accordance with this Statement. The Committee is the governing body responsible for (i) developing this Statement; (ii) monitoring compliance of the investment program with this Statement; (iii) overseeing the Finance Staff in the discharge of their responsibilities as outlined below; (iv) retaining, monitoring and terminating Investment Managers, Advisors, and/or Outsourced Chief Investment Officer (OCIO) partners – collectively referred to as external investment partners (“Partners”) as appropriate; and (v) approving the terms upon which Partners manage the Invested Assets, including without limitation, the terms of investment management agreements, asset allocation guidelines, fees and compensation, and performance measurement benchmarks. At least annually, the Committee shall review this Statement to ensure that the policies contained herein remain current and appropriate. 

The Finance Staff is responsible for (i) providing day-to-day monitoring, supervision and administration of the Invested Assets; (ii) providing day-to-day interaction and oversight of the Partners; (iii) apprising the Committee of important portfolio information including the net transfer of funds between Financial Reserves and Operating Capital; and (iv) managing Operating Capital in accordance with this policy and applicable guidelines.

Subject to specific legal limitations or other restrictions in a debt, gift or legal instrument, the Committee may hire and prudently delegate to Partners the management of some or all of the Invested Assets. The Committee will act in good faith, with the care that an ordinary prudent person in a like position would exercise under similar circumstances in:

  1. Selecting Partners.
  2. Establishing the scope and terms of the delegation, consistent with the purposes, goals, and mission of the University.
  3. Periodically reviewing the Partners’ actions in order to monitor the Partner’s performance and compliance with the scope and terms of any delegated activities.

In this regard, the Committee shall engage qualified external professional Partners that have demonstrated competence in their respective areas of expertise. These Partners shall have discretion and authority for determining the investment strategy, security selection, and timing of purchases and sales of assets subject to applicable laws, regulations and the provisions of this Statement.

The duties and responsibilities delegated to Partners will be defined by specific contracts, applicable laws, and regulation. 

Investment Discretion:

The OCIO Partner is responsible for establishing, and, as appropriate, modifying the Investment Pool’s asset allocation, consistent with the terms of the Agreement and this Statement. 

The OCIO Partner also has the responsibility and authority to manage the Investment Pool’s assets. In order to carry out its investment duties, the OCIO Partner will appoint Investment Managers to manage designated components of the Investment Pool on a day-to-day basis, consistent with the terms of the Agreement and this Statement. The OCIO Partner will be responsible for the selection and monitoring of such Investment Managers. The OCIO Partner may also choose mutual funds, exchange traded funds, or other commingled investment vehicles for inclusion in the Investment Pool. The OCIO Partner represents that with respect to the performance of its duties under this Statement, it is a “fiduciary” and is registered as an investment advisor under the Federal Investment Advisers Act of 1940 (the “Advisers Act”) and will perform the duties set forth hereunder consistently with the fiduciary obligations imposed under the Advisors Act, and regulations promulgated thereunder and any interpretations thereof by the U.S. Security and Exchange Commission.

The OCIO Partner will adhere to the guidelines set forth in this Statement and will ensure that each Investment Manager it selects for the investment of the Investment Pool are appropriate within these guidelines. The OCIO Partner will use its best efforts to meet investment objectives and policies that are generally consistent with the Statement, however, individual portfolio holdings may not at all times be consistent with this Statement.

IV. INVESTMENT POOL 



The objective of the Investment Pool is to support the educational mission of the University by providing a reliable source of funds for current and future use. The Investment Pool has two primary missions. First, the Investment Pool must achieve investment returns sufficient to sustain the level of spending necessary to support the ongoing University operations, and second, the Investment Pool’s assets must maintain sufficient liquidity to allow it to properly carry out its mission over shorter time periods.  Additionally, the purchasing power of the Endowment’s assets must be maintained in perpetuity.

A. GENERAL PRINCIPLES

 

The following general principles shall apply to the Investment Pool which includes the Endowment:

  1. Investments of the Investment Pool shall be diversified unless the Trustees, or their lawful delegates, after appropriate deliberation, reasonably determine that because of special circumstances the purposes of the Investment Pool are better served without diversification.
  2. The Investment Pool shall be managed in accordance with applicable standards of fiduciary duty and in compliance with applicable laws and regulations.
  3. Standards for return, asset allocation, and diversification shall be determined primarily from a strategic perspective and measured over long time periods - commensurate with successive market cycles.
  4. Endowment funds are, by definition, perpetual pools of capital and as such a long-term view in setting investment policy and strategy should be taken. Maintaining a bias towards return-seeking assets, which have historically produced higher long-term returns, is appropriate.
  5. Management of Financial Reserves must consider the liquidity needs of the University.
  6. All assets of the Investment Pool, including those funds that are unrestricted, should be used for the purpose of accomplishing the University’s mission. 
  7. The investment of donor-restricted endowed funds must be undertaken in good faith and with prudence in line with the key tenants of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”).  

B. INVESTMENT OBJECTIVE OF ENDOWMENT

 

The primary investment objective of the Endowment is to preserve and enhance the purchasing power of the University’s assets. Accordingly, the Investment Pool seeks a long-term rate of return on investments to grow its assets by an amount sufficient to offset inflation, required spending, and program fees and expenses over a full market cycle, while maintaining sufficient liquidity to meet obligations arising from planned activities. Measurement of this objective is best measured by the Investment Pool obtaining a real rate of return (net of management fees) of at least 5.0% - measured over rolling five-year time periods. It is recognized that the real return objective may be difficult to attain in every five-year period but should be attainable over a series of five-year periods. This objective should also be achievable within risk levels defined by the Trustees.

In furtherance of these objectives, the Investment Pool will generally diversify the portfolio among various asset classes and securities with the goal of reducing the investment portfolio’s volatility and its non-systematic, single issuer, principal risk.

C. ENDOWMENT SPENDING

 

The spending policy was developed to meet several objectives, namely to:

  1. Provide a current source of funding for meeting the long-term needs of the University’s beneficiaries. 
  2. Provide some year-to-year budget stability.
  3. Meet intergenerational needs by protecting the future purchasing power of the fund against the impacts of long-term inflation.

The Spending Policy adopted by the Trustees for the Endowment is to provide for an annual 4.5% distribution based upon the average of twelve fiscal quarters’ market value and paid quarterly. In order to preserve the Endowment’s purchasing power, long-term average spending of endowment payout should be limited by the expected long-term real total return of the fund. 

Additionally, each fund participating in the Investment Pool will incur a fee of 0.25% per annum, assessed quarterly, to provide the appropriate infrastructure support and stewardship for the Investment Pool.  

As a general matter the Trustees should review the Spending Policy at least annually.

D. INVESTMENT OBJECTIVES OF FINANCIAL RESERVES

 

Financial Reserves are a portfolio of unrestricted assets managed to meet the strategic objectives of the University. Financial Reserves provide working capital to fund operations, strategic plans, and capital initiatives.  Liquidity represents a two-fold risk to the University. Too little liquidity creates the risk for the inability to meet obligations when they become due without incurring unacceptable losses upon investment liquidation. Too much liquidity creates the risk of under-performing investment earning when otherwise investing in longer maturity vehicles generally enhances returns.  

The liquidity distribution strategy for the Financial Reserves consists of investing funds within liquidity layers, a primary short-term layer and a secondary long-term layer. The decision to allocate funds across these layers involves a careful balance of fulfilling the Financial Reserves’ investment objectives and, at the same time, understanding the University’s ability and willingness to assume investment risk in the portfolio. 

As such, certain Financial Reserves may be invested for the short term duration or long term duration depending on the needs of the University.  Funds expected to be used within one year are invested in the primary liquidity layer to ensure they are available for expenditure. The longer-time horizon investments are expected to provide higher rates of return and therefore provide a secondary liquidity layer. These longer maturity investments will experience some variation in market value as capital market conditions change.  

Financial Reserves will be invested to meet the following objectives:

  1. Grow the reserve to provide means for the fulfillment of future objectives.
  2. Preserve purchasing power of University financial resources.
  3. Provide liquidity allowing for continuous University operation.

The broad objectives of the Financial Reserves, to both grow University assets and to ensure liquidity, may require a similarly broad array of investment instruments. Key to the management of this portfolio is the projection of the cash requirements of strategic objectives and preparedness for unanticipated developments that demand the use of University resources.  Maintaining a prudent level of liquidity in the primary layer makes assets in the secondary layer available to earn returns consistent with portfolio growth objectives. Financial Reserves shall be managed according to the guidelines established in Exhibit B.

E. PORTFOLIO COMPOSITION AND ASSET ALLOCATION 

 

The single most important investment decision is the allocation of the Investment Pool funds to various asset classes. To achieve the investment objectives, the Investment Pool’s asset allocation policy is to provide a strategic mix of asset classes which produces the highest expected investment return within a prudent risk framework that meets the liquidity requirements and long-term goals and objectives of the Investment Pool. Each asset class should not be considered alone but in the context of the overall structure of the particular portfolio and that portfolio’s objectives. Diversification among asset classes has historically increased returns and reduced overall portfolio risk. How the different asset classes relate and interact with each other is the key to making asset allocation decisions within the context of the required risk and return trade-offs.

i. GENERAL ASSET ALLOCATION STRUCTURE

The basic framework for developing the asset allocation mix for the Investment Pool is to consider the universe of investments fitting into two broad categories – return seeking assets and risk mitigating assets. Return seeking assets are generally the return drivers of the portfolio, provide portfolio diversification benefits during stable capital market conditions, but tend to see their diversification benefits diminish (as a result of rising correlations) during stressed capital market environments. As a result of their lower and more stable correlations (even in stressed capital market conditions), especially in relation to return seeking assets, risk mitigating assets provide a dependable diversification benefit during all market environments. By optimizing and controlling the overall portfolio mix between return seeking assets and risk mitigating assets, a more stable, risk managed portfolio results – especially during stressed capital market environments.  The follows is a summary of the return seeking assets and risk mitigating asset segments approved for use in portfolio construction as further defined in Exhibit A, “Asset Allocation Guidelines and Investment Performance Benchmarks.”

ii. RETURN SEEKING ASSETS:

Global Public Equity: Publicly traded U.S., developed international, and emerging market stocks are a core asset class of institutional portfolios with long-term investment horizons and moderate liquidity constraints. The objective of the Global Public Equity portfolio is to generate investment returns with adequate liquidity through consistent exposure to common stock investments. 

Global Credit: This asset class includes investments in publicly and privately traded fixed income strategies and securities which possess higher return characteristics and greater risks than those in the Risk Mitigating Fixed Income segment.   These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles. 

Real Estate & Infrastructure: Investments in real estate and infrastructure may be made in the form of both public market securities (i.e., primarily Real Estate Investment Trusts (REIT’s) and other securities that possess many common characteristics of general public equity investments) and private real estate and infrastructure investments (i.e., actual direct investments, commingled fund vehicles, or limited partnership structures). The long term objective of the Real Estate & Infrastructure portfolio is to provide equity-like returns while providing a partial hedge against inflation. 

Natural Resources & Commodities: Investments in natural resources and commodities may be made in the form of both public market securities (i.e., futures contracts, swaps, as well as public equity investments) and private investments in timber, oil and gas, mineral rights, or other natural resources (i.e.: actual direct investments, commingled fund vehicles, or limited partnership structures). These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles. Like the Real Estate & Infrastructure portfolio, the long term objective of the Natural Resources & Commodities portfolio is to provide equity-like returns while providing a partial hedge against inflation.

Hedge Funds: The Hedge Fund segment of the portfolio includes managers specializing in asset allocation across multiple investment strategies that have low correlations and/or market exposure to other asset classes. These strategies will be accessed primarily through limited partnership structured vehicles. The objective of this asset class is to generate near equity-like returns with less volatility and market exposure than long only investments in U.S. or international equities. 

Private Equity: The Private Equity segment of the portfolio includes illiquid investments in private and public companies domiciled both domestically and internationally. These investments include venture capital, buyout, high yield, and subordinated debt. The Private equity portfolio’s objective is to earn higher returns than the public equity markets over the long term. 

iii. RISK MITIGATING ASSETS:

U.S. Investment Grade Bond: The U.S. Investment Grade Bond segment of the portfolio will consist primarily of publicly traded debt instruments of the U.S. government, its agencies, and U.S. domiciled corporations. In general the underlying investments which comprise this portfolio will be intermediate in maturity/duration, high quality (i.e., investment grade rated), and highly liquid/marketable. The objective of the U.S. Investment Grade Bond portfolio is to generate income and most importantly provide stability/down-side risk protection for the portfolio in times of capital market stress. 

Inflation Protected Bonds (IPB): The IPB portfolio will consist primarily of publicly traded, inflation-protected, debt instruments of the U.S. government, foreign governments, and high quality, investment grade corporations (both domestic and foreign). The objective of the IPB portfolio is to generate real, inflation-adjusted income and most importantly provide stability/down side risk protection for the portfolio in times of capital market stress. 

International Developed Market Bonds: This asset class includes investments in publicly and privately traded debt instruments issued by corporations and governments in developed countries outside of the U.S. These credit instruments will carry investment grade ratings and characteristics. 

Cash: Commingled funds, invested in short maturity/duration, high quality, highly liquid and marketable, interest bearing, money market securities will generally be used to fulfill this asset class segment. 

iv. ASSET ALLOCATION GUIDELINES:

The Committee will establish and approve a set of customized asset allocation guidelines for each discrete portfolio of investible capital being managed for the Investment Pool. Each customized set of asset allocation guidelines will be aligned to support the underlying goals and objectives of each separate portfolio of investible capital. The asset allocation guidelines will include a Policy Normal Level, representing the strategic asset allocation mix for the pool of Investment Pool assets being managed. The asset allocation guidelines will also include an approved target range that:  (i) recognizes various asset classes may be under- and over-weighted due to the trading, settlement, and timing delays associated with fully implementing an investment program; (ii) recognizes it may be prudent and necessary for its Partners to operate outside the Policy Normal Levels when the  financial markets are stressed and subject to extreme levels of volatility; and (iii) allows its Partners to deliberately over- and under-weight the investment program’s asset classes within prescribed target ranges when the Partner concludes an asset class represents either a unique value providing an excess return opportunity or presents too much incremental risk.

The approved asset allocation guidelines for all Partners, when considered together, will reflect the overall liquidity needs and risk tolerance of the Investment Pool and will, in the judgment of the Committee, represent the asset mix likely to satisfy the Investment Pool’s long-term investment objectives.  

Exhibit A to the Investment Policy Statement provides the asset allocation guidelines for the Endowment;

Exhibit B provides the asset allocation guidelines for the Financial Reserves; Exhibit C provides the asset allocation guidelines for Operating Capital. 

v. REBALANCING

Rebalancing is a critical element in controlling the long-term asset allocation of the Investment Pool. The portfolio rebalancing policy will be implemented in a systematic and disciplined fashion using the guidelines outlined below.

Consistent with the limitations imposed by the asset allocation guidelines, the Partners will periodically adjust the allocation of assets within the allowed target ranges depending on:  (i) routine cash flows and net new money available for investment; and (ii) the relative performance of each and all asset classes.  If the weighting of an asset class exceeds its target range, the Partners shall either (a) rebalance the portfolio to within the target range within a reasonable period of time; or (b) seek approval from the Treasurer to adjust the target range.

In general, the Partners are expected to review the portfolios at least quarterly to determine if any rebalancing activities are required. The Investment Pool’s assets will be allocated in a manner consistent with the asset allocation guidelines, as determined by the Committee and the Partners given prevailing market conditions, with variations around the expected long-term policy normal allocation levels permitted within the ranges set in the asset allocation guidelines.

vi. MONITORING OF OBJECTIVES AND PERFORMANCE:

The Committee will establish and approve investment performance expectations for the Partners. Such expectations will vary by asset class and will be based on appropriate index returns, composites or other recognized industry performance standards deemed appropriate by the Treasurer. The investment performance objectives for the Investment Pool’s portfolio are outlined in the exhibitsof this Statement.

The Partner will review and evaluate investment performance periodically in the context of both the current investment environment and the long-term investment horizon of the Investment Pool. Performance evaluation will be conducted for the total portfolio and for each asset and sub-asset class.  The performance review at the asset class level will evaluate asset class performance versus the appropriate benchmarks as outlined in the exhibits.

On a semi-annual basis, the Committee will be provided with a performance report for the Investment Pool for the prior period and longer- term trailing periods through the Treasurer of the University.  The performance report will contain industry standard benchmarks that are relevant for evaluating the performance of the portfolio and its sub components.  

F. OTHER CONSIDERATIONS


i. CATHOLIC CONSCIENCE INVESTING:

The Trustees require that all Partners adhere to the University’s prohibition of investments in companies that are substantially engaged in activities inconsistent with the teachings of the Catholic Church and outlined in the US Conference of Catholic Bishops (USCCB) Socially Responsible Investment Guidelines. Special care and effort will be made by all Partners to ensure the investment strategies they employ are aligned with the USCCB Guidelines and Catholic teachings. The Trustees understand that the Partner’s ability to implement Catholic Conscience investing guidelines will be limited when commingled funds and pooled investment vehicles (i.e., institutional mutual funds, common funds, exchange traded funds, LP structured vehicles, etc.) are utilized. The Trustees also understand that the size of the Investment Pool may make the use of commingled funds and pooled investment vehicles necessary to fulfil certain asset class segments in the investment program. Partners will use their best efforts to utilize commingled funds and pooled investment vehicles that are not in conflict with Catholic Conscience investing guidelines but are not prohibited from utilizing commingled funds and pooled investment vehicles that are not specifically designed or designated as complying with Catholic Conscience investing guidelines.

ii. USE OF DERIVATIVES:

Certain investment strategies employed will be permitted to use derivative investments. Derivative investments are those securities whose value is related, or derived, from that of another security, index, or financial instrument. Investments in derivatives include (but are not limited to) futures, forwards, options, warrants, swaps, etc. No derivative positions can be established that have the effect of creating portfolio characteristics that would ordinarily be prohibited by this Statement. 

When using derivative investments, the investment manager responsible for the position needs to carefully monitor the creditworthiness of any counterparties involved in the transaction.  Each investment manager using derivatives shall exhibit expertise and experience in utilizing such products; demonstrate that such usage is strategically integral to their security selection, risk management, or investment process; and demonstrate acceptable internal controls regarding these investments.

G. LIQUIDITY MANAGEMENT:

 

The Investment Pool may have liquidity needs for operational commitments, need cash to meet annual payout requirements, or for the management of its legal commitments to draw down funds for certain private investments. Additionally, the portfolio needs to be able to respond to changing market conditions allowing the portfolio to be shifted modestly to take advantage of the relative or absolute attractiveness of certain asset classes over time. To address all of these needs, care must be given to the level of liquid assets in the portfolio, the anticipated funding needs, and the level of future funding commitments while providing additional liquidity for unplanned or emergency needs. In particular, there should be an awareness of how liquidity can change in periods of capital market stress. 

Nevertheless, the permanent nature of the Endowment’s capital should enable it to accept lower levels of liquidity in instances where capital is likely to earn a sufficient return premium.

H. USE OF LEVERAGE:

 

While the Investment Pool may invest in investment funds and vehicles that utilize differing forms of leverage, the Investment Pool as a whole is to remain unlevered. In terms of this section of the Statement, unlevered refers to the fact that the total notional exposure of the portfolio should not exceed 100% of the assets of the Endowment. 

Subject to any legal or regulatory limitations, and requiring specific Trustee oversight and approval, the Committee through the Treasurer of the University may approve the creation of a line of credit to be utilized in unusual situations to address temporary liquidity needs.

I. HANDLING OF IN KIND GIFTS:

 

In general, all in-kind gifts will be liquidated as soon as practical after receipt and added to the corpus of the Endowment. Any exceptions to this policy will be approved by the Treasurer of the University. Exceptions require clear documentation of the rationale for the exception and require a plan outlining the long-term intentions for managing the in-kind gift or Separately Invested fund on an ongoing basis.

J. EXCEPTIONS TO POLICY:

 

The Committee may waive or modify any of the restrictions in this Statement given appropriate circumstances. Any such waivers or modifications shall be made only after a thorough review by the Treasurer of the University of the situation. Any such waiver or modification should be documented in writing and maintained as a permanent record. All such waivers and modifications shall be reported to the Trustees by the Treasurer of the University.

V. OPERATING CAPITAL:

 

Operating Capital consist of demand deposit account balances and short-term, high quality investments. Operating Capital constitutes the transactional resources of the University. Balances and liquidity must be maintained at sufficient levels to always meet the obligations of the University. Assuring liquidity is the primary management objective followed by principal preservation. Funds may be invested only in highly liquid, high quality instruments and deposits must only be maintained with banks that are deemed stable and reliable. Operating Capital shall be managed according to the guidelines established in Exhibit C.

VI. DEBT SERVICE AND CONSTRUCTION FUNDS:

 

Debt service, unexpended bond proceeds, and interest sinking funds include the mandatory transfers from operating units for payment of principal and interest on the University’s outstanding debt. All investment income earned on these funds must be used for debt payments and/or the construction project.

Debt service funds are normally held by the University, or its trustee, as a requirement of bond covenants for outstanding debt issues. The specific bond covenant determines the type of funds required to be held and any limitations on the income earned on those funds. Debt service reserve funds are retained in the event the University defaults on a bond payment. 

Unexpended bond proceeds are funds earmarked for construction that are generated through debt issues and separately invested in order to meet bond covenants and to foster project accountability. Investment of these funds generally follow a maturity structure guided by projected cash flows.


VII. SEPARATELY INVESTED FUNDS:

 

The objective, duration, and permissible investments of any Separately Invested instrument or fund will vary depending on its nature.  In general, the following methodologies should be applied to these Separately Invested instruments:


Nature of Investment


Authoritative Guidance

Endowment to be held in perpetuity and required to be separately invested per donor agreement or board action

Donor agreement or board resolution

Term Endowment

Endowment or operating funds policy depending on the duration of the term of endowment 

Planned gift arrangement including gift annuity, split interest agreement, and/or perpetual trust

At discretion of the Treasurer of the University or as prescribed by the donor and trust agreement

Debt service or construction fund

Debt service and construction funds policy 

Agency Fund

Operating funds policy

University real estate held for investment

At discretion of the Treasurer, subject to valuation on bi-annual valuation

Other

At discretion of the Treasurer of the University in consultation with the Partners, as necessary


Approved and adopted on this 14th day of December, 2020.



EXHIBIT A

 

ASSET ALLOCATION GUIDELINES AND 
INVESTMENT PERFORMANCE BENCHMARKS - ENDOWMENT 

The following Asset Allocation Guidelines and Investment Performance Benchmarks will apply to  the Endowment until such time as this document is revised through a manner described in the Investment Policy Statement.

These Asset Allocation Guidelines describe the risk and return parameters determined best meet the objectives of the Endowment.  Asset classes or ranges are guidelines and therefore asset allocations within the Endowment may differ from the ranges outlined below depending on the Endowment’s circumstances, management’s directions and market conditions. Therefore, a reasonable amount of time will be required to rebalance the Endowment’s asset allocation consistent with these Asset Allocation Guidelines.  The asset allocation described in these Asset Allocation Guidelines may be attributable to a given account or portfolio, or aggregated across accounts or portfolios, depending on the circumstances.  

The following benchmarks will provide parameters for the performance review at the asset class level.

Asset Class

Normal Level

Range

Performance Benchmark


RETURN SEEKING ASSETS

Global Public Equity

50%

35% - 65%

  • MSCI ACWI
  • Russell 3000
  • Russell 1000
  • S&P 500 
  • Russell 2000
  • MSCI ACWI ex-US
  • MSCI EAFE
  • MSCI Emerging Markets
  • MSCI Frontier Emerging Markets

Global Credit

3%

0% - 8%

  • Barclay’s Corporate High Yield
  • Merrill Lynch US High Yield Bond
  • Credit Suisse Levered Loan
  • JP Morgan Diversified Emerging Markets Bond
  • Barclay’s Multiverse Bond
  • Barclay’s Universal Bond
  • Barclay’s Global Aggregate Bond

Real Estate and Infrastructure 

14%

9% - 19%

  • FTSE EPRA/NAREIT US & Global Real Estate
  • S&P US & Global REIT
  • NCREIF Property
  • S&P Global Infrastructure
  • MSCI US & Global Infrastructure
  • DJ Brookfield Infrastructure
  • Alerian MLP

Natural Resources and Commodities

4%

0% - 9%

  • Bloomberg Commodity Index
  • Newedge Trend Index

Hedge Fund

6%

0% - 11%

  • HFRI Hedge Funds

Private Equity

11%

0% - 16%

  • Russell 2000 Index + 2%
  • Cambridge Private Equity

Total Return Seeking Assets


88%


60% - 95%


RISK MITIGATING ASSETS

US Investment Grade Bond

12%

5% - 30%

  • Barclays US Aggregate Bond

Inflation Protected Bonds (IPB)

0%

0% - 10%

  • Barclays US TIPS

International Developed Market Bonds

0%

0% - 10%

  • Barclays Global Aggregate ex-US (Dollar Hedged)

Cash

0%

0% - 10%

  • 90 Day US Treasury Bill

Total Risk Mitigating Assets


12%


5% - 40%

Account Level Performance Benchmarks:

Real Return Benchmark = CPI + 5.0%

Blended Benchmark = a blended benchmark comprised of market indices weighted by the strategic, Policy Normal Weights, will be constructed.

Simplistic Benchmark = 80% MSCI ACWI / 20% BC Aggregate Bond

The following table summarizes the strategy and considerations of each asset class:

Asset Class

Strategy

Global Public Equity

The Global Public Equity portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the global equity market which will primarily be achieved through the use of, but not limited to, commingled index funds and exchange traded funds (ETF’s). The portfolio may seek to generate incremental returns (i.e., alpha or out performance) through an active investment strategy. The active investment strategy may include both skill and risk-based strategies employed in the form of both long only and/or long/short strategies. These strategies will be accessed primarily through commingled funds; ETF’s, separately managed accounts (SMA’s), and limited partnership structured vehicles.

Global Credit

These strategies and the securities that comprise them will attempt to generate “near equity” like returns through exposures to one or more of the following return / risk characteristics: structured and securitized fixed income instruments that expose the investor to increased optionality, market exposure, and credit risk; emerging market debt including exposures to currency risk; unhedged developed market credit instruments which take on currency and credit risk; high yield and below investment grade (i.e., “junk” ) bonds exposing investors to significant credit risk; levered loans and bank debt which provide enhanced credit and liquidity risks;  and distressed debt securities whose issuer is in financial distress or default. The underlying liquidity of these instruments will vary greatly and can be highly sensitive to current market conditions. Exposure to bonds denominated in foreign currencies also pose additional volatility and currency translation risks. In stressed market environment, liquidity for the bonds and strategies employed in this segment can quickly diminish or disappear leading to significant market price gapping if positions need to be liquidated. Given that these securities are not perfectly correlated with other risk asset categories (although correlations can rise dramatically in a falling, or poor capital market environment) they do provide some moderate overall portfolio diversification benefits during normally functioning capital market environments. Investments in this sector tend to have duration and maturity structures that vary widely, and these bond strategies often provide a greater level of current income than investments in the Risk Mitigating Fixed Income segment due to their higher risk profile. Instruments in this segment come in both fixed and floating rate/coupon form. One of the main advantages of this portfolio segment is the above average yield these securities offer. That said, the investment focus will be total return – both income production and opportunities for capital appreciation. Many of the managers employed in this segment will utilize a combination of the above strategies to provide enhanced returns. Often these managers employ tactical rotation strategies to move in and out of different higher return / risk bond strategies to mitigate risks and improve the overall return profile for the portfolio. Managers who utilize this approach generally have very broad mandates and are known as “unconstrained” fixed income managers. 

Real Estate and Infrastructure 

Real estate and infrastructure investments (especially private real estate and infrastructure) provide good portfolio diversification benefits given their generally low correlations with other risk assets. Private investments in this asset class are invariably illiquid but come with the benefit of generally higher returns and better diversification benefits. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy. These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles.

Natural Resources and Commodities

Natural resource and commodity investments (especially the “private” assets in this segment) provide good portfolio diversification benefits given their generally low correlations with other risk assets. Private investments in this asset class are invariably illiquid but come with the benefit of generally higher returns and better diversification benefits. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy.

Hedge Fund

Diversification across strategies and positions will be wide in order to dampen portfolio volatility. The portfolio’s liquidity will be moderate, less than that of traditional public equities but more liquid than private investments. This portfolio will focus on areas and strategies where value added by active management can contribute a substantial portion of the return. The underlying investments utilized by the managers in this portfolio segment are generally public market traded vehicles and will include traditional stocks and bonds as well as a variety of other derivative investments. Some of these investments could have limited liquidity and marketability.

Private Equity

This portfolio invests in highly illiquid positions and should generate higher returns as compensation for that illiquidity. A secondary objective of these investments is diversification. The portfolio’s strategy is to invest in a select group of funds (or fund of funds) managed by the highest quality management teams. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy. Underlying fund managers are sought which have proprietary deal flow and whose experience enables them to bring strategic, operational, or technical expertise to a transaction in addition to financial acumen and capital. The portfolio will be diversified across investment categories and investment stage (i.e., vintage year). These investments are almost exclusively organized as limited partnership investments.  

US Investment Grade Bond

A low and stable correlation between the U.S. Investment Grade Bond portfolio and the Risk Asset portfolios are the primary determinant of the portfolio’s ability to fulfill this mission. The U.S. Investment Grade Bond portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the broad U.S., investment grade, bond market and will primarily be achieved through the use of, but not limited to, commingled index funds and ETF’s. The portfolio may seek to generate incremental returns (i.e., alpha) through an active investment strategy. The active investment strategies will be accessed primarily through commingled funds, ETF’s, and SMA’s.

Inflation Protected Bonds (IPB)

A low and stable correlation between the IPB portfolio and the Risk Asset portfolios are the primary determinant of the portfolio’s ability to fulfill this mission. The IPB portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the broad or maturity/duration targeted segment - primarily the U.S. Treasury Inflation Protected Securities (TIPS) market - and will primarily be achieved through the use of, but not limited to, commingled index funds and ETF’s. The portfolio may seek to generate incremental returns (i.e., alpha) through an active investment strategy. The active investment strategies will be accessed primarily through commingled funds, ETF’s, and SMA’s.

International Developed Market Bonds

To be included as risk mitigating assets, the foreign currency exposure of the bonds should be hedged to the U.S. dollar. The underlying liquidity of these instruments will vary greatly and can be highly sensitive to global economic and market conditions. The instruments are issued in both fixed and floating rate/coupon form. These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles.

Cash

Cash investments are by their nature relatively risky investments for an Endowment given the general, long investment time horizon and low returns (i.e., often zero or negative returns on a real basis) – which result in a diminution in purchasing power - of these pools of capital. As a result, unless unusual circumstances exist, it is generally prudent to minimize the long term cash allocation in the portfolio. Cash positions do however have value for meeting transaction liquidity, portfolio rebalancing needs, and as a volatility cushion during times of turbulent capital market activity.


EXHIBIT B

 

ASSET ALLOCATION GUIDELINES AND 
INVESTMENT PERFORMANCE BENCHMARKS – FINANCIAL RESERVES

The following Asset Allocation Guidelines and Investment Performance Benchmarks will apply to Financial Reserves until such time as this document is revised through a manner described in the Investment Policy Statement.

These Asset Allocation Guidelines describe the risk and return parameters determined best meet the objectives of the Financial Reserves.  Asset classes or ranges are guidelines and therefore asset allocations within the Financial Reserves may differ from the ranges outlined below depending on the Financial Reserves’ circumstances, Management’s directions and market conditions. Therefore, a reasonable amount of time will be required to rebalance the Financial Reserves’ asset allocation consistent with these Asset Allocation Guidelines.  The asset allocation described in these Asset Allocation Guidelines may be attributable to a given account or portfolio, or aggregated across accounts or portfolios, depending on the circumstances.

The Financial Reserves may include an investment in the Endowment. During the period of transition in which the commingled investments of both funds are segregated into separately managed portfolios for Endowment and Financial Reserves, it will be necessary for the Financial Reserves to have an investment in the Endowment as the lack of liquidity for some investments in the commingled portfolio may prevent the segregation of those investments into Endowment and Financial Reserves for an extended period of time. During that period, to the extent that the Financial Reserves maintains an investment in the Endowment Fund that causes the fund to exceed an asset class range, it will not be deemed a deviation from the asset class range guidelines.

The following benchmarks will provide parameters for the performance review at the asset class level.

Asset Class

Normal Level

Range

Performance Benchmark


RETURN SEEKING ASSETS

Global Public Equity

67%

25% - 80%

  • MSCI ACWI
  • Russell 3000
  • Russell 1000
  • S&P 500 
  • Russell 2000
  • MSCI ACWI ex-US
  • MSCI EAFE
  • MSCI Emerging Markets
  • MSCI Frontier Emerging Markets

Global Credit

3%

0% - 3%

  • Barclay’s Corporate High Yield
  • Merrill Lynch US High Yield Bond
  • Credit Suisse Levered Loan
  • JP Morgan Diversified Emerging Markets Bond
  • Barclay’s Multiverse Bond
  • Barclay’s Universal Bond
  • Barclay’s Global Aggregate Bond

Real Estate and Infrastructure 

5%

0% - 5%

  • FTSE EPRA/NAREIT US & Global Real Estate
  • S&P US & Global REIT
  • NCREIF Property
  • S&P Global Infrastructure
  • MSCI US & Global Infrastructure
  • DJ Brookfield Infrastructure
  • Alerian MLP

Natural Resources and Commodities

3%

0% - 5%

  • Bloomberg Commodity Index
  • Newedge Trend Index

Hedge Fund

5%

0% - 5%

  • HFRI Hedge Funds

Private Equity

5%

0% - 5%

  • Russell 2000 Index + 2%
  • Cambridge Private Equity

Total Return Seeking Assets


88%


60% - 95%


RISK MITIGATING ASSETS

US Investment Grade Bond

12%

5% - 40%

  • Barclays US Aggregate Bond

Inflation Protected Bonds (IPB)

0%

0% - 15%

  • Barclays US TIPS

International Developed Market Bonds

0%

0% - 10%

  • Barclays Global Aggregate ex-US (Dollar Hedged)

Cash

0%

0% - 25%

  • 90 Day US Treasury Bill

Total Risk Mitigating Assets


12%


5% - 55%

Account Level Performance Benchmarks:

Real Return Benchmark = CPI + 3.0%

Blended Benchmark = a blended benchmark comprised of market indices weighted by the strategic, Policy Normal Weights, will be constructed.

Simplistic Benchmark = 65% MSCI ACWI / 35% BC Aggregate Bond

The following table summarizes the strategy and considerations of each asset class:

Asset Class

Strategy

Global Public Equity

The Global Public Equity portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the global equity market which will primarily be achieved through the use of, but not limited to, commingled index funds and exchange traded funds (ETF’s). The portfolio may seek to generate incremental returns (i.e., alpha or out performance) through an active investment strategy. The active investment strategy may include both skill and risk-based strategies employed in the form of both long only and/or long/short strategies. These strategies will be accessed primarily through commingled funds; ETF’s, separately managed accounts (SMA’s), and limited partnership structured vehicles.

Global Credit

These strategies and the securities that comprise them will attempt to generate “near equity” like returns through exposures to one or more of the following return / risk characteristics: structured and securitized fixed income instruments that expose the investor to increased optionality, market exposure, and credit risk; emerging market debt including exposures to currency risk; unhedged developed market credit instruments which take on currency and credit risk; high yield and below investment grade (i.e., “junk” ) bonds exposing investors to significant credit risk; levered loans and bank debt which provide enhanced credit and liquidity risks;  and distressed debt securities whose issuer is in financial distress or default. The underlying liquidity of these instruments will vary greatly and can be highly sensitive to current market conditions. Exposure to bonds denominated in foreign currencies also pose additional volatility and currency translation risks. In stressed market environment, liquidity for the bonds and strategies employed in this segment can quickly diminish or disappear leading to significant market price gapping if positions need to be liquidated. Given that these securities are not perfectly correlated with other risk asset categories (although correlations can rise dramatically in a falling, or poor capital market environment) they do provide some moderate overall portfolio diversification benefits during normally functioning capital market environments. Investments in this sector tend to have duration and maturity structures that vary widely, and these bond strategies often provide a greater level of current income than investments in the Risk Mitigating Fixed Income segment due to their higher risk profile. Instruments in this segment come in both fixed and floating rate/coupon form. One of the main advantages of this portfolio segment is the above average yield these securities offer. That said, the investment focus will be total return – both income production and opportunities for capital appreciation. Many of the managers employed in this segment will utilize a combination of the above strategies to provide enhanced returns. Often these managers employ tactical rotation strategies to move in and out of different higher return / risk bond strategies to mitigate risks and improve the overall return profile for the portfolio. Managers who utilize this approach generally have very broad mandates and are known as “unconstrained” fixed income managers. 

Real Estate and Infrastructure 

Real estate and infrastructure investments (especially private real estate and infrastructure) provide good portfolio diversification benefits given their generally low correlations with other risk assets. Private investments in this asset class are invariably illiquid but come with the benefit of generally higher returns and better diversification benefits. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy. These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles.

Natural Resources and Commodities

Natural resource and commodity investments (especially the “private” assets in this segment) provide good portfolio diversification benefits given their generally low correlations with other risk assets. Private investments in this asset class are invariably illiquid but come with the benefit of generally higher returns and better diversification benefits. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy.

Hedge Fund

Diversification across strategies and positions will be wide in order to dampen portfolio volatility. The portfolio’s liquidity will be moderate, less than that of traditional public equities but more liquid than private investments. This portfolio will focus on areas and strategies where value added by active management can contribute a substantial portion of the return. The underlying investments utilized by the managers in this portfolio segment are generally public market traded vehicles and will include traditional stocks and bonds as well as a variety of other derivative investments. Some of these investments could have limited liquidity and marketability.

Private Equity

This portfolio invests in highly illiquid positions and should generate higher returns as compensation for that illiquidity. A secondary objective of these investments is diversification. The portfolio’s strategy is to invest in a select group of funds (or fund of funds) managed by the highest quality management teams. Like all investments in private asset classes, manager selection, access, ongoing due diligence, and scale are important drivers for implementing a successful investment strategy. Underlying fund managers are sought which have proprietary deal flow and whose experience enables them to bring strategic, operational, or technical expertise to a transaction in addition to financial acumen and capital. The portfolio will be diversified across investment categories and investment stage (i.e., vintage year). These investments are almost exclusively organized as limited partnership investments.  

US Investment Grade Bond

A low and stable correlation between the U.S. Investment Grade Bond portfolio and the Risk Asset portfolios are the primary determinant of the portfolio’s ability to fulfill this mission. The U.S. Investment Grade Bond portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the broad U.S., investment grade, bond market and will primarily be achieved through the use of, but not limited to, commingled index funds and ETF’s. The portfolio may seek to generate incremental returns (i.e., alpha) through an active investment strategy. The active investment strategies will be accessed primarily through commingled funds, ETF’s, and SMA’s.

Inflation Protected Bonds (IPB)

A low and stable correlation between the IPB portfolio and the Risk Asset portfolios are the primary determinant of the portfolio’s ability to fulfill this mission. The IPB portfolio may contain both a passive core and an active investment strategy. The passive core is meant to provide low-cost exposure to the broad or maturity/duration targeted segment - primarily the U.S. Treasury Inflation Protected Securities (TIPS) market - and will primarily be achieved through the use of, but not limited to, commingled index funds and ETF’s. The portfolio may seek to generate incremental returns (i.e., alpha) through an active investment strategy. The active investment strategies will be accessed primarily through commingled funds, ETF’s, and SMA’s.

International Developed Market Bonds

To be included as risk mitigating assets, the foreign currency exposure of the bonds should be hedged to the U.S. dollar. The underlying liquidity of these instruments will vary greatly and can be highly sensitive to global economic and market conditions. The instruments are issued in both fixed and floating rate/coupon form. These strategies will be accessed primarily through commingled funds, ETF’s, SMA’s, and limited partnership structured vehicles.

Cash

Cash investments are by their nature relatively risky investments for an Endowment given the general, long investment time horizon and low returns (i.e., often zero or negative returns on a real basis) – which result in a diminution in purchasing power - of these pools of capital. As a result, unless unusual circumstances exist, it is generally prudent to minimize the long term cash allocation in the portfolio. Cash positions do however have value for meeting transaction liquidity, portfolio rebalancing needs, and as a volatility cushion during times of turbulent capital market activity.

 

EXHIBIT C

 

ASSET ALLOCATION GUIDELINES AND 
INVESTMENT REQUIREMENTS – OPERATING CAPITAL
Operating Capital shall be managed so to adhere to the following requirements:
All investment must comply with covenant restrictions that may exist as part of agreements with lending or trade institutions.
Investments in individual securities:
  • To minimize foreign exchange exposure, all investments must be denominated in US dollars.
  • Repurchase agreements must be executed with a Bond Market Association (BMA) standard contract
  • Investments must be explicitly rated by two of the three following rating services: Standard & Poor’s, Moody’s, and Fitch.  The minimum short-term ratings are A-1, P-1, and F-1 respectively.  Split rated investments are not permitted.  Bank investment products that are not rated may only be provided by banks with minimum issuer ratings equivalent to the corresponding minimum long-term ratings of A, A2, and A by Standard & Poor’s, Moody’s, and Fitch respectively.  
  • No more than ten percent of the size of any outstanding issue (i.e. a particular financial asset) may be held in the portfolio.
  • For US agency, GSE, and corporate-related instruments, investments are limited to the lesser of $10 million or ten percent of the total investment portfolio per issuing entity at the time of the investment.

Investments in Funds:

  • Up to $50 million may be invested in any single well-diversified money market mutual fund. 
  • Money market mutual funds must conform to the definition and constraints of Securities and Exchange Commission Rule 2(a)7.

Up to $10 million may be invested in any single high-quality, well diversified, commingled fund vehicle that primarily invests in short-term, fixed income securities.

A minimum of $5 million, or the entire portfolio if the portfolio is less than $5 million, shall be maintained in demand deposit accounts or in money market mutual funds.  The portion of the portfolio in excess of $5 million may be allocated among the following categories, not to exceed the percentages indicated:

Investment Category

Maximum Percentage of Portfolio

US Government 

100%

US Agency and GSE

50%

Bank Obligations (other than demand deposits)

50%

Corporate

50%

Comingled Fund Vehicles

50%

Money Market Mutual Funds

100%