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Chapter 140: Investments

140.013 Investment Policy for Endowment Pool

Bd. Min 7-22-11. Revised in entirety, Bd. Min. 6-26-12. (Note: Board approval on 6-26-12 replaced previous rules 140.010, 140.011, 140.012 and 140.013 with new language and reissued new rules 140.010 through and including 140.016.) Revised Bd. Min 6-14-13; Revised 9-12-13; Revised 6-25-15; Revised 2-4-16; Revised 4-14-16; Revised 6-23-17; Revised 9-27-17.

  1. Introduction -- The University's Endowment Pool contains gifts, bequests and other funds directed to be used to support a University program in perpetuity.  Some donors require such a commitment as a condition of their gift ("true endowments").  Also, funds may be assigned to function as endowments by the Board of Curators or by University administration ("quasi endowments").
  2. Responsibilities and Authorities – See CRR 140.010 “Policy for Management and Oversight of Selected University Investment Pools.”
  3. .  Investment Objectives -- The Endowment Pool must be managed to provide ongoing support of endowed programs in perpetuity, in conformance with donor stipulations.  To accomplish this, investment returns, net of inflation, should be sufficient over time to cover annual spending distributions while maintaining or growing the underlying purchasing power of each endowed gift.

    Endowment Pool investments should be managed in a manner that maximizes returns while attempting to minimize losses during adverse economic and market events, with an overall appetite for risk governed by the objectives noted above. This will be accomplished through a more ‘risk-balanced’ portfolio that seeks meaningful diversification of assets, which necessarily means less equity risk and more long-term bond exposure relative to peers. To offset potentially lower returns from a more risk-balanced portfolio, a key component of this strategy includes a less common, yet prudent, program of return enhancement commonly referred to in the investment industry as portable alpha. These investment objectives seek to prioritize the long-term structural needs of the Endowment Pool over short-term performance comparisons of the investment portfolio relative to peers.
  4. Authorized Investments – The Endowment Pool shall be invested in externally managed funds, consistent with the guidelines established in CRR 140.011, “Policy for Investment Manager Selection, Monitoring and Retention” and CRR 140.017, “Allowable Investments,” in the following asset classes:
     
    Asset Class Economic Environment Risk Factor(s) Sub-Class Target Asset Class Target Range

    Public Equity

    Rising Growth
    Falling Inflation

    Equity
    Currency

     

    35%

    25%-45%

    Private Equity

    Rising Growth
    Falling Inflation

    Equity
    Currency
    Liquidity

     

    10%

    5%-15%

    Public Debt

    Sovereign
    Bonds

    Inflation-Linked
    Bonds

    Opportunistic

     

    Falling Growth
    Falling Inflation

    Falling Growth
    Rising Inflation

     

    Rising Growth
    Falling Inflation

     

    Interest Rates
    Currency

    Inflation
    Interest Rates
    Currency

    Interest Rates
    Credit spreads

     

    14%


    15%

     


    0%

    29%

    19%-39%

    Private Debt

    Rising Growth
    Falling Inflation

    Credit Spreads
    Liquidity

     

    3%

    0%-7%

    Diversifiers

    Risk Balanced



     

    Commodities

     

    Real Estate /
    Infrastructure

     

    Opportunistic

     

    Rising Growth
    Falling Growth
    Rising Inflation
    Falling Inflation

    Rising Growth
    Rising Inflation

    Rising Growth
    Rising Inflation

     

    Rising Growth
    Rising Inflation

     

    Diversified



     

    Inflation

     

    Equity
    Credit Spreads
    Inflation
    Liquidity

    Equity
    Interest Rates

     

    10%



     

    5%

     

    8%



     

    0%

    23%

    18-28%

    Total Portfolio

    100%

     

  5. Portfolio Rebalancing
    Asset allocations shall be monitored on an ongoing basis as changes in market behavior may cause variations from the target asset mix.  Rebalancing of the portfolio shall be considered at least quarterly, and more often if necessary to maintain allocations within the allowable range.  The need to rebalance shall take into account any logistical issues associated with fully funding a particular asset sector, as well as any tactical decisions to overweight or underweight a particular asset sector based on current market conditions.  The University may utilize external managers to rebalance portfolio exposures consistent with targets and allowable ranges established by this policy.  In those instances, conventional derivative instruments commonly accepted by other institutional investors, such as futures, swaps, options, forward contracts and reverse repurchase agreements may be utilized.

    Actual asset class allocations shall not fall outside of the allowable ranges, with the exception of violations caused solely by periods of extreme market distress, when it may not be possible or advisable to immediately bring such allocations back to within the allowable ranges.
  6. Currency Risk Management
    In the context of a global investment portfolio, currency risk exists to the extent that investments contain exposures to foreign currencies.  The desirability of this currency exposure is not necessarily aligned dollar for dollar with the desired exposure to assets denominated in foreign currencies.  As such, external managers in any asset class may implement currency strategies to alter the currency exposure of the portfolio when deemed prudent to do so in the context of the particular investment mandate.  In addition, the University may utilize external managers to implement currency strategies to alter exposures in an active or passive manner as part of a portfolio or asset class overlay when deemed prudent to do so.
  7. Portable Alpha Program
    Synthetic market exposures across asset classes including equities, sovereign bonds, inflation-linked bonds and commodities may be obtained through derivative instruments commonly accepted by other institutional investors, such as futures, swaps, options, forward contracts and reverse repurchase agreements. These derivative instruments shall be managed by external investment firms with appropriate expertise, experience and depth of resources.

    When synthetic market exposures are obtained through derivative instruments, a portion of the resulting cash and cash equivalent balances may be invested by active alpha managers seeking to add returns over the benchmark. These alpha managers will possess broadly diverse strategies/styles and, in the aggregate, are expected to produce returns that show little or no relationship to the economic environment being experienced at any given time.  Furthermore, this portfolio of managers will be constructed with a goal of low/no correlation to the synthetic market exposures obtained through the derivative instruments.  The risk drivers with the portable alpha portfolio should generally be well-known, empirically-tested, sources of return that can be systematically harvested through dynamic long/short strategies.  They can be thought of either as returns that underlie “classic” hedge fund strategies (hedge fund risk premia), such as arbitrage and macro or the returns from “classic” styles (style premia), such as value, momentum, carry, defensive and low volatility.

    Legal account structures will be in the form of one or a combination of separate accounts, institutional commingled funds and/or limited partnerships or other similar forms.

    The allowable range of the portable alpha portfolio shall be 0-25% of the total Endowment Pool.

    Management of liquidity risk is a critical component of the portable alpha program.  If not managed appropriately, there is a risk that synthetic market exposures may need to be unwound at undesirable points in time in order to meet margin calls during volatile markets.  To help mitigate this risk, prudent balances of cash and cash equivalents shall be maintained as part of the program and monitored daily.

    The following table outlines the minimum cash requirements with associated replenishing guidelines:
     
      Cash Margin* Replenishing Guidelines

    Target

    30%

    n/a

    Range 1

    29.9% to 20%

    Develop action plan to replenish to Target within 12 months

    Range 2

    19.9% to 10%

    Develop action plan to replenish to Range 1 within 60 days, with subsequent plan to replenish to Target within 12 months

    Range 3

    9.9% or less

    Take immediate action to replenish to Range 2 as quickly as possible.  Follow with plan to replenish to Range 1 within 60 days, and subsequent plan to replenish to Target within 12 months


    * Cash Margin is defined as Portable Alpha Program cash and cash equivalents divided by the total of synthetic market exposures outstanding across all asset classes with the program.
  8. Spending Policy – To provide ongoing support to endowed programs in perpetuity, the spending policy must be managed in conjunction with investment objectives and other factors in compliance with applicable law, such that the spending rate plus an inflationary assumption shall not exceed expected investment returns over time.  At minimum, the spending policy should be reviewed in conjunction with asset/liability studies performed by the Investment Consultant not less than once every three years.
    1. The formula used to determine the Endowment Pool spending distribution for each fiscal year shall apply a rate of 4.0% to a base equal to the 28-quarter trailing average of market values as of December 31st of the prior fiscal year.  Endowment spending distributions shall be paid on a monthly basis.

      The transition of the rate from 4.5% to 4.0% shall be accomplished in a methodical manner over a period not to exceed the seven years ended June 30, 2024.  In no case shall the transition from 4.5% to 4.0% cause the actual spending distribution to decrease from one year to the next during the transition phase.In addition to the spending distribution noted above, the President shall have the discretion to distribute from the Endowment Pool an administrative fee each fiscal year to be used for support of internal endowment administration and development functions.  Such administrative fee shall be calculated by applying a rate of up to 1.25% to a base equal to the 28-quarter trailing average of market values as of December 31st of the prior fiscal year.  The administrative fee shall be paid on a monthly basis.  In addition, internal investment management, accounting and legal expenses may be charged directly to the Endowment Pool.
    2. The spending policy, spending distribution formula and administrative fee may be adjusted over time by the Board to respond to general economic conditions and other factors as appropriate and in compliance with applicable law.
    3. Implementation of the spending policy is delegated to the Vice President for Finance or her/his designees.

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