STATEMENT OF POLICY AND INVESTMENT OBJECTIVES
UNIVERSITY OF WEST FLORIDA FOUNDATION, INC.
November 2004
Revised March 2005
Revised June 2005
Revised June 2006
Revised August 2006
TABLE OF CONTENTS
VII. ASSET ALLOCATION & STYLE DIVERSIFICATION
A. Summary of Asset Allocation
B. Rebalancing Procedures
VIII. SELECTION & RETENTION CRITERION FOR INVESTMENTS
A. Investment Management
B. Individual Security Investment Guidelines
i. Equity Holdings
ii. Fixed Income Holdings
iii. Alternative Investments
A. Total Fund
B. Equity Segment
C. Fixed Income Segment
D. Alternative Investments
Addendum
The purpose of these assets is to further the over all mission of the University of West Florida. This Investment Policy Statement establishes a clear understanding between the Investment Committee of the University of West Florida Foundation, Inc., the Investment Management Consultant and the Investment Managers as to the investment objectives and policies applicable to the foundation’s investment portfolio. This Investment Policy Statement will:
It shall serve the Investment Manager(s) as the principal source for developing an appropriate strategy. In addition, it shall serve as the basis for performance evaluation. Any changes in this Investment Policy Statement will be in writing and will be communicated to the Investment Managers.
The current spending policy for the University of West Florida Foundation is four percent (4%) annually as calculated on a three year average of the market value of the portfolio as of June 30 th. Additionally, two percent (2%) of the market value will be used to fund the operating budget. Pursuant to the proposal adopted by the Board of Directors, the goal is to reduce the operating budget from two percent (2%) to one and one-half percent (1.5%) of the total investment assets. As such, for each $1,000,000 increase in market value of the investment portfolio above $50,000,000, the percentage for the operating budget will decrease by one basis point (0.01%), reaching the objective of 1.5% with assets of $100,000,000.
The objectives of the assets are the enhancement of capital and real purchasing power while limiting exposure to risk of loss. Real purchasing power or real rate of return will be defined as returns in excess of inflation as defined by Consumer Price Index.
At a minimum, long-term rates of return should be equal to an amount sufficient to maintain the purchasing power of these assets and provide necessary capital to fund the foundation’s spending policy. As such, the desired minimum rate of return is equal to the Consumer Price Index (CPI) plus 400 basis points (4%) for spending, plus an additional 200 basis point (2%) on an annualized basis. Bottomline, the overall minimum rate of return is equal to CPI plus 600 basis points (6%).
In light of this return requirement, the portfolio should be constructed using a total return approach with a significant portion of the funds invested to seek growth of principal over time. The assets are to be invested for the long term, and a higher short-term volatility in these assets is to be expected and accepted.
The time horizon for these assets is perpetual. For strategic planning purposes, a minimum of five years will be considered for decision-making purposes. Capital values do fluctuate over shorter periods and the Investment Committee recognizes that the possibility of capital loss does exist. However, historical asset class return data suggest that the risk of principal loss over a holding period of at least three to five years can be minimized with the long-term investment mix employed under this Investment Policy Statement.
The Investment Committee recognizes that prudent investing requires taking reasonable risks in order to raise the likelihood of achieving the targeted investment returns. Research has demonstrated that portfolio risk is best minimized through diversification of assets. The portfolio of funds will be structured to maintain prudent levels of diversification. In terms of relative risk, the volatility of the portfolio should be in line with general market conditions.
The Investment Committee recognizes that over the long term, the risk of owning equities has been, and should continue to be rewarded with a somewhat greater return than that available from fixed income investments. The role of fixed income investments is to reduce the volatility of the overall portfolio while providing a predictable stream of income.
The Investment Committee is charged with the oversight of the investment of the endowed, restricted, unrestricted and operating assets of the University of West Florida.
The roles of the Investment Committee, the Investment Consultant, and the Investment Manager(s) with regard to the assets are delineated as follows.
The Investment Committee, with active assistance and recommendations from the Investment Consultant, shall have responsibility for the following:
The Investment Consultant will be proactive in advising and making recommendations to the Investment Committee regarding:
The Investment Manager(s) will be responsible for the following:
VII. ASSET ALLOCATION AND STYLE DIVERSIFICATION
Research suggests that the decision to allocate total assets among various asset classes will far outweigh security selection and other decisions that impact portfolio performance. The Investment Committee recognizes the strategic importance of asset allocation and style diversification in the investment performance of the assets over long periods of time. Domestic and international equities both large and small capitalization, fixed income, cash equivalent securities, real estate and fund of funds hedge funds in the form of diversified fund of funds have been determined to be acceptable vehicles for these assets. Additional asset classes and style strategies may be incorporated into the investment philosophy in the future.
A. Summary of Asset Allocation Guidelines:
After reviewing the long-term performance and risk characteristics of various asset classes, the following asset allocation strategy is incorporated to achieve the objectives of these assets:
Asset Category |
Minimum |
Target |
Maximum |
||
| Cash | 0.00% |
0.00% |
5.00% |
||
| Fixed Income | 10.00% |
15.00% |
25.00% |
||
Equity |
50.00% |
60.00% |
70.00% |
||
Large Cap |
30.00% |
35.00% |
40.00% |
||
Small Cap |
7.50% |
10.00% |
15.00% |
||
International |
10.00% |
15.00% |
20.00% |
||
Alternative Assets |
0.00% |
25.00% |
30.00% |
||
Real Estate |
0.00% |
5.00% |
15.00% |
||
Diversified Fund of Fds Hedge Funds |
10.00% |
20.00% |
25.00% |
||
There is no set minimum cash requirement; however adequate liquidity should be maintained. It is intended that Investment Managers will be given ample notice for any withdrawals to reduce the probability of adversely affected the portfolio. Additionally, any withdrawals will be funded on a pro-rata basis to ensure that the asset allocation after the withdrawals is within the investment guidelines as listed above.
From time to time, market conditions may cause the investment in various asset classes to vary from the established allocation. At least on an annual basis, the Investment Committee and their Investment Consultant will review both the specific asset allocation (equity versus fixed) and the style targets for possible rebalancing back to the target allocation, to ensure consistency with the asset allocation guidelines established by this investment policy. If the actual weighting goes above / below the maximum / minimum weighting intra-year, rebalancing may be recommended.
VIII. SELECTION AND RETENTION CRITERION FOR INVESTMENTS
A. Investment Management
Investment Manager(s) (including mutual funds) shall be chosen using the following criteria:
B. Individual Securities
The Investment Committee desires to permit investment managers flexibility to maximize investment opportunities. However, it is cognizant of its responsibility to practice prudent management in order to conserve and protect the assets and to prevent exposure to undue risk. Exceptions to the guidelines stated below may be made upon special written approval of the Investment Committee and shall be subject to annual review.
The Investment Committee foresees the possibility of using mutual funds / collective trust funds / limited partnerships in the form of fund of funds hedge funds and understands that they would not have any control over the management of such funds with regard to guidelines and restrictions. However, when possible, they intend to utilize funds that generally comply with the investment guidelines stated in this Investment Policy Statement.
i.) Equity Holdings:
Security Types:
Equity securities shall consist of common stocks and equivalents (ADRs, issues convertible into common stock, etc.). Issues traded on the New York, American, Over the Counter, Regional Exchanges and foreign exchanges are appropriate. There are no specific constraints as to earnings record and dividend policy. For Investment Managers who manage international equity portfolios, up to 25% of the market value of the portfolio may be invested in emerging markets.
Diversification :
No more than seven percent (7%) of the market value of the equity portfolio shall be in one issue. (If more than one investment manager manages equities, this restriction shall apply separately to each equity portfolio.)
Quality :
There are no qualitative guidelines with regard to equity ratings, etc., except that prudent standards should be developed and maintained by the investment manager(s).
No more than the greater of ten percent (10%) or two times the sector weighting in the appropriate index can be invested in any one sector.
Restrictions:
Investment in the following is prohibited unless written permission is granted:
ii.) Fixed Income Holdings:
Security Types:
Investment in obligations of the U.S. Government, including Treasury Inflation-Protected Securities (TIPS), U.S. Government Agencies, U.S. Corporate entities, Mortgage Backed Securities (MBS), Preferred Stock, Collateralized Mortgage Obligations, Asset Backed Securities, Taxable Municipal securities, Commercial Mortgage Backed securities (CMBS), REIT debt and dollar denominated foreign bonds is permitted unless otherwise prohibited by investment restrictions .
Diversification:
With the exception of U.S. Treasury and Agency obligations, no more than two percent (2%) of the fixed income portfolio at market shall be invested in a single issue or corporate entity. If more than one investment manager manages fixed income, these restrictions apply separately to each portfolio.
Maturity:
The Investment Managers shall have responsibility for setting the appropriate maturity schedule for their portion of the assets based on the fund's investment objectives, risk profile and stated mandate (i.e. low duration, core, etc.) Based on current and expected market conditions, the Investment Manager should determine the structure that will yield optimal performance.
Quality:
Each debt instrument selected for investment shall be subjected to credit analysis by the Investment Manager prior to inclusion in the portfolio. The minimum acceptable quality is investment grade at the time of purchase by Moody's Investor Service (Baa) or Standard and Poor's (BBB). The weighted average quality of the fund shall be AA+ or better. If the rating agencies have split ratings on an issue, the higher rating will apply in determining compliance with these guidelines.
In the event that an issue is downgraded below investment grade, the Investment Manager will review the situation with the Investment Committee and Investment Consultant and discuss the rationalization for holding the security and explanation for a course of action.
Restrictions:
Investment in the following is prohibited without written permission:
iii.) Alternative Investments:
Real Estate – The Investment Committee may time to time elect to purchase real estate assets if it is determined that such purchases are intended to be, but not guaranteed to be, in the best interest of the Foundation and the University community as the primary beneficiary over the long term. Such assets will be valued at the lesser of purchase price or fair market value and should at no time comprise more than 15% of the total market value of the Foundation’s assets. There are no specific guidelines regarding the characteristics necessary for purchase; however, the Investment Committee should work closely with the Real Estate Committee in making any acquisitions, evaluating the status of the property with respect to environmental issues, assessing the impact of any contingent liabilities, determining the impact of holding costs and financing options.
In the event that a real estate asset is sold, the Foundation may provide financing, which will be held as an asset of the overall fund. These notes will be monitored in terms of balance, principal repayment and interest payments to reflect the income generated on the overall fund.
Hedge Funds – Diversified Fund of Funds Hedge Funds will be held in the forms of professionally managed pooled limited partnership investments offered by professional investment managers with proven records of superior performance over time.
Fund of Fund Hedge Funds are subject to the same due diligence process as traditional investments, however due to their unique nature, additional criteria is to be considered. Additional criteria include, but are not limited to:
The overall fund performance will be reviewed on a quarterly basis, with long term emphasis placed on results achieved over a three to five year period. Objectives will be reviewed annually and adjusted, if necessary, after consultation with the Investment Committee, Investment Consultant and Investment Managers.
A. Total Fund:
Overall fund performance will be compared to the performance of a similarly structured balanced index in line with the target allocation in each strategy. This custom index will be comprised of the S&P 500 Index (or Russell 1000 Index), Russell 2000 Index, EAFE International Index, Lehman Brothers Aggregate Bond Index, Merrill Lynch 1-3 Year Treasury Index and Citigroup One-Month Treasury Bill Index and/or other appropriate indices. The Fund should at least equal the performance of the custom balanced index
The Fund should rank in the top thirty-three percent (33%) of a nationally recognized evaluation service's universe for comparable funds over a rolling three to five year time period.
The volatility of investment returns, as measured by the standard deviation of quarterly returns, should be comparable to that of the custom index. Volatility greater than the benchmark is acceptable so long as returns are commensurate.
B. Equity Segment:
The performance of the domestic large cap equity portion is expected to meet or exceed the performance of S&P 500 Composite Index or the S&P Citigroup Growth/Value Index/Russell 1000 Growth/Value, depending on the manager's investment style.
The returns of the large capitalization equity portion should rank in the top thirty-three percent (33%) of a nationally recognized evaluation service's universe for comparable funds and investment styles over rolling three to five year time periods.
The performance of the small capitalization equity portion should meet or exceed the performance of the Russell 2000 Small Stock Index or the Russell 2000 Value / Growth Index, depending on the manager's investment style.
The returns of the small capitalization equity portion should rank in the top thirty-three percent (33%) of a universe for comparable funds over a rolling three to five year time periods.
The performance of the international equity portion should meet or exceed the performance of the Morgan Stanley Capital International's Europe Australia Far East (EAFE) Index.
The returns of the international equity portion should rank in the top thirty-three percent (33%) of a universe for comparable funds over a rolling three to five year time periods.
The volatility of investment returns, as measured by the standard deviation of quarterly returns, should be comparable to that of the segment’s appropriate index. Volatility greater than the benchmark is acceptable so long as returns are commensurate.
C. Fixed Income Segment:
The performance of the core fixed income portion is expected to meet or exceed the performance of the Lehman Brothers Aggregate index or other appropriate index or mix of indices, which reflect the fixed income portion of the portfolio.
The returns of the fixed income portion should rank in the top forty percent (40%) of a universe for comparable fixed income funds over a three to five year time period.
The performance of the low duration fixed income portion is expected to meet or exceed the performance of the Merrill Lynch 1 – 3 Year Treasury index, Citigroup 3 Month Treasury Bill index or other appropriate index or mix of indices, which reflect the fixed income portion of the portfolio.
The cash equivalent investment performance results will be compared against the yield on one month Treasury Bill securities, MFR All Taxable Money Market index, and are expected to exceed the annualized rate of the Consumer Price Index (CPI).
The volatility of investment returns, as measured by the standard deviation of quarterly returns, should be comparable to that of the segment’s appropriate index. Volatility greater than the benchmark is acceptable so long as returns are commensurate.
D. Alternative Investments:
The Investment Committee recognizes that benchmarks for alternative investments, more specifically hedge fund of funds, are relatively new in their creation and there is no perfect benchmark in existence for these types of investments. Hedge fund indexes are created from hedge fund databases. There is no complete database because inclusion in these databases is voluntary and they are subject to survivorship bias. Additionally, each hedge fund, including fund of funds, has diverse investment objectives and characteristics making like comparisons difficult.
To aid in the on-going evaluation of the alternative investment portion of the portfolio, Diversified Fund of Funds Hedge Fund investments will be compared to the following benchmarks:
A. Review and Evaluation of Investment Objectives:
The achievement of investment objectives will be reviewed on an annual basis by the Investment Committee. This review will focus on the continued feasibility of achieving the objectives and the continued appropriateness of the investment policy statement. It is not expected that the investment policy statement will change frequently. In particular, short-term changes in the financial markets should not require an adjustment in the investment policy statement.
B. Review and Evaluation of Investment Manager(s):
The Investment Committee will meet at least annually with the Investment Manager(s) or their representative(s). Additionally, with or without the Investment Manager(s), the Investment Committee will review investment results quarterly.
These reviews will focus on:
The Investment Committee may discharge or replace an Investment Manager at any time it deems such action necessary and appropriate.
Guidelines for evaluation, retention, and replacement of Investment Managers will be as follows:
An Investment Manager will be rated in a “Favorable Status” if they are delivering favorable performance and there are no outstanding organizational issues.
An Investment Manager will be in a “Caution Status” if:
An Investment Manager will also be considered on “Caution Status” if there is a material change in the ownership structure of their organization, or there is a departure of key investment professionals.
An Investment Manager that falls in “Caution Status” should undergo a formal review by the Investment Consultant. The review will address how the Investment Manager will move back to “Favorable Status” or recommend termination. An Investment Manager can move back to “Favorable Status” by improving its performance above the criteria as listed above. Highest priority will be given to those failing to meet the five-year target and next to those failing to meet the three-year target. There may be situations where immediate problems, questions or short-term performance issues arise regarding an Investment Manager and the priority will shift to review these situations first.
In addition to the above, immediate termination of managers should be considered:
Month-end accounting of transactions and portfolio holdings, ending portfolio and holdings values will be provided by the custodian(s).
Quarter-end regular accounting of transactions, portfolio holdings, yields, current market values, summary of cash flows, calculations of the portfolio's total rate of return on a latest quarter, year-to-date and since inception basis will be provided by each Investment Manager.
The Investment Managers will maintain communication with the Foundation and the Investment Consultant with as reasonable frequency as market conditions and the portfolio warrant. Major market conditions and major portfolio changes should be called to the attention of the Foundation and the Investment Consultant by the Investment Managers.
Significant changes within the Investment Managers’ operations of personnel and the anticipated impact on the assets should be brought to the attention of the Foundation and the Investment Consultant immediately.
Proxies must be voted by the Investment Manager in compliance with the values and philosophy of The University of West Florida Foundation.
The Investment Consultant will provide comparative performance evaluation reports quarterly.
Accepted by:
__________________________ __________________
Date
ADDENDUM
Deposit and Investment Risks
As a component unit of the University of West Florida, the University of West Florida Foundation, Inc. (the Foundation) is required under GASB 40 to make certain disclosures related to deposit and investment risk. Deposit and investment resources of the Foundation represent significant resources necessary for the delivery of educational services and programs. Financial statement users should know that risks are inherent in all deposits and investments and this element of risk could affect the Foundation’s ability to provide resources and impact services.
By nature of its function, the Foundation’s risk exposure is significantly greater than the deposit and investment risks of the University of West Florida. In general, the common deposit and investment risks are related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk.
Deposit and Investment Policy: The Foundation has deposit and investment policies related to each of these risks. The policy states that the Investment Committee of the Board of Directors will meet no less than quarterly to review investment performance with our investment consultant. The policy provides guidelines for the evaluation, retention, and replacement of individual investment managers, establishes appropriate benchmarks/indices used to evaluate each investment managers’ performance, and establishes performance asset allocation targets and investment quality measures.
Risk Categories
Credit risk: The custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the Foundation would not be able to recover deposits or would not be able to recover collateral securities that are in the possession of an outside party. Therefore, the Foundation shall monitor deposits on account so as to avoid deposits that are not covered by depository insurance or are uncollateralized. In compliance with GASB and FASB standards, to the extent required, the Foundation will disclose in its annual financial statements the credit quality ratings of any external investment pools, money market funds, bond mutual funds, and other pooled investments of fixed-income securities in which they invest.
Concentration of Credit Risk: The Foundation, with the assistance of its investment advisor, shall implement policies and procedures to ensure adequate portfolio diversification. It is the Foundation’s policy that, with the exception of U.S. Treasury and Agency obligations, no more than two percent (2%) of the fixed income portfolio at market shall be invested in a single issue or corporate entity. If more than one investment manager manages fixed income, these restrictions apply separately to each portfolio. Furthermore, the Foundation and its investment advisor monitor the asset allocation to ensure investments are within established targets for quality and investment balances remain within the established target range for each asset category.
Interest Rate Risk: As an element of interest rate risk, GASB requires disclosures of investments that have fair values that are highly sensitive to changes in interest rates. The allocation of the Foundation’s portfolio in Fixed Income investments susceptible to interest rate risk will be monitored not to exceed established targets in the approved investment policy. In cooperation with the investment advisor and the investment manager of the Fixed Income investments, the interest rate risk information will be organized by investment type and amount using one of the following methods:
a. Segmented time distribution
b. Specific identification
c. Weighted average maturity
d. Duration
e. Simulation model.
Foreign Currency Risk: The Foundation is required to disclose any investment denominated in a foreign currency. The Foundation has limited its exposure to foreign currency risk by limiting the asset allocation in international investments in accordance with the established targets in the approved investment policy.
Investment Committee: revised and approved August 15, 2006.
Full Board Approval on September 21, 2006
