Investment Committee Policy and Guidelines
Department: Business Affairs
Policy Number: 200.004.01
Approved by: Board of Trustees
Effective Date: December 2010
This statement is issued by the Scripps College Board of Trustees to authorize the Investment Committee (a) to make investment decisions on behalf of the Board of Trustees and (b) to guide the College’s external investment managers in the investment of the managed portion of Investment Pool assets (collectively, the “Pool”). This statement shall be reviewed annually by the Board of Trustees and shall remain in full force and effect until modified by the Board. If the Investment Committee wishes to engage in transactions that are outside the scope of this policy, it shall first seek the approval of the Board of Trustees and/or the Executive Committee before engaging in such transaction. A copy of this statement, together with any future revisions, shall be provided by the Investment Committee to the Pool’s external investment managers.
Investment Pool defined: Where permitted by gift agreement and/or applicable government regulations, investments of endowments and funds subject to annuity or life income agreements are pooled. This Investment Pool normally accounts for over 95% of the College’s endowment assets. Certain endowment assets are owned separately by named endowment funds due to their nature or donor restriction. Examples include real estate, closely-held corporate stock, oil lease rights, paid-up whole life insurance policies, and the Student Investment Fund. There are also certain assets held by the Investment Pool that are managed by the College in accordance with prior Board resolutions. Examples would include life income funds, annuities and the reserve for depreciation.
A. Management and Investment Objectives
- The College’s management objective for the Pool is to preserve and enhance its real (inflation-adjusted) purchasing power, net of annual spending withdrawals and expenses in order to support the spending needs at the College.
- The College’s primary investment objective for the Pool is to attain a real total return equal to inflation plus the College’s spending rate plus 2%. The College also aspires to earn long-term returns in the top quartile of all universities and colleges. Results will be monitored on a quarterly basis with an understanding that objectives, while not attainable in every period, should be attainable over market cycles of five to ten years.
- The responsibility of the Investment Committee is not to manage a portfolio of stocks or bonds but rather, a portfolio of money managers. To fulfill its management obligations, the Committee engages competent professional investment counselors to manage security portfolios with appropriate custodial accounts to safeguard these funds. Mutual funds, limited partnerships, and real estate investment trusts are also used as investment vehicles. Performance is measured against investment objectives and appropriate national or international indices. Independent consultants may be hired to advise the Committee on investment strategy, asset allocations, and the selection of investment counselors.
- The Asset Allocation Committee has been established as a subcommittee of the Investment Committee in order to provide a means by which the Committee can make timely decisions to react to special situations and opportunities should these arise between regularly scheduled Investment Committee meetings. It is authorized to make investment decisions which fall within approved allocation target ranges and to do strategic rebalancing. In addition, the Asset Allocation Committee is available to meet as needed to study new investment strategies and make recommendations to the general Investment Committee. Membership of the subcommittee includes the Chair, Chief Financial Officer, and two members of the Committee appointed by the Chair. The Chair may convene additional informal groups to research areas of interest and outside experts may also be brought in to assist in the evaluation of new investment opportunities. All Committee members are encouraged to take a proactive approach to exploring new ideas and opportunities.
- The Gift Acceptance Committee has been established as a subcommittee of the Investment Committee in order to provide a means by which the Committee can respond quickly to time-sensitive planned gift proposals which include real property or do not conform to the Planned Giving Program approved by the Executive Committee November 17, 1987. Unless there is a demonstrated College use for the real estate or a reason to retain it as an investment or for income property, the property will normally be sold as soon as possible. At the same time of GAC Approval, the Treasurer’s Office will submit a liquidation plan for the real estate: broker multiple listing, private sale, or public sale (auction). Membership includes the Chair, Chief Financial Officer, and three Investment Committee members appointed annually by the Chair. The Director of Planned Giving staffs the subcommittee.
B. Spending Policy
- The Pool’s spending rate shall be calculated using a sixteen-quarter moving average of quarter-ending market values for 2009-2010 and a twenty-quarter moving average thereafter. Cash gifts and transfers in or out of the investment pool do not affect the unit market value, but change the number of units in the pool. The final quarterly observation to be included in the moving average shall be the market value as of December 31 of the calendar year preceding the fiscal year (July 1-June 30) for which spending is being determined. The target spending rule is 5% of the moving average. Each year the Investment Committee and the Finance Committee will review the College’s endowment resources and recommend to the Board of Trustees an appropriate spending rule.
- Current income (dividends, interest, and rents) in excess of budgeted spending shall be transferred from Current Unrestricted Funds to Quasi-Endowment.
- If current income (as defined in paragraph B.2 above) is less than the budgeted spending, capital gains may be drawn upon to avoid spending shortfalls.
C. Asset Allocation
The philosophy of the Investment Committee is that:
- Over the long run, asset allocation is the single most important determinant of the Pool’s investment performance, and
- The two most important risks to the endowment are: (1) The depletion of purchasing power over time, and (2) Shortfall risk, the risk of not generating sufficient returns to meet financial and program obligations.
- The Investment Committee thus seeks an equity oriented yet highly diversified portfolio of non-correlated assets. The target portfolio seeks to maximize less efficiently priced assets where there is an opportunity for skilled managers to add incremental return through active management.
- Asset allocation targets are reviewed on an annual basis and evaluated by the absolute and relative attractiveness of investment opportunities, as well as the College’s ability to access top managers and to execute its strategy in a cost effective manner.
D. Asset Allocation Targets
Asset Allocation targets for the entire managed investment pool are as follows: TARGET RANGE
The role of each asset class is defined as follows:
Fixed Income: The primary objective of the fixed income allocation is liquidity, providing stability and shelter during periods of sudden and unexpected financial distress or geo- political turmoil. Bonds are also an important deflation hedge and provide protection during periods of economic contraction and during equity bear markets. As such, only high-quality government bonds are included in the bond allocation. In general, this allocation will favor long maturities although duration will be reviewed and adjusted based on market conditions and the assessment of current risk/reward tradeoffs.
The amount of money allocated to fixed income is monitored based on the dollar amount the College draws from the endowment based on current spending policy. The fixed income allocation should be able to support the spending needs of the college during a three-year bear market so that equities would never have to be sold at depressed levels in order to fund the annual needs of the institution.
Equities: The equity allocation encompasses U.S. equities, international equities and long/short equities. The objective of the equity allocation is to provide long term capital appreciation which exceeds inflation and builds intergenerational equity. It is recognized that this portion of the portfolio may have significant year-to-year volatility, but given the long-term horizon of the College and the assumption that one is planning for perpetuity, an equity oriented approach is more likely to generate superior returns over sufficiently long time frames.
Recognizing that the U.S. equity market is highly efficient, the investment committee has elected to favor active equity managers with proven bottom-up fundamental research capabilities. Because superior stock selection has provided the most consistent and reliable opportunity for generating excess returns, the committee looks for managers with sound bottom-up stock picking approaches, who can clearly articulate the fundamental analysis and decision-making which goes into their investment process. Manager selection is diversified among both growth and value disciplines as well as market capitalization in an effort to insure that exposure to multiple investment philosophies will smooth the path of returns through different market cycles, with no single manager or style having a disproportionate impact on the endowment’s aggregate results. Equity manager returns will be monitored on a quarterly basis versus appropriate benchmarks for each individual style, with an understanding that the anomalies of market cycles dictate that a true assessment of performance can only be evaluated over rolling five-year periods. In addition, because of the committee’s preference for “stock pickers” versus benchmark driven managers, the committee recognizes that some managers may have highly concentrated stock portfolios whose returns are driven predominantly by “alpha,” or stock selection, versus “beta, ” or market forces, and that those managers can have high tracking error relative to most market benchmarks.
Investing in foreign equities is an important part of the equity diversification process and includes both developed and emerging markets. Allocations to U.S. versus foreign managers are evaluated on an annual basis in respect to the valuations and opportunities available in the various markets. In general, foreign equities are expected to have somewhat higher expected returns and higher volatility of returns due to the inefficiencies inherent in many foreign markets, and also due to the potential opportunities in the rapidly growing economies of the emerging markets.
Absolute Return: The objective of the Absolute Return Allocation is to provide attractive long-term, stable returns, with low correlations to both the fixed income and equity markets. The ability of Absolute Return managers to earn relatively stable, positive returns which compound over time makes this asset category a valuable component to the endowment’s goal of both preserving and growing assets. Because manager skill, rather than market direction, is the primary source of returns on these strategies, the investment risk shifts from market risk to manager risk, which can be amplified by the liquidity constraints which often limit withdrawals to an annual basis with 90 days notice.
The amount of money allocated to absolute return strategies is evaluated based upon the ability of the college to access top tier managers, the opportunities available in the market for these managers to exploit, and the overall liquidity profile of the endowment as a whole.
Long/Short Equities: Long/short equities is not considered a separate asset class but simply an expanded tool set to enable skilled equity managers to implement their stock picking capabilities from both the long and short side. Like concentrated “alpha” managers, the goal of long/short equity managers is to separate out some of the “beta”, or market forces, and add alpha through both long and short stock selections based on strong fundamental research.
Real Assets/Inflation Hedging Assets: Real Assets serve the portfolio as a hedge against inflation, and also act as an important diversifying tool given their relative stability during periods of public market turmoil. The purpose of the inflation hedging allocation is to provide attractive real returns over the long-term, and above-average returns during periods of escalating inflation. Many of the investments in this area will have attractive cash flow characteristics which add to their stability. Both inflation hedging assets and fixed income investments lend a measure of stability to the endowment portfolio, but their long-term returns tend to lag equity related instruments and this fact is kept in mind when setting target allocations for both fixed income and real assets.
Real asset investments include both publicly traded investments as well as private partnership funds. Specific investments can include Treasury Inflation Protected Securities (TIPS), private real estate funds, REITS, energy, timber, metals, commodities, macro hedge funds and a variety of other uniquely structured inflation-sensitive investments.
Private Equities: The objective of the private equity allocation is to benefit from the inefficiencies of the illiquid private equity markets which have historically resulted in returns that have beat inflation and the more efficiently priced public equity markets. In addition, this asset class offers the potential for talented managers to add substantial value through direct involvement in financial restructurings and operational improvements. The Private Equity portfolio can include investments which are either domestic or international, and the funds themselves can include venture and/or expansion capital, buyouts and corporate restructurings, and distressed /turnaround investments.
Private equity is not considered a diversification hedge to publicly traded equities. Indeed, private equity returns are dependant on many factors common to the determination of marketable equity returns.
The committee recognizes that achieving target allocations to private equities is a challenge and rebalancing this asset class an equal challenge. With this in mind, a 17% target has been set with the understanding that the committee strives to limit its investments to only top quartile funds and to average into investment commitments over numerous vintage years. Any stock distributions from private equity funds will be sold by the committee within 90 days and the Asset Allocation Committee has the authority to implement such sales.
Opportunistic: As capital flows have made more and more markets increasingly efficient and drained much of the excess return from traditional assets classes, managers have been forced to become increasingly creative in an effort to find new market inefficiencies. This has resulted in the development of many hybrid investment vehicles which could be classified under several different asset classes, but whose structure, risks and benchmarks are unique to themselves. Understanding that conventional investing will lead to conventional results, the committee has made a commitment to explore and understand new product offerings which cannot be slotted into traditional boxes but could potentially be important portfolio diversifiers and important drivers of return.
Since new product risks can potentially be high, the committee has a policy of sizing each new investment appropriately, and has established guidelines for reviewing new products which includes such things as: experienced management team; well thought out business plan and support structure; understanding of the correlation of the investment to the result of the portfolio; understanding of the drivers of return and the drivers of excess return; break down of potential risks; realistic return expectations under a variety of scenarios.
Cash: Cash is generally not viewed as an investment option but is rather a short-term solution to fund inflows and outflows. It should be kept at the minimum level necessary to meet the immediate funding needs of the College and upcoming investment obligations. In times of extreme market stress or to meet unusual liquidity needs of the College, the Investment Committee may decide to hold a “liquidity reserve” and maintain cash at levels that are higher than would be expected under more normal conditions. Extra cash shall be allocated to investment managers by either the Investment Committee or the Asset Allocation Committee with a goal of adhering to the investment targets as laid out in the Investment Pool Guidelines.
Although cash is not considered an investment option, it should nevertheless be invested wisely and safely and governed by the guidelines set forth in Appendix A. Investments in cash should at least perform in line with the total return of 91-day U.S. Treasury Bills.
E. Guidelines for Transactions
- Except under unusual circumstances, all transactions should be entered into on the basis of best execution, which means best realized net price. Notwithstanding the above, commissions may be designated for payment of services rendered to the Pool in connection with its management. These should be kept to a minimum to avoid any conflicts with best execution.
F. Monitoring of Objectives and Results
- All objectives and policies are in effect until modified by the Investment Committee. The Committee will review these annually for their continued appropriateness.
- The deployment of both individually managed portfolios and total Pool assets will be monitored for consistency of investment philosophy, return relative to objectives, and investment risk as measured by asset concentration, exposure to extreme economic conditions, and market volatility. Individually managed portfolios will be monitored by the Investment Committee on an on-going basis but results will be evaluated on a rolling three, five and ten-year basis. [see A.2] The above-noted time horizons notwithstanding, the Investment Committee will review each manager annually to confirm that the attributes and incentives underlying its expectations for each manager remain in place.
- Individual Account managers will report the following information quarterly: current account value, total return net of all commissions and fees, additions to and withdrawals from the account, current holdings at cost and at market, and purchases and sales for the quarter. Fund managers will report total return net of all fees, and net asset value. Regular written communications outlining the manager’s evolving investment strategy are expected. Also, managers are required to inform the Investment Committee of any material change in firm ownership, organizational structure, key personnel, account structure (i.e., number and size of accounts including minimum account size), and investment philosophy.
- The Investment Committee of the Board of Trustees has responsibility for monitoring the Student Investment Fund. The Student Investment Fund will make a presentation to the Investment Committee annually along with written quarterly reports as outlined in Appendix D.
G. Social and Ethical Responsibilities
- The Board has an obligation to invest and vote proxies with the best interest of the College foremost in mind in order to maximize the return of the College’s funds to support the goals and programs of the College. For custodial accounts, the investment counselors have been designated by the Committee to vote proxies.
- The College does not wish to invest in areas or concerns which practice policies which are openly offensive to our understanding of human rights. The Board also recognizes that it lacks power to impose standards of conduct on society as a whole and has neither the competence nor the mandate to set social or economic priorities.
- The members of the Investment Committee sign the Code of Business Ethics in accordance with Board approved policies.
Appropriate Cash-Equivalent Investments
Managers are expected to emphasize safety of principal in making cash-equivalent investments.
- “Cash-equivalent investments” are defined as fixed income instruments with maturities of one year or less.
- Permissible cash-equivalent instruments are:
- Direct obligations of the United States.
- Obligations unconditionally guaranteed (principal and interest) by the U.S. Government.
- Negotiable certificates of deposit, bankers’ acceptances and floating rate notes issued by, or time deposits placed with, banks meeting the following criteria:
- U.S. chartered banks must have debt ratings of “A” or higher, ready access to world capital markets, a demonstrated record of profitability (including the avoidance of recent major loan losses), and a sizable ongoing C.D. issuance or deposit collection program.
- Foreign chartered banks must be domiciled in nations with strong economies, established capital markets, and central banks capable of controlling effectively domestic monetary movements. Instruments must be recognized as direct obligations of such banks, not as obligations of their subsidiaries.
- A1-P1 Commercial Paper issued by large companies domiciled in the United States or abroad. Instruments issued by state-owned companies must be guaranteed by the government owner.
- Repurchase Agreements secured by U.S. Government and Federal Agency obligations–such obligations to be priced at least 102% of market value.
- Money Market Funds of commercial banks and other major investment advisors.
Guidelines for Fixed Income Managers
The manager is to construct and maintain a fixed income portfolio consisting primarily of U.S. Treasury Securities, in an amount equal to at least three years of spending needs of the College. The Investment Committee may also grant a manager the ability to opportunistically invest any excess amounts of the Fixed Income allocation in other U.S. government securities. The purpose of this portfolio is not to maximize return, but to provide safety and liquidity to
fund the spending needs of the College, particularly in bear market environments when it is not desirable to liquidate equities. The secondary goal of the bond portfolio is to provide current income, and to that end the portfolio should be invested entirely in coupon-bearing
instruments. The portfolio will generally be weighted towards long maturity U.S. Government Securities but because this end of the market tends to be most sensitive to changes in the level of interest rates, the portfolio can, on consultation with the Investment Committee or the Asset Allocation Committee, be shortened significantly in an effort to protect principal.
The Treasury portion of the bond portfolio will be passively managed within the above guidelines. It is also recognized that the returns achieved on this portfolio may correlate either positively or negatively with the total returns of the College’s equity portfolio over extended periods of time.
Guidelines for Student Investment Fund Managers
The Student Investment Fund President and/or Treasurer will make an annual presentation to the Committee which includes:
- Written investment philosophy
- Current holdings at cost and at market
- Purchases and sales and the reason these investment decisions were mad
- Return on portfolio for the quarter and year-to-date versus the S&P 500.
In addition, the Student Investment Fund will submit abbreviated quarterly written reports to the Investment Committee detailing items ” 2″ through “4” above.