VCU Investment Policy

Transcription

1 VCU Investment Policy Policy Type: Board of Visitors Responsible Office: Vice President for Finance and Administration, Associate Vice President for Finance and Administration, Treasurer Initial Policy Approved: 05/15/2009 Current Revision Approved: 09/19/2013 Policy Statement and Purpose The purpose of this Investment Policy is to give guidance to the Board of Visitors of Virginia Commonwealth University ( the Board ) and the relevant Committees regarding the investment and management of Virginia Commonwealth University s ( the University or VCU ) Operating Pool ( the Pool ) and will set forth the responsibilities the University, its external managers, and investment advisors. The Finance, Budget, and Investment Committee ( FB&I Committee or the Committee ) or the equivalent to the FB&I Committee will oversee the Pool. Investment objectives, policies, and a prudent investment program are essential tools for the Board and the Committee in carrying out their fiduciary responsibilities with regard to the investment and management of the Pool. The Committee will comply with the Uniform Prudent Management of Institutional Funds Act, which replaces current provisions in the Virginia Code by adding in Chapter 11 of Title 64.2 an article numbered 2.1, consisting of sections numbered through The Pool will consist of unrestricted and restricted current funds, locally operated auxiliary enterprise funds, research and sponsored program funds, auxiliary enterprise funds and all other non general fund revenues that are governed by the Uniform Prudent Management of Institutional Funds Act as required by the amended Code of Virginia in Sections , :01 and , effective July 1, In addition, the Pool will consist of tuition and Educational and General fees that are governed by the Investment of Public Funds Act of the Code of Virginia in Sections through In the pursuit of its investment objectives, the Committee may engage the services of one or more investment advisors (each, an Investment Advisor ), who, in turn, may assist in the selection of investment managers (each, an Investment Manager ) for the assets. This Investment Policy also assists the Committee in guiding Investment Advisors in performing their duties. The Committee will review this Investment Policy as needed and at least annually, making any appropriate changes. VCU Treasury staff will communicate any revisions in writing to the Investment Advisors. VCU Operating Pool Investment Policy 1 Approved: 09/19/2013

2 The policy will attempt to impose discipline and provide a framework for prudent investment management, while also allowing for sufficient flexibility to capture investment opportunities as they may occur. More specifically, the policy will provide guidance in the following areas: Establish a governance structure for the Pool funds and delineate the responsibilities of the Committee. Define the financial objectives for the Short Term and Long Term Tiers of the Operating Pool and set fund structures for each Tier. Provide guidance regarding authorized investments, asset allocation parameters, and portfolio constraints for each Tier Establish performance measures and monitoring and reporting requirements for each Tier. The policy will be reviewed periodically and modified as necessary by the Board of Visitors to meet the changing needs of the University. VCU Operating Pool Investment Policy 2 Approved: 09/19/2013

3 Table of Contents Policy Statement and Purpose 1 Definitions 4 Governance 4 Responsibilities of the Committee 5 Short Term Tier 6 A. Financial Objectives 6 B. Fund Structure 6 C. Authorized Investments 7 D. Asset Allocation Parameters and Portfolio Constraints 9 E. Performance Measures 10 F. Duties of Investment Managers 11 G. Monitoring and Reporting 11 Long Term Tier 12 A. Financial Objectives 12 B. Authorized Investments 12 C. Strategic Asset Allocation 13 D. Investment Restrictions 14 E. Performance Measures 14 F. Distribution Policy 14 Establishing a Prudent Split between the Short Term and Long Term Tiers 15 Legal and Other Considerations 16 Conflicts of Interest 17 Who Should Know This Policy 18 Contacts 19 Related Documents 19 Revision History 19 Exhibit A Conflict of Interest Form 20 VCU Operating Pool Investment Policy 3 Approved: 09/19/2013

4 Definitions There are no definitions associated with this policy. Procedures Governance In accordance with the By Laws of the Board, the FB&I Committee has been charged with the responsibility to supervise the investment and management of the Operating Pool. The Committee may delegate oversight and investment management to a designated investment advisor. Should it be decided that fiduciary responsibilities and investment management are to be delegated to an investment advisor, the designated Investment Advisor shall have discretion over the day to day decisionmaking with respect to the investment portfolio as well as the duty to report to the Committee. When the Investment Advisor has been given discretion to manage the Investment assets, the chart below sets forth the responsibilities of the various entities involved in the management of the Investment Funds. Governance Structure for the Management of the Investment Funds (Structure applies when the Investment Advisor has Discretion) Asset Allocation Policy Strategic Rebalancing Manager Selection and Monitoring Investment Operations Administrative Operations Performance Reports FB&I Committee Approves Approves Approves Investment Advisor Reviews quarterly Senior Management (with Advisor) Recommends Recommends policy and ranges Oversees selection process / recommends Investment Advisor Reviews monthly Investment Advisor Advises Implements within guidelines Researches and implements investment managers Implements and monitors Implements some Provides quarterly Treasury Staff Oversees Implements VCU Operating Pool Investment Policy 4 Approved: 09/19/2013

5 In the absence of selecting an investment advisor, the Committee will work with Senior Management to see that all responsibilities are fulfilled. The Committee may consult with financial firms and experts. Responsibilities of the Committee According to the by Laws of the Board of Visitors, the Rector will appoint members of the standing committees, including the FB&I Committee. Unless otherwise specifically provided by the Board, actions of the FB&I Committee must be approved by the Board of Visitors. The FB&I Committee will be comprised of one or more members of the Board and preferably with financial and/or investment background or expertise. Members of the Committee will be appointed by the Board for a term of one year at a meeting of the Board and will serve until such member s successor is duly appointed and qualified or until such member s earlier resignation or removal. The Chair of the Committee will be appointed by the Chair of the Board of Visitors. The Chair of the Committee will set the agendas for and chair the Committee meetings. The Committee will meet at least quarterly or more frequently as circumstances dictate. The Committee may invite to its meetings any director, any employee of the University, and any other person with whom it deems appropriate to consult in order to carry out its responsibilities. The Committee will authorize and supervise the investment of the Pool. It will review and assess the Investment Policy for the Pool at least annually. With the assistance and recommendation of the Investment Advisor, the Committee will establish and review an investment strategy consistent with the requirements, guidelines and principles articulated in the Investment Policy. The Committee may approve an Investment Advisor to advise the Committee with respect to its duties and responsibilities. The selection of an Advisor will be made after consideration of the Investment Policy and factors such as the Investment Advisor s (a) qualifications; (b) experience; (c) historical performance as compared against appropriate benchmarks; and (d) fees and expenses charged. The Committee will review the performance of the Investment Advisor and the underlying Investment Managers. Required reports from the Investment Advisor will include appropriate performance information, including comparisons of performance against appropriate benchmarks. The Committee will keep detailed minutes of the Committee meetings, especially with regard to reviewing allocations, approving an Investment Advisor, and reviewing the qualifications and performance of the Investment Advisor. The Committee will report to the Board material information regarding the Pool, including performance, exposure to particular asset classes and any changes that it makes to the investment guidelines for the Pool. VCU Operating Pool Investment Policy 5 Approved: 09/19/2013

6 Short Term Tier A. Financial Objectives The Operating Pool has two tiers, a Short Term Tier and a Long Term Tier. Each Tier has different financial objectives, structure, and investment guidelines. The primary objective of the Short Term Tier of the Pool is to provide an accessible, safe and reliable source of funds to support the University s dayto day operations. As such, capital preservation and liquidity are the two most important objectives. A secondary objective is to earn the highest rate of return, given an appropriate level of risk. While investment return is secondary to safety and liquidity, it is recognized that additional interest rate risk and credit risk must be assumed to generate higher returns. All investments shall be made with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. B. Fund Structure The Short Term Tier will be divided into two funds: the Primary Liquidity Pool and the Total Return Pool. The Primary Liquidity Pool will be the first source of liquidity for the University and will be used for short term operating expenses. The remaining Short Term Tier funds, collectively known as the Total Return Pool, will provide additional liquidity support in the case of unexpected or unplanned disbursements, but also seek out higher returns. Both pools of the Short Term Tier will consist of funds managed by external money managers. Each fund and respective manager will have a specific mandate and related restrictions. A more detailed description of each fund is described below: The Primary Liquidity Pool The Primary Liquidity Pool is intended to provide for the day to day working capital requirements for the University and will be invested in cash and cash equivalent investments (securities with a time to maturity of six months or less). The Primary Liquidity Pool will only invest in the highest quality, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to a relatively small risk of changes in value. The Total Return Pool may consist of the following funds: The Short Duration Fund This fund will provide a secondary source of liquidity in the event that disbursements exceed the amounts for the Primary Liquidity Pool. The fund will be invested in high quality short term fixed income securities with a duration of five years or less and a total fund duration less than 120% of the Merrill Lynch 1 3 year Gov t/corp. Index. The Core Bond Fund This fund will be invested in high quality long term fixed income securities with a duration of twenty years or less and a total fund duration less than 120% of the Barclays Capital Aggregate Index. VCU Operating Pool Investment Policy 6 Approved: 09/19/2013

7 The TIPS Fund This fund will be invested in Treasury Inflation Protected Securities with a duration of twenty years or less and a total fund duration less than 120% of the Barclays TIPS index. The Emerging Market Debt (EMD) Fund This fund will be primarily invested in dollar denominated sovereign debt securities issued by emerging market countries with a duration of twenty years or less and a total fund duration less than 120% of the JPMorgan EMBI Global Diversified Index. The Bank Loan Fund This fund will be primarily invested in US dollar denominated senior secured, floating rate loans of non investment grade (i.e., high yield ) companies. High yield companies have a credit rating equal to or lower than BB+ (Standard & Poor s) or Ba1 (Moody s) or are not rated but have a non investment grade credit profile. Duration of Credit Suisse Leveraged Loan Index is essentially zero and no duration guidelines will apply to the Bank Loan Fund. C. Authorized Investments The following investments are authorized for the Short Term Tier: Treasury and Agency Securities Obligations issued or guaranteed by the U.S. Government, an agency thereof or U.S. Government sponsored enterprises. Non Negotiable CD s and time deposits of Virginia banks and savings institutions federally insured to the maximum extent possible and collateralized under the Virginia Security of Public Deposits Act. Negotiable CD s and Bank Deposit Notes of domestic banks and domestic offices of foreign banks with a rating of at least A 1 by Standard & Poor's and P 1 by Moody's Investors Service for maturities of one year or less. For maturities over one year and not exceeding five years, a rating of at least AA by Standard & Poor's and Aa by Moody's Investors Service is required. Repurchase Agreements collateralized by securities of the U.S. Treasury, an agency thereof or U.S. Government sponsored enterprises. The collateral on overnight or one day repurchase agreements is required to be at least 100% of the value of the repurchase agreement. Longer term repurchase agreements are required to have collateralization of over 100% and be marked to market on a regular basis. Market fluctuations could result in the value of the collateral increasing or decreasing between valuation dates. Banker s Acceptances with major U.S. banks & domestic offices of international banks rated not lower than A 1 by Standard & Poor s and P 1 by Moody's Investors Service. Commercial Paper Prime quality commercial paper issued by domestic corporations and rated by at least two of the following: Standard & Poor s within its rating of A 1, Moody s Investors Service within its rating of P 1, Fitch Investor s Services within its rating of F 1, Duff and Phelps within its rating of D 1, or by their respective corporate successors, provided that at the time of any such investment the corporation meets the criteria specified in section of the Code of Virginia. Money Market Funds and other open end investment funds provided that they are registered under the Securities Act of the Commonwealth of Virginia or by the Federal Investment Co. Act of 1940, and that the investments by such funds are restricted to investments otherwise permitted by qualified public entities within the Commonwealth of Virginia. VCU Operating Pool Investment Policy 7 Approved: 09/19/2013

8 Asset Backed and Mortgage Backed Securities with a duration of no more than five years and rated no less than AAA by at least two nationally recognized rating agencies, one of which must be either Standard & Poor's or Moody's Investors Service. Authorized mortgage backed investments include Commercial Mortgage Backed Securities (CMBS), Agency and Non Agency (private label) Mortgage Backed Securities (MBS) including pass throughs, Collateralized Mortgage Obligations (CMOs) and Planned Amortization Classes (PACs). Corporate Debt having a credit rating of at least A or better by two nationally recognized rating agencies, one of which must be either Standard & Poor's or Moody's Investors Service. This includes all levels of the A rating. In addition, the managers of the Core Bond Fund and EMD Fund may invest 10% of the portfolio in securities having a credit rating of at least BBB or Baa2 by two nationally recognized rating agencies, one of which must be either Standard & Poor's or Moody's Investors Service. Taxable Municipal Bonds issued by states, political subdivisions and agencies of the fifty United States (including D.C.) and its territories rated A or better by two nationally recognized rating agencies, one of which must be either Standard & Poor's or Moody's Investors Service. This includes all levels of the A rating. Obligations of Sovereign Governments Dollar denominated obligations of sovereign governments, and their instrumentalities. Loans Secured and unsecured loans including first lien term loans, second lien term loans, bridge loans, letter of credit, synthetic letters of credit, delayed draw term loan and revolvers (Including floating rate bonds, notes or other debentures). Should a security fail to meet the required credit quality or duration limitations after purchase (i.e. credit downgrades), the external manager shall notify the University s Treasury Department and the Investment Consultant in writing within one business day after the security fails to meet the credit quality limitations. Such security must then be sold within 30 calendar days, unless retention of the security is approved in writing by the University s Associate Vice President for Finance and Administration or Treasurer. If a manager is allowed to retain an out of compliance security (a security that does not meet the requirements of the above section), the manager should provide a monthly report to VCU Treasury staff and the Investment Consultant. The report must include the manager s rationale on why a security should continue to be considered for an exception. The use of pooled funds may be considered. If a pooled fund is utilized, it is understood that the portfolio will be governed by the prospectus or similar document for the fund. However, pooled fund managers are expected to comply with the appropriate performance standards and reporting requirements contained in the Investment Policy. Finally, the Short Term Tier can only be invested in senior debt. Subordinated and convertible debt securities are not authorized investments. Investment securities not specifically authorized above are prohibited. VCU Operating Pool Investment Policy 8 Approved: 09/19/2013

9 D. Asset Allocation Parameters and Short Term Tier Constraints Asset Allocation Primary Liquidity Pool As noted above, the Primary Liquidity Pool is intended to provide for the day to day working capital requirements of the University, with the remaining balance of the Short Term Tier being invested in the Total Return Pool. The University will utilize the expertise of its investment consultant to make asset allocation recommendations for the Total Return Pool. A formal asset allocation study will be performed at least annually, but the strategy will be evaluated quarterly and target allocations adjusted accordingly. However, the assets of the Total Return Pool should not fall outside of the policy ranges described below: Total Return Pool Policy Range Short Duration Fund 0 100% Core Bond Fund 0 40% TIPS Fund 0 30% EMD Fund 0 20% Bank Loan Fund 0 20% Duration Limitations Operating Pool Funds Individual Security Fund Primary Liquidity Pool Less than 13 Months Less than 6 Months Short Duration Fund Less than 5 Years Less than 120% of the index Core Bond Fund Less than 20 Years Less than 120% of the index TIPS Fund Less than 20 Years Less than 120% of the index EMD Fund Less than 20 years Less than 120% of the index Bank Loan Fund N/A N/A Diversification Each fund will be diversified with no more than 5% of the value of the fund invested in the securities of any single issuer. The limitation shall not apply to the U.S. Government, or agency thereof, or U.S. Government sponsored corporation securities and fully insured and/or collateralized certificates of deposits. The Bank Loan fund will hold no more than 10% of assets in any one issue or company as well as no more than 30% of assets in any one industry. VCU Operating Pool Investment Policy 9 Approved: 09/19/2013

10 For separate accounts, the maximum percentage in each eligible security type is limited as follows: Authorized Investments Primary Liquidity Short Duration Core Bond TIPS EMD Bank Loans U.S. Treasury and Agency Securities 100% 100% 100% 100% 100% Overnight Repurchase Agreements 100% Bankers Acceptances 40% Negotiable CD's and/or Negotiable Bank Deposit Notes 40% 20% 20% 20% Commercial Paper 35% Repurchase Agreements 35% Money Market Funds 35% 10% 10% 10% 10% Non Negotiable Certificates of Deposits 5% Corporate Debt 50% 65% 65% 25% 65% Asset Backed Securities 25% 35% 35% Municipal Securities 10% 20% 20% Bank Loans 100% Obligations of Sovereign Governments 10% 10% 100% 10% Mortgage Backed Securities 50% 50% Planned Amortization Classes 20% 20% Commercial Mortgage Backed Securities 10% 10% Collateralized Mortgage Obligations 10% 10% As noted above, if the University chooses to make an investment in a pooled fund, those assets will be governed by the prospectus or similar document for the fund. E. Performance Measures In accordance with the Management Agreement between VCU and the Commonwealth, the University should achieve a three year average rate of return at least equal to the imoney.net money market index fund. External managers should produce returns commensurate with the following benchmarks: Operating Pool Funds Primary Liquidity Pool Short Duration Fund Core Bond Fund TIPS Fund EMD Fund Bank Loan Fund Benchmark imoney.net Index Fund Merrill Lynch 1 3 Year Gov t/corp A+ Index Barclays Capital Aggregate Index Barclays Capital TIPS Index JPM EMBI Global Diversified Index Credit Suisse Leverage Loan Index VCU Operating Pool Investment Policy 10 Approved: 09/19/2013

11 VCU Treasury staff and the University s investment consultant will monitor and review each external manager s performance no less frequently than quarterly. Each external manager s performance will be reviewed annually. In addition, the University s investment consultant will perform ongoing due diligence on each manager and report any change that may significantly impact the investment process and recommend appropriate action. F. Duties of Investment Managers Short Term Tier Investment Managers shall be responsible for the following*: Accepting assets as directed by the University, and investing those assets according to the stated investment philosophy and strategy as dictated in A) the fund prospectus, and/or B) investment guidelines provided to each manager of individual assets; Issuing prospectuses, annual reports and other pertinent information on a timely basis to the University; Meeting as required with the University to review portfolio and investment results; Notifying the University and Investment Consultant in advance of potential material changes in fund and/or firm operations under consideration or about to be implemented. This includes organizational or strategy changes that may impact asset management; Within 30 days of each month end, reconcile all transactions, market values, security holdings, and cash flows with the custodian and provide a written report to the University; Report monthly performance against the benchmarks established for the account by the fifth business day of the following month; Provide quantitative quarterly performance attribution relative to the appropriate benchmark. Provide quarterly reports concerning investment strategy, including quantitative performance attribution based on interest rate risk, sector allocation and security selection. Provide an economic and investment outlook by the end of the following month. Notifying the University of any non compliant securities and adhering to the procedures outlined in Section C of the Short Term Tier Policy. *Assets held in a pooled fund may not meet all requirements. G. Monitoring and Reporting The Short Term Tier will be reviewed annually and any suggested changes to the Short Term Tier will be reported to the Board for consideration and action. Semi annually, the Board will receive an investment report for the Short Term Tier. At a minimum, the report will include the following information: Investment performance (net of fees) for each external manager and the Short Term Tier as a whole versus appropriate benchmarks. Actual asset allocation versus the targets. A compliance report to include duration, credit quality and diversification restrictions. Status of any investments that may require management attention (such as credit downgrades). VCU Operating Pool Investment Policy 11 Approved: 09/19/2013

12 Long Term Tier A. Financial Objectives The funds invested in the Long Term Tier should be treated as long term assets managed to maintain the purchasing power of those assets in the future while being mindful of the cash flow and liquidity requirements of the University. Long Term funds should be invested in such a way as to help in meeting the future capital and other investment needs of the University. The long term objective is to achieve a rate of return in excess of inflation, CPI + 5%, at an acceptable level of risk for the Investment Funds. The Board does not expect that this investment objective will be achievable in every year and, as a result, will normally measure investment performance over rolling three, five, and ten year periods. The Board also recognizes that some level of investment risk, including volatility and illiquidity, is necessary to achieve the long term investment objectives of the Long Term Tier. In developing and implementing the Long Term Tier s investment program, the Committee and VCU Treasury staff will consider the risks associated with each investment strategy and asset class. The overall return will be evaluated against a policy portfolio benchmark consisting of the sum of different asset class benchmarks weighted in accordance with the long term policy targets. B. Authorized Investments 1. Permitted Global Equity Securities This asset class may include, but is not limited to, common and convertible preferred stock, convertible debentures or other investments or vehicles that invest in or correlate with the performance of these securities. 2. Permitted Global Fixed Income Securities This asset class may include, but is not limited to, government, agency and corporate bonds, debentures, notes and preferred stock, commercial paper, commercial bank certificates of deposit, semi secured floating rate bonds, yield enhancement techniques (e.g., options and futures) or other instruments that invest in or correlate with the performance of these securities. 3. Cash or Cash Equivalents Investment Managers may invest in short term U.S. Treasury obligations, government agency obligations, commercial bank CDs and other generally acceptable money market and equivalent instruments. 4. Alternative Investments Alternative Investments may include, but are not limited to, hedge funds, private equity, venture capital, real assets, and special situations / opportunistic investments. Note: Investment Managers are to vote shareholders proxies. Such voting is to be solely in the best interest of the Investment Funds given their stated policies, goals, and objectives. Where Investment Managers or fund vehicles have their own terms regarding proxy voting, such terms will be an attribute to be considered by the Investment Advisors in selecting and monitoring Investment Managers and investment vehicles VCU Operating Pool Investment Policy 12 Approved: 09/19/2013

13 C. Strategic Asset Allocation 1. Strategic Asset Allocation. The responsibility for establishing the strategic asset allocation policy ( Asset Allocation ) rests with the Committee, in conjunction with the Investment Advisor. In making asset allocation judgments, the Committee recognizes that the Funds must be invested in a portfolio that will generate a return sufficient to meet the stated objectives. 2. With significant allocations to asset classes that have different risk and return characteristics, the Investment Funds will be invested in a highly diversified portfolio that is expected to generate strong returns and reduce volatility over the long term. 3. Reallocation. On a periodic basis, at least annually, the Committee should informally review and assess the strategic asset allocation targets. These targets are intended to be long term, incorporating the outlook for asset classes over two economic cycles or approximately ten to fifteen years. Strategic Asset Allocation As of September 19, 2013 Equity Asset Class Long Term Policy Range Benchmark U.S. Large Cap Equity 10 S&P 500 Index U.S. Mid and Small Cap Equity 4 S&P MidCap 400 Index EAFE Equity 8 MSCI EAFE Index Asia ex Japan Equity 5 MSCI Pacific ex Japan Index Emerging Markets Equity 3 MSCI Emerging Markets Equity Index Total Equity 30 +/ 15 Alternative Investments Hedge Funds 25 HFRI FOF Index Private Equity 12 S&P 500 Index basis points Real Estate & Infrastructure 8 NCREIF Index Hard Assets (e.g., commodities and commodity linked investments) 5 Goldman Sachs Commodity Index (GSCI) Total Alternative Investments 50 +/ 15 Fixed Income & Cash Cash & Short term 0 Citigroup 3 month T Bill Index U.S. Fixed Income 13 Barclays Aggregate Bond Index Non US Fixed Income 5 VCU Operating Pool Investment Policy 13 Approved: 09/19/2013

14 Foreign Exchange & Non USD Fixed Income Complementary Structured Strategies 2 0 JPM Emerging Markets Bond Global Plus Index Dependent upon underlying instrument Total Fixed Income & Cash 20 +/ 15 TOTAL 100% Custom Benchmark (ex: 60/40) D. Investment Restrictions 1. Diversification. In general, the Committee should seek to ensure an appropriate diversification of the portfolio by asset class, sector, geographic region, and by Investment Manager. The Committee will ensure compliance with the asset allocation guidelines outlined above unless it prudently determines that, because of special circumstances, the purposes of the Investment Funds are better served without diversification. Any decision not to diversify will be reviewed at least annually. 2. It is understood that the Long Term Tier must maintain a certain minimum level of liquidity that is sufficient to fund annual programmatic activities, as well as to fund ongoing expenses, including capital calls. The Committee will establish guidelines for minimum liquidity available from the Investment Funds. The Investment Advisor monitors on an ongoing basis the liquidity of the Investment Funds consistent with the parameters set forth by the Committee. E. Performance Measures The performance objectives for each asset class or subcategory are outlined in the above Section C of the Long Term Tier section of the Policy. The purpose of the objectives is to establish specific, clear, consistent, fair and rigorous parameters for regular and ongoing review. While performance is measured over both short and long term periods, the focus and emphasis of performance evaluation is on longer time periods, generally three year, five year and ten year periods (once programs are fully developed) or a market cycle, whichever is greater. The Investment Advisor, under the supervision of the Committee, will monitor Investment Managers on an ongoing basis to ensure consistency of investment philosophy, implementation, organizational structure, and performance. F. Distribution Policy The VCU spending policy is meant to maintain the purchasing power of the investment funds (in this case the Long Term Funds) with the goal of providing a predictable and sustainable level of income to support current operations. The rule should reflect best industry practices among endowment institutions. Under this policy, spending for a given year equals the sum of (i) 70% of spending in the previous year, adjusted for inflation as measured by the Higher Education Price Index (HEPI) for the 12 months prior to the start of the fiscal year, and (ii) 30 % of the trailing three year average market value of the Long Term Tier multiplied by the long term spending rate (currently 5%). Spending on additional contributions of funds into the Long Term Tier received in the previous fiscal year will receive a prorated amount based on the number of whole months each contribution was included in the Pool. For VCU Operating Pool Investment Policy 14 Approved: 09/19/2013

15 example, Year 2 payout from a contribution received December 15 would be based on 6/12 of the spending target calculated under the formula above because the Long Term Tier held the additional funds for six full months (January through June) in Year 1. This spending policy has two implications. First, by incorporating the previous year s spending, the policy eliminates large fluctuations and so enables efficient planning for operating budget needs. Second, by adjusting spending toward a long term rate (currently 5%), the policy ensures that spending levels will be sensitive to fluctuating portfolio market value levels thereby providing stability in long term purchasing power. From time to time, income from investments may exceed budgetary needs. At the discretion of the Vice President for Finance and Administration or the Associate Vice President for Finance and Administration, VCU may elect to reinvest any portion of the annual distribution back into the Long Term Tier. Regarding payout and spending, the assumption is a payout annually. Distributions are anticipated to be made on, or before, September 30. VCU Treasury staff will communicate the planned distribution amount to the Investment Advisor in writing approximately 180 days in advance. The Advisor will confirm receipt of these instructions in writing to VCU Treasury staff within 5 business days. The Advisor is responsible to wire the requested funds as directed. If the Investment Funds fall underwater, the payout and distribution would be in compliance with Virginia's Uniform Prudent Management of Institutional Funds Act ( et seq., "UPMIFA"). Establishing a Prudent Split Between the Short Term and Long Term Tiers Implementation of the investment objectives of the Short Term and Long Term Tiers respectively will likely result in markedly different liquidity and volatility profiles for the Short Term and Long Term Tiers. It is the responsibility of the Office of the Associate Vice President for Finance and Administration (the AVP for F&A ) to perform ongoing analysis and monitoring to ensure that a prudent split is established and maintained between the Short Term and Long Term Tiers. The ongoing analysis and monitoring performed by the Office of the AVP for F&A will be directed at ensuring the following: 1) Adequate liquidity exists to support the University s operations. Some permitted Long Term Tier Investments such as hedge funds or private equity may lock up funds for extended periods of time. Furthermore, some permitted Long Term Tier investments such as equities exhibit high volatility and are therefore not best suited to meet the shortest term operating needs, but rather bought and sold tactically in response to favorable market movements. Therefore, the Office of the AVP for F&A will ensure that adequate funds are present in the Short Term Tier to meet operating requirements such as payroll and spending on capital projects. 2) The University meets the financial and administrative measures on which the State Council of Higher Education assesses and certifies instructional performance. As stated, certain investments in the Long Term Tier may carry more risk and have less liquidity. The Office of the AVP for F&A must ensure that the overall liquidity and risk profile of the Pool is established such VCU Operating Pool Investment Policy 15 Approved: 09/19/2013

16 that the University meets the performance measures related to bond rating and investment performance as outlined in the Commonwealth of Virginia appropriation act and described in the Code of Virginia Section :1.01. Legal and Other Considerations The Committee will, in accordance with law, consider the present and anticipated financial requirements of VCU, the expected total returns on investments, the capital markets environment and general economic conditions. Specifically, the Committee will comply with the Uniform Prudent Management of Institutional Funds Act, which replaces current provisions in the Virginia Code by adding in Chapter 11 of Title 64.2 an article numbered 2.1, consisting of sections numbered through A of the Virginia Uniform Prudent Management of Institutional Funds Act sets forth specific factors that, if relevant, must be considered in managing and investing the Institution s funds. These factors are: 1. The duration and preservation of the Pool s funds; 2. The purposes of the institution and the Pool s funds; 3. General economic conditions; 4. The possible effect of inflation or deflation; 5. The expected total return from income and the appreciation of investments; 6. Other resources of the institution; and 7. The investment policy of the institution. The Committee should contemporaneously document in its meeting minutes its consideration of each of the above factors it determines to be relevant to its decisions regarding managing and investing the Investment Funds. As discussed, the Committee may delegate to an Investment Advisor, the management and investment of the Investment Funds. The Committee must act in good faith, and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, in: a) selecting an advisor; b) monitoring the advisor s performance and compliance with the scope and terms of the delegation. VCU will take reasonable measures to assess the independence of the external agent. Potential or actual conflicts of interest are likely to arise. Members of the Committee, Senior Management, and members of the internal financial staff must disclose any conflicts of interest. See Conflicts of Interest section for a more detailed discussion. VCU Operating Pool Investment Policy 16 Approved: 09/19/2013

17 B. Prior to investing with an Investment Manager, the Investment Advisor should obtain all relevant documentation, including: any offering memorandum or other document containing guidelines; limited partnership agreement or other governing documents; subscription documents; form ADV for advisers registered under the U.S. Investment Advisers Act of 1940, if available; and any due diligence materials deemed appropriate by the Committee. The Investment Advisor will be responsible for communications with Investment Managers and the receipt and evaluation of reports from the Investment Managers. The Investment Advisor will meet with the Investment Managers on a periodic basis, and at least annually, and will report to the Committee on such meetings. In addition to quarterly performance, the Investment Advisor will notify the Committee of significant changes for any Investment Manager, including key personnel or change in style. In addition, Investment Managers may be requested to meet with the Committee. C. Policies for Investment Managers 1. Investment Managers are not permitted to deviate from their specifically announced investment strategies without the approval of the Investment Advisor. 2. The following will be among the attributes to be considered by the Investment Advisors in selecting and monitoring Investment Managers and Investment Funds: industry exposure and diversification; portfolio volatility, and other measures of portfolio risk, use of borrowing and leverage, transparency of Investment Manager reporting; terms of investment, including fees and lock ups; operational considerations (e.g., custody, brokerage, proxy voting and securities lending); and potential conflicts of interest. D. Volatility. Portfolio volatility and risk should be prudently managed in keeping with pertinent metrics that enhance the Committee s ability to evaluate risk exposure and manage risk. Conflicts of Interest A. Certain investment relationships that members of the Committee have could present a potential or actual conflict of interest. This Section of the Investment Policy is intended to provide the Committee with a policy and procedure for handling conflicts of interest. Specifically, a conflict of interest could arise when: (i) a member of the Committee has a material ownership interest in, or is directly employed by, a potential Investment Advisor; (ii) a member of the Committee is a client of a potential or existing Investment Advisor; (iii) a member of the committee is an investor in an Asset Manager that was proposed by a member of the Committee (Note: there would not be a conflict of interest if a Committee member owned an investment in an Investment Manager that was independently selected by an Investment Advisor). 1. It is the general policy of the University not to engage an Investment Advisor if a member of the Committee has a material ownership interest in, or is directly employed by, the Investment Advisor. If a Committee member has such a relationship, that relationship must be disclosed to the Chair of the Committee. In consultation with legal counsel and internal financial staff, as appropriate, the Chair will make a recommendation to the Committee, which will determine whether the Investment Advisor should be disqualified from engagement. VCU Operating Pool Investment Policy 17 Approved: 09/19/2013

18 2. It will be the responsibility of the internal financial staff, when performing due diligence on a potential Investment Advisor, to use reasonable efforts to ascertain whether any member of the Committee or any officer is a principal, holds a material ownership interest in, or is otherwise directly employed by that Investment Advisor. If any such relationship exists, the financial staff will disclose the interest to the Chair, who will consult with the financial staff and legal counsel, as appropriate, to determine whether the relationship merits further consideration by the Committee. 3. If the Committee is considering engaging or continuing the engagement of an Investment Advisor, a Committee member who is a client of such Investment Advisor must disclose the interest to the Chair. In consultation with legal counsel and financial staff, as appropriate, the Chair will make a recommendation to the Committee, which will determine whether the member should be recused from the engagement. Whether it is advisable for the member to be recused will depend on the facts and circumstances. The relevant inquiry will include, among other factors, whether the University s decision to engage could have an impact on the Committee member s relationship or investment in any material way. 4. The policy and procedures described in this Section also apply to household family members. For example, if a Committee member knows that his or her household family member has an interest in or is employed by an Investment Advisor under consideration, the Committee member will disclose this information in accordance with the procedures described above. 5. If a Committee member is unsure whether his or her relationship with a potential or current Investment Advisor merits disclosure, the Committee member will err on the side of caution and disclose the relationship to the Chair. B. On an annual basis, the financial staff will provide the Committee, Senior Management, and financial staff with a list of current relationships and investments with Investment Advisors in a form substantially similar to the form attached as Exhibit A in the appendix. Each Committee member, member of Senior Management, and financial staff member should indicate on the form provided if, to the best of his or her knowledge, he, she and/or a member of his or her household family (i) has a material ownership interest in, or is directly employed by, an Investment Advisor engaged by the University or (ii) is a client of an Investment Advisor engaged by the University. C. Other relationships that do not rise to the level of those covered in paragraphs (A) and (B), above, may still present a conflict of interest for a member of the Committee if the member s independent judgment regarding the Investment Advisor could be impaired by virtue of the relationship. Potential conflicts of interest must be disclosed to the Chair of the Committee, who will consult with Senior Management and legal counsel, as appropriate, to determine whether the Committee member must abstain or recuse himself or herself from consideration of the matter. D. If it is determined that abstention or recusal is required, then after disclosure of the potential conflict of interest and all material facts to the Committee, and after the member responds to any questions that the Committee may have, the member will be asked to abstain or be recused from the meeting while the appointment of the Investment Advisor is discussed and voted upon. All such abstentions and recusals will be contemporaneously documented in the minutes of the Committee meeting. While the member may not vote on the issue to which the potential conflict of interest relates, he or she may be counted in determining the presence of a quorum for purposes of the vote. VCU Operating Pool Investment Policy 18 Approved: 09/19/2013

19 Who Should Know This Policy Vice Presidents and other Senior Executives Vice Provosts, Deans, Directors, and Department Heads Contacts General and Specific questions about this policy can be answered by VCU s Department of Treasury Related Documents VCU Debt Management Policy Investment Policy Statement for Virginia Commonwealth University s Glasgow Endowed Fund Revision History This policy supersedes the following archived policies: 05/15/2009 VCU Operating Pool Investment Policy Forms There are no forms associated with this policy and procedures. FAQs There are no FAQs associated with this policy and procedures. VCU Operating Pool Investment Policy 19 Approved: 09/19/2013

20 Exhibit A Annual Investment Conflict of Interest Disclosure Statement Name: Title: [LIST OF CURRENT INVESTMENT ADVISORS TO BE PROVIDED BY STAFF] Except for the relationships and investments set forth below, I hereby certify to the best of my knowledge that neither I, nor any of my household family members, (i) has a material ownership interest in, or is directly employed by, any Investment Advisor engaged by the University, or (ii) is a client of any Investment Advisor engaged by the University, I hereby certify that I have received a copy of the University s current Investment Policy, have read and understand the policy, and agree to abide by its provisions pertaining to Conflicts of Interest. Signature: Print Name: Date: PLEASE LIST ANY EXCEPTIONS BELOW: VCU Operating Pool Investment Policy 20 Approved: 09/19/2013