Investment and Spending Policy

Transcription

1 Investment and Spending Policy Effective: December 10, 2010 v4 Updated 1/4/11

2 Page 1 Introduction This policy statement provides a framework for the management of the financial assets of the Garrett College Foundation ( the Foundation ). Real property owned by the Foundation (Laker Hall) is managed under a separate agreement among the Foundation, Garrett College, and M&T Bank. A subcommittee of the Foundation Board, the Finance and Investment Committee ( the Committee ), is charged with implementing and monitoring the Policy in accordance with the guidelines outlined below. Within a framework of due diligence, the Committee recommends to the Foundation Board the engagement of an accountant, an auditor, and an investment manager. The Committee is responsible for monitoring the Foundation s financial activity and investment performance on a regular basis. The financial assets of the Foundation are comprised of the Endowed Funds ( the Endowment ), the Operating Account, and the Restricted Accounts. This policy statement refers primarily to the Endowed Funds, which are established in perpetuity to provide for the long-term needs of Garrett College and its students. The Restricted Accounts have unique and specific current goals and objectives and, unless specifically prohibited by the gift or grant instrument, are invested in shortterm instruments that provide appropriate liquidity. The Operating Account is a cash account into which unrestricted income and administrative fees are deposited and from which expenditures are made on a daily basis. Management of the Foundation s assets, whether by its employees, by agents hired for the purpose of asset management, or by the Foundation Board in its fiduciary role, is expected to occur with the care, skill, prudence and diligence that an ordinarily prudent person in a like position would exercise under similar circumstances. I. Investment Objective for Endowed Funds The investment objective for the Endowment is to ensure that its long-term growth is sufficient to offset the cumulative impact of inflation and also to allow for reasonable spending for the purposes for which each Fund was established. The goal of the investment program is to enhance the Endowment s long-term viability by maximizing its value within a prudent risk environment. On an annualized, net-of-fees basis, the total return on the Endowment (interest, dividends, and realized or unrealized market gains/losses) over a three to five year market cycle will be expected to: Equal or exceed the spending rate plus inflation; and Equal or exceed the average return of appropriate market indices related to the various asset allocations; and

3 Equal or exceed the average return of a universe of similarly sized Endowment Funds over the same period. Performance goals are based on a long-term investment horizon; therefore, interim fluctuations should be viewed with that perspective in mind. Investment managers will be expected to include in their decisions consideration of corporate social responsibility, recognizing the ethical concerns of a Foundation devoted to educational purposes. II. Investment Philosophy Page 2 The Endowment is exposed to both investment risk, based on asset allocation within the investment program, and to operational risk, in the design and implementation of a spending policy that delivers annual resources sufficient to fulfill the purposes of the individual Funds. While the Foundation Board recognizes the importance of the preservation of capital, it also understands that varying degrees of investment risk are generally rewarded with compensating returns and expects that the Endowment will be compensated for those risks that the Finance and Investment Committee is willing to accept. At the same time, the Board understands that a consistently applied spending formula may lead in some years to expenditures that exceed or fall short of the actual current yield on investment, including earned income and realized or unrealized appreciation, and expects that over time these variations will be balanced in their impact on the Endowment. Current needs of the College should not be sacrificed in the interest of the future, nor future needs sacrificed for the needs of the present. a. Investment Strategy The investment strategy employed by the Endowment managers will be based on a number of factors, including: The relationship between current and projected assets of the Endowment and the requirements of the spending policy; The maintenance of sufficient liquidity to meet spending payments; Historical and expected long-term capital market risk and return behaviors. Accordingly, the Endowment portfolio shall be balanced to achieve both appropriate growth and provide for current income needs. The investment strategy will provide for diversification of assets in an effort to maximize the investment return and manage the investment risk of the Endowment consistent with prevailing market conditions. The Finance and Investment Committee of the Foundation Board has adopted the following asset allocation targets and ranges:

4 Asset Class Equities US Large Cap US Mid/Small Cap International Fixed Income Municipal Bond Taxable Bond Minimum Target Max Weight Weight Weight 40% 50% 65% 25% 40% 50% Representative Index S&P 500 Russell 2000 MSCI EAFE BarCap 3-Year Muni Bond BarCap US Gov/Credit Interm Cash/Equivalents 5% % Lipper Money/Market Due to the fluctuation of market values, positioning within a specified range is acceptable and constitutes compliance with the asset allocation strategy; it is expected that periodic revisions and rebalancing will occur as appropriate and necessary. b. Equity Securities The purpose of equity investments is to provide capital appreciation, growth of income, and current income, with the recognition that this asset class carries with it the assumption of greater market volatility and increased risk of loss. This component of the Endowment portfolio includes domestic and international common stocks, American Depository Receipts (ADRS), preferred stocks, and convertible stocks traded on the world s stock exchanges or over-the-counter markets. Public equity securities shall generally be restricted to high quality, readily marketable securities of corporations that are traded on the major stock exchanges, including NASDAQ. Decisions as to individual security selection are left to the discretion of the Investment Manager, subject to the standards of fiduciary prudence. However, no single major industry shall represent more than 20% of the Endowment portfolio s total market value, and no single security shall represent more than 5% of the portfolio s total market. Within these guidelines, the Investment Manager has complete discretion over the timing and selection of equity securities. c. Fixed Income Securities The purpose of fixed income investments is to provide diversification and a predictable and dependable source of current income. Fixed income instruments should reduce the overall volatility of the Endowment s assets and provide a hedge against deflation. This component includes both the domestic and international fixed income markets. It includes, but is not Page 3

5 limited to, U.S. Treasury and government agency bonds, foreign government and supranational debt, and public and private corporate debt. Investments in fixed income securities should be managed actively to pursue opportunities presented by changes in interest rates, credit ratings, and maturity premiums. These investments are subject to the following limitations: Corporate bonds purchased shall be primarily those rated as investment grade; and Investments of a single issuer, with the exceptions of the U.S. Government and its entities, may not exceed 5% of the total market value of the Endowment portfolio; and In general, the fixed income portfolio should be well diversified with respect to type, industry, and issuer in order to minimize risk exposure. Within these guidelines, the Investment Manager has complete discretion over the timing and selection of fixed income securities. d. Cash and Equivalents The Investment Manager may invest in the highest quality commercial paper, repurchase agreements, Treasury Bills, certificates of deposit and money market funds to provide income, liquidity for expense payments, and preservation of the Endowment s long-term purchasing power. Commercial paper assets must be rated at least A1 or P-1 (by Moody s or S&P). No more than 5% of the portfolio s total market value may be invested in the obligations of a single issuer, with the exception of the U.S. Government and its agencies. Cash reserves not invested should be kept to a minimum. Within these guidelines, the Investment Managers have complete discretion over the timing and selection of cash equivalent securities. e. Prohibited Transactions The following are prohibited transactions or assets: Commodity trading, including all futures contracts Purchasing of letter stock Short selling of stock Option trading (with the exception of covered call writing) Investments prohibited in any legal or contractual agreements Page 4

6 f. Spending Policy Spending from Endowed Funds is governed by a detailed policy included with this document as Appendix One. Restricted Accounts may be the result of annual gifts for scholarships, gifts or grants for programmatic activities, or gifts or grants for capital projects. The spendable amount from each Account is determined by its specific purpose and nature and by the fund balance available as of March 1 prior to the new fiscal year. At that time, for budgeting purposes, the College Officer responsible for the management of an individual Restricted Account will be notified of the amount available for expenditure in the fiscal year ahead and reminded of the applicable restrictions. For new restricted annual gifts, a fee of 5% is deducted by the Foundation to cover the costs of account administration. The Executive Director of the Foundation is responsible for the management of the Operating Account, within procedures established by the Foundation s accountant and the College Business Office for processing transactions. III. Duties and Responsibilities Page 5 Implementation of the Investment Policy is the joint responsibility of the Executive Director, the Foundation Board, the Finance and Investment Committee, and the Investment Manager. a. Executive Director of the Foundation The Executive Director coordinates the relationships among the Board, the Finance and Investment Committee, and the Investment Manager. The Executive Director is responsible for the following: Execute documents necessary to facilitate implementation of the investment policy as directed by the Foundation Board, including but not limited to contracts with the Investment Manager for providing investment services. Provide for the collection and proper recording and transmittal of contributions to the Endowed Funds, to Restricted Accounts, and to the Operating Account and for the payment of expenditures related to management of these Funds. Ensure that quarterly and annual reviews of investment performance and the impact of spending on Endowed Funds take place in a timely fashion. Provide the Investment Manager with all relevant information on the Foundation s financial conditions and notify the Investment Manager promptly of any changes in this information.

7 b. Finance and Investment Committee In the management of the Endowment s assets, the Foundation Board will approve the Investment Policy and Spending Policy developed by the Finance and Investment Committee and any subsequent proposals for amendment. The Board in its sole discretion may delegate its decision-making authority to the Finance and Investment Committee regarding implementation of the investment program within the guidelines established by these policy statements. The following are the duties and responsibilities delegated by the Board to the Committee: Select, retain, and terminate a qualified external Investment Manager, as necessary and appropriate, to invest the assets of the Endowment consistent with the objectives of this Policy. Review quarterly with the Investment Manager the Endowment portfolio s investment performance versus appropriate market indices. The review will include, if warranted, recommendations for changes in asset allocation. Review annually with the Investment Manager the Endowment portfolio s investment structure and financial performance versus appropriate market indices and in comparison with Endowments of similar size at peer institutions. The review will include, if warranted, recommendations for adjustment to the long-term investment strategy. Approve or disapprove in a timely manner the Investment Manager s recommendations with regard to asset allocation or investment policy, guidelines and objectives. Take appropriate action if investment objectives are not being met, or if investment policies and guidelines are not being followed, or if material changes occur in the Investment Manager s organization (i.e. personnel changes) that can potentially affect investment performance. c. Investment Manager The Investment Manager is expected to manage the Endowment portfolio in a manner consistent with this Investment Policy and in accordance with state and federal laws and UPMIFA. The Investment Manager is specifically responsible for the following: Design and implement an appropriate asset allocation plan consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this Policy. Advise the Finance and Finance Committee about the selection of and the allocation of asset categories. Identify specific assets and asset managers within each category. Page 6

8 Monitor the performance of all selected assets and take timely action to change asset allocation or managers when warranted by circumstances. Provide the Foundation Accountant with monthly statements showing values for each asset and all transactions affecting assets within the portfolio, including additions and withdrawals Meet with the Finance and Investment Committee on a quarterly basis to review and explain the portfolio s investment results and any related issues. Keep the Committee apprised of any material changes in the Investment Manager s outlook, recommended investment policy, and tactics. Any material event that affects the Investment Manager s organization (i.e. personnel changes) must be reported immediately. d. Effective Date This policy is in effect as of December 10, 2010 and supersedes all prior statements of investment policy. The Finance and Investment Committee is authorized to waive or modify any of its parameters or restrictions in appropriate circumstances, subject to approval from the Board of Trustees. Any such waiver or modification will be made only after a thorough review of the investment strategy involved. Page 7

9 Page 8 Appendix One Policy on Expenditures from Endowed Funds

10 I. Purpose of the Policy The purpose of the Policy On Expenditures From Endowed Funds ( Policy ) is to establish the procedure by which the Garrett College Foundation ( Foundation ) will decide to annually allocate for expenditure amounts from Endowed Funds for the purposes for which the funds were established ( Spending Allocation ) and for related costs of administration of the Endowed Funds ( Administrative Fee ). II. Policy The Foundation is committed to administering and investing Endowed Funds in compliance with all relevant Foundation by-laws, organizational concerns, industry standards, and federal and state laws and regulations, including the Maryland Uniform Prudent Management of Institutional Funds Act ( MUPMIFA ). No element of this policy will supersede any provision of federal or state law or regulation. The Foundation shall periodically review the application of the Spending Allocation and Administrative Fee to Endowed Funds, and shall make a determination that such application to the Endowed Funds is prudent. In making a determination to expend such amounts from Endowed Funds, the Foundation shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances and shall consider the following factors: The duration and preservation of the Endowed Funds; The purposes of the Foundation and the Endowed Funds; General economic conditions; The possible effect of inflation or deflation; The expected total return from income and the appreciation of investments; Other resources of the Foundation; and The investment policy of the Foundation. The Foundation shall document its consideration of the above factors in its review. The Foundation has a duty under MUPMIFA to maintain the long term purchasing power of each Endowed Fund. In accordance with that duty, the Foundation will record not only the historic dollar value ( HDV ) of each Endowed Fund but also its calculated present dollar value ( PDV ), the latter to be updated annually as the CPI for the calendar year just past becomes available. A Fund is said to be under water when its market value falls below its HDV in a given year. In such cases, the Foundation will not implement this Policy for that Fund and will allow any subsequent earned income or market appreciation to remain unspent and to be re-invested until the fund recovers its HDV. Unspent prior income distributions, however, will continue to be available for spending purposes and will be disregarded in comparing an Endowed Fund s HDV to its market value. Page 9

11 A Fund can also become impaired in its long-term purchasing power when its market value is close to or less than its PDV. The Foundation will institute procedures to identify any individual Endowed Fund for which such potential impairment may be caused by continued application of this Policy, and present a strategy for remedying the condition to the Finance Committee and the Board. The Foundation will in good faith make information available to donors and potential donors of Endowed Funds concerning its expenditure policies. III. Calculation Method Page 10 Expenditures from Endowed Funds for the Spending Allocation and the Administrative Fee shall be calculated by the method described below. Such expenditures may be made regardless of whether an Endowed Fund has sufficient current period and/or accumulated net investment returns to support such allocation, unless a determination has been made pursuant to Section II above to limit or withhold such payments with respect to a particular fund. However, in the event that the sum of the calculated Spending Allocation plus the calculated Administrative Fee is less than three percent (3%) or greater than six percent (6%) of the market value of the Endowed Funds as of the end of the immediately preceding calendar year, then the Spending Allocation and the Administrative Fee will be proportionally increased or decreased such that the Total Endowment Expenditure is increased to three percent (3%) or reduced to six percent (6%) of the current market value. a. Spending Allocation The amount of funds allocated for expenditure for the purposes for which an Endowed Fund was established ( Spending Allocation ) will equal 4% of the rolling prior 12-quarter average Unitized Market Value of the long term pooled investment portfolio multiplied by the number of units held by each Endowed Fund on the Calculation Date. The Spending Allocation, as calculated, will be transferred to the Endowed Fund spending account in equal quarterly installments on the first day of each quarter in the fiscal year following the Calculation Date. b. Administrative Fee The amount of funds allocated for expenditure for Foundation administrative expenses ( Administrative Fee ) will equal one percent (1%) calculated based on the rolling prior twelve (12) quarter average Unitized Market Value of the long-term pooled investment portfolio multiplied by the number of units held by each Endowed Fund on the Calculation Date. The Administrative Fee, as calculated, will be transferred to the Foundation s operating account in equal quarterly installments on the first day of each quarter in the fiscal year following the Calculation Date.

12 c. Earnings in Excess of Spending Policy Any earnings in excess of the amount calculated for annual spending shall be added to the endowment funds to be reinvested. IV. Exceptions Unless otherwise directed by the donor, a new endowment gift must be invested for at least four quarters and until the end of a calendar year before this Policy will be applied to the Endowed Fund thus created. Once this condition is met, the expenditures from the Fund will be calculated based upon the average market value for the quarters during which the Fund has been invested, until the full twelvequarter average becomes available. The Spending Allocation will not be calculated as set forth above for Endowed Funds established pursuant to a Gift Instrument which by its terms specifies a different spending method. In such cases, the spending method specified in the Gift Instrument will be followed. The Administrative Fee will not be assessed as set forth above for Endowed Funds established pursuant to a Gift Instrument which by its terms does not permit the assessment of such fees; or for gifts from foundations or agencies of which the governing boards prohibit the assessment of fees as an established organizational policy which can be documented in writing. All other exceptions to this Policy must be approved by the Finance Committee of the Board upon the recommendation of the Executive Director of the Foundation, where there is substantial potential for developing a long-term funding relationship with the donor and the gift s designated use is compatible with the College s organizational priorities. Exceptions to this Policy should be granted in only the rarest of circumstances. V. Applicability This Policy applies to all Endowed Funds administered, held, and invested at or by the Foundation. VI. Definitions Page 11 Calculation Date means December 31 prior to the beginning of each fiscal year in which expenditures from Endowed Funds will be made. The twelve-quarter average of the Unitized Market Value of the long-term pooled investment portfolio will be calculated as of this date. No later than the following March 1, the Spending Allocation for each Endowed Fund and the Administrative Fee for the fiscal year to follow will be provided to the Foundation for budgeting purposes. The Foundation will notify the College Officer responsible for the use of income from one or more

13 Endowed Funds (e.g., the Director of Financial Aid, for scholarship funds) of the amount available for the fiscal year ahead. Quarterly payments based on these calculations begin on July 1 of the new fiscal year. Endowed Fund means 1) a Foundation fund or any part thereof not wholly expendable by the Foundation on a current basis under the terms of a gift instrument or 2) assets of the Foundation designated by the Board as an endowment fund (typically referred to as quasi-endowment funds). "Gift Instrument" means a record or records, including a solicitation, under which financial or real property is granted to, transferred to or held by the Foundation as a Foundation fund. Historic Dollar Value (HDV) means the original dollar value of a donor s gift to an Endowed Fund and any subsequent donations to that Fund. Present Dollar Value (PDV) means the HDV plus the increase or decrease over time in the value of the dollars it represents, calculated as the cumulative impact of changes in the CPI for the years that the original gift and subsequent additions, if any, have been held in the Fund. Once the PDV for each Fund has been calculated as of calendar year 2009, it will be updated each year on the Calculation Date. The PDV also serves as a benchmark for evaluation of the investment performance of Endowed Funds. Unitized Market Value means fair value of the investment assets within the longterm pooled investment portfolio divided by the number of units in such pool. VII. Enforcement and Interpretation It is the responsibility of all employees and agents of the Foundation to uphold this Policy. VIII. Effective Date This Policy is effective December 10, 2010 (to impact the fiscal year beginning July 1, 2011) and replaces any preceding policy concerning this subject matter. This Policy shall be reviewed not less than annually by the Finance and Investment Committee, which shall make any necessary recommendations with respect to amendments to the Foundation Board. Page 12