ROTARY INTERNATIONAL. Investment Information

Transcription

1 ROTARY INTERNATIONAL Investment Information Updated as of November 2015

2 RI Investment Information Table of Contents TAB # 1 Overview Investment Philosophy Statements Investment Structure... 4 Investment Policy Statements 2 General Surplus Fund (k) Investment Managers 4 Current Information Historical Information Historical Investment Return Information RI General Surplus Fund Historical Policy Asset Allocations Glossary of Selected Investment Terms... 41

3

4 ROTARY INTERNATIONAL INVESTMENT OVERVIEW This booklet provides comprehensive information regarding Rotary International s current investment program, including its investment policy statement (IPS), historical asset allocations, investment managers and performance. Rotary International has two distinct investment portfolios. The larger portfolio represents the operating reserve of the organization and is referred to as the General Surplus Fund. The smaller portfolio is invested at Bank of America in short-term investments and is used to meet RI s daily cash operating needs. This fund typically maintains a balance equal to one month s expenses and is known as the Short-Term Fund. To assist staff and our external advisors in managing these assets, the Board has developed an IPS for the General Surplus Fund. This document outlines the guidelines and responsibilities for overseeing and managing Rotary s investments and provides direction on asset allocation, performance objectives, and control procedures. Rotary retained NEPC on 1 December 2009 to provide investment consulting services for the Annual Fund, Endowment Fund, and RI General Fund. All assets are held at BNY Mellon, Rotary s custodian bank since October Also included in this booklet is the Investment Policy Statement for Rotary s 401(k) retirement plan. This plan is overseen by the Rotary International World Headquarters Retirement Plan Committee. 1

5 RI Board of Directors is responsible for setting overall investment policy; including the investment objectives and asset allocation strategy, and for approving any changes to the Investment Policy Statement (IPS). RI Finance Committee (RIFC) recommends investment policies to the RI Board, monitors investment results, participates in the TRF Investment Committee (IC) meetings, and votes on matters relevant to RI during the IC meetings. TRF Investment Committee serves in an advisory capacity to the RIFC. The investment staff is responsible for the daily operation of and compliance with the IPS on behalf of the Board of Directors. Such daily operations and compliance include the implementation of the Board of Directors decisions, and termination and hiring of investment managers, with the approval of the IC. The investment consultant is responsible for developing and recommending asset allocation strategies, monitoring the Fund s investments, researching and recommending investment vehicles and managers to members of the RIFC and the investment staff, and providing timely investment reports to the IC and the investment staff. The investment managers appointed to execute the policy will invest the Fund in accordance with the Fund s investment guidelines and the managers judgments concerning relative investment values. The custodian bank acts as an independent party from the investment managers. Their responsibilities include: the safekeeping of securities, reconciling account positions and activity with the investment managers, accounting for the collection of interest and dividends, accounting for security transactions, and preparing periodic account statements. 2

6 Investment Philosophy Statement * Rotary International General Fund Adopted October 2011 The primary objective in managing the General Fund is to provide for the long-term financial security of Rotary International (RI). Other objectives include (1) meeting RI s financial goal of maintaining a reserve, (2) providing investment earnings to supplement revenue from other sources so that RI can produce a balanced budget and generate sufficient income to pay for operating expenses; and (3) provide liquidity, if needed, for working capital purposes. To achieve these objectives, RI manages the General Fund in a manner to achieve returns which, over multi-year periods, but not necessarily over shorter time periods, exceed the returns on a passively investable benchmark. In approaching asset allocation, RI will construct and maintain a well diversified portfolio. RI does not believe in market timing; instead, RI recognizes that certain actions, such as adjusting asset allocation, acting to preserve capital or altering liquidity in times of unusual market or economic conditions, can improve performance and/or reduce risk. To implement these objectives, RI seeks managers who are flexible in their investment approach in addition to those focused on benchmark indices. RI does not impose moral, ethical, and/or environmental constraints in the investment process in an effort to align the organization s investments with its mission. Instead, RI prudently invests its operating reserve so funds are available to deliver the necessary services and tools to Rotarians to enable them to carry out the organization s mission. * Posted on Rotary.org 3

7 ROTARY INTERNATIONAL GENERAL FUND US Equity Non-US Equity Core Fixed Income Non-Core Fixed Income Real Assets Westfield All Cap Growth GMO International Equity Allocation Treasury Bills Treasury Bills Wellington DIH Robeco Investment All Cap Value PIMCO All Asset Global Equity Global Asset Allocation Walter Scott Global Opportunities Artisan Partners Global Value GMO Global Asset Allocation BlackRock Global Asset Fund Mondrian Emerging Markets 4

8 ROTARY INTERNATIONAL GENERAL FUND Hedge Funds Canyon Value Realization Event Driven Marshall Wace Equity-Linked Caxton Global Investments Global Macro SEG Partners Equity-Linked Criterion Capital Partners Equity-Linked Senator Global Multi-Strategy ING Voya Mortgage Credit-Linked Koppenberg Global Macro LibreMax Capital Credit-Linked Standard Life Liquid Alternative Symphony Long-Short Credit-Linked Whitebox Multi-Strategy 5

9 INVESTMENT POLICY STATEMENT ROTARY INTERNATIONAL GENERAL SURPLUS FUND Adopted June 2010, Amended May 2011, June 2013, September 2013, April 2014, and October 2014 Mission of Rotary International The mission of Rotary International, a worldwide association of Rotary clubs, is to provide service to others, to promote high ethical standards, and to advance world understanding, goodwill, and peace through its fellowship of business, professional, and community leaders. Objectives of the General Surplus Fund The primary objective of the General Surplus Fund, hereinafter referred to as the Fund, is to provide for the long-term financial security of Rotary International ( RI ). The Fund includes Rotary International s (1) unrestricted cash, plus (2) marketable securities, plus (or minus) (3) any receivable (or payable) from (or to) The Rotary Foundation. (RI Code of Policies ) Other objectives for the marketable securities portion of the Fund include (1) meeting RI s financial goal of maintaining a reserve (Appendix V is RI s General Surplus Reserve Policy), (2) providing investment earnings to supplement revenue from other sources so that RI can meet operating expenses if need be and produce a balanced budget, and (3) provide liquidity, if needed, for working capital purposes. RI s unrestricted cash is used for working capital purposes and resides in bank accounts throughout the world. RI s primary source of working capital is held at its main operating bank in the U.S. Specific investment guidelines for unrestricted and restricted cash are included in Appendix IV. Delegation of Responsibilities The Board of Directors of RI (the Board ) is responsible for setting overall investment policy; including the investment objectives and asset allocation strategy, and for approving any changes to this Investment Policy Statement (IPS). The RI Finance Committee is responsible for recommending investment policies and for monitoring the performance of investment managers. The Foundation s Investment Committee (IC) acts in a consultative capacity for the RI Finance Committee with respect to RI investment matters. The Chair of the RI Finance Committee and a member of the RI Finance Committee appointed by the Chair will attend meetings of the IC when investment matters affecting RI are discussed. The RI Finance Committee attendees have voting rights with respect to appointments and terminations of investment managers utilized by RI and other matters that impact RI s investment portfolio. The investment staff is responsible for the daily operation of and compliance with the IPS on behalf of the Board. Such daily operations and compliance shall include the implementation of the Board decisions, and termination and hiring of investment managers, with approval of the IC. 6

10 The investment consultant is responsible for developing and recommending asset allocation strategies, monitoring the Fund s investments, researching and recommending investment vehicles and managers to members of the RI Finance Committee and the investment staff, and providing timely investment reports to the RI Finance Committee and the investment staff. The investment consultant also has been appointed to implement the direct hedge fund program in accordance with the investment preferences outlined in Appendix III. The investment managers appointed to execute the policy will invest the Fund in accordance with the Fund s investment guidelines and the managers judgments concerning relative investment values within their specific investment universe. Statement of Investment Goals and Objectives This statement of investment goals and objectives expresses the Fund s position regarding risk tolerance and the asset allocation of the Fund; sets forth an appropriate set of goals and objectives for the Fund s assets; and defines parameters within which the investment managers may formulate and execute their investment decisions. The investment objective of the Fund is to generate sufficient earnings to enable RI to balance its annual budget, while mitigating downside risk. Other investment objectives are to preserve the capital allocated to the operating reserve and provide liquidity when operating cash is insufficient to cover operating expenses. Given that investment earnings are likely to be greater to or less than those budgeted, the RI Board established an Investment Earnings Reserve into which excess earnings are transferred or from which investment earnings shortfalls are funded. The policy is included in Appendix V. The performance objective of the Fund is to achieve a rate of return consistent with the expected return of the target allocation in Appendix I. Over a three- to five-year period, the rate of return earned by the Fund should exceed the annualized total return of the custom index or Policy Index on a net-of-fee basis. The Policy Index is defined by the following indices and allocated based on the target allocation: Index Asset Class/Strategy MSCI ACWI IMI Global Equities Dow Jones US Total Stock Market US Equities MSCI ACWI ex US Non-US Equities BC Aggregate Core Fixed Income 50% BC Global Agg/25% BC HY/25% JPM EMBI+ Non-Core Fixed Income 60% MSCI World/40% BC Global Aggregate Global Asset Allocation 50% BC TIPS; 30% DJ UBS Commodities Index; 20% Real Assets MSCI ACWI IMI Credit Suisse Hedge Fund Index Hedge Funds 7

11 For performance evaluation purposes, all rates of return will be examined on a net-of-fee basis. Total portfolio risk exposure and risk-adjusted returns will be regularly evaluated and compared with other comparable total funds. The risk exposure for the overall Fund should generally rank in the midrange (25th to 75th percentile) of comparable total funds. Risk-adjusted returns are expected to consistently rank favorably relative to comparable funds. Normally, results are evaluated over a three-to-five year time horizon. However, shorter-term results will be regularly reviewed and earlier action taken as required. General Investment Guidelines Overall Fund structure targets and permissible ranges for eligible asset classes are detailed in Appendix I of this IPS. Performance objectives for investment managers are included in Appendix II. Appendix III contains the investment preferences for the Direct Hedge Fund Portfolio. The investment managers should determine that the securities to be purchased are consistent with the guidelines expressed in this IPS and suitable for this Fund. Full discretion, within the parameters of this IPS, is granted to the investment managers regarding the asset allocation, the selection of securities, and the timing of transactions. All investments will be made in accordance with a pre-approved investment management agreement that outlines the limitation of the investable securities. The investment manager is responsible for making an independent analysis of each security and its appropriateness as an investment for this Fund. Investment Guidelines U.S. Equity Investment Mandates U.S. equity holdings consist of equity securities of companies that are listed on U.S. registered exchanges or actively traded in the over-the counter market. The market capitalization of securities should be largely consistent with securities held in appropriate indices. American Depository Receipts (ADRs), which are U.S. dollar denominated foreign securities traded on the U.S. stock exchanges (e.g., Reuters, Nestle, Sony) may be held by each U.S. equity manager in proportions which each investment manager shall deem appropriate. Non- U.S. Equity Investment Mandates Non-U.S. equity securities can be accessed through local markets or American Depository Receipts (ADRs). The investment manager may hedge currency exposure through the use of derivative instruments. Emerging markets equity is permitted and should be largely consistent with a preapproved benchmark. 8

12 Global Equity Investment Mandates The intent of these strategies is to give managers the flexibility to invest across global equity markets based on the manager s view of opportunities. Managers should invest within the context of controlled risk and added return. Equity holdings consist of equity securities of companies that are listed on registered local exchanges or actively traded in the over-the counter market. The manager may hedge currency exposure through the use of derivative instruments. Emerging markets equity is permitted with a pre-approved benchmark. Core Fixed Income Investment Mandates Eligible securities are broad fixed income securities publicly traded in respective domestic markets and may include, but are not limited to, U.S. government and agency obligations, mortgage backed securities, corporate bonds, debentures, and commercial paper. This mandate should be largely U.S. fixed income securities, with the minimum quality rating of the overall weighted average quality AA or higher. The duration of the portfolio should be largely consistent with appropriate indices. Unless otherwise agreed to, the duration of the portfolio must be within 20% of the appropriate benchmark. Compliance with classifications provided by rating agencies (Moody s, S&P, and Fitch) is not sufficient for an issue to be deemed an appropriate investment. The investment manager is responsible for making an independent analysis of the credit-worthiness of securities and their appropriateness as an investment for this Fund. Non Core Fixed Income Investment Mandates Eligible securities are broad fixed income securities publicly traded in respective domestic markets and may include, but are not limited to, U.S. government and agency obligations, global high yield, global credit and emerging market debt. Guidance on overall average quality of the non-core fixed income is B or higher. The duration of the portfolio should be largely consistent with appropriate indices. Unless otherwise agreed to, the duration of the portfolio must be within 20% of the appropriate benchmark. Compliance with classifications provided by rating agencies (Moody s, S&P, and Fitch) is not sufficient for an issue to be deemed an appropriate investment. The investment manager is responsible for making an independent analysis of the credit-worthiness of securities and their appropriateness as an investment for this Fund. Global Asset Allocation Managers The intent of these strategies is to give investment managers the ability to invest across traditional and non-traditional asset classes in order to further diversify the Fund, control risk and add return. It is understood that securities, strategies, constraints and investments that are declared ineligible for inclusion within other investment mandates may be included in these portfolios. The otherwise restricted investments may be allowed within the Alternatives category to allow for positions that, on an aggregate basis, offer attractive risk-adjusted return benefits to the overall Fund. The investment 9

13 managers should determine that the securities to be purchased and the strategies to be utilized are suitable for this account. The majority of the assets will be invested in global equity and fixed income mandates that shall comply with the above listed guidelines for those asset classes. Derivatives are permitted in this portfolio, but are limited in use relative to the Derivatives Policy herein, unless approved in writing by the Board. From time to time, these strategies may make additional diversifying investments in other asset classes or securities such as hedge funds, commodities, etc. The Board shall approve any such investment prior to implementation and shall restrict these investments to specific investment managers. Hedge Fund Managers The overall goal of the hedge fund program is to provide a diversified investment, which over a full market cycle, will be competitive with similar strategies while exhibiting relatively low correlations to equity and fixed income markets. The optimal risk mitigation technique is investing in a diversified pool of strategies and managers. Hedge Funds include a broad array of strategies, which utilize both liquid and illiquid securities. Hedge Funds have the ability to sell securities short as well as purchase long securities. They may also use options, futures, swaps and other derivatives within their portfolio. The Fund will invest primarily in direct investments consistent with the investment preferences in Appendix III. The hedge fund program shall be monitored regularly by the Investment Committee in order to determine that it is providing the expected level of diversification and return to the overall Fund. Real Assets Real Assets are permissible as a long-term inflation hedge. Real Assets also create current income as well as the potential for capital appreciation. The Real Assets allocation will be invested in liquid strategies that may include commodities, inflation linked bonds, and global natural resource stocks. The asset allocation should seek broad diversification across sub-asset classes. The RI Finance Committee in conjunction with the Foundation s IC will review the appropriateness of these strategies through an investment manager search and due diligence process and then on an as needed basis. Provisions, including liquidity and transparency, shall be reviewed and mandates will be deemed appropriate for the Fund s assets on an individual basis. Derivatives Policy Derivative instruments are permitted only as specified in this IPS. managers may use derivative securities for the following reasons: Where appropriate, investment 1. Hedging. To the extent that the portfolio is exposed to clearly defined risks and there are derivative contracts (i.e. futures and options) that can be used to reduce those risks and achieve other portfolio structural objectives, the investment managers are permitted to use such derivatives for hedging purposes. 10

14 2. Creation of Market Exposures. Investment managers are permitted to use derivatives to replicate the risk/return profile of an asset or asset class provided that the guidelines for the investment manager allow for such exposures to be created with the underlying assets themselves. 3. Management of Country and Asset Allocation Exposure. Investment managers charged with tactically changing the exposure of their portfolio to different countries and/or asset classes are permitted to use derivative contracts for these purposes. Non-U.S. equity and global bond managers may enter into forward exchange contracts on currency provided that the use of such contracts is designed to dampen portfolio volatility rather than lever portfolio risk exposure. Currency contracts may be utilized to either hedge the portfolios currency risk exposure or in the settlement of securities transactions. Non-U.S. equity and global bond managers may employ an active currency management program and deal in futures and options within the discipline of that currency management program. The use of futures and options to establish a leveraged position is prohibited. By way of amplification, it is noted that the following two uses of derivatives are prohibited for the financial assets unless provided an exemption from the Board: 1. Leverage. Derivatives shall not be used to magnify overall portfolio exposure to an asset, asset class, interest rate, or any other financial variable beyond that which would be allowed by a portfolio s investment guidelines if derivatives were not used. 2. Unrelated Speculation. Derivatives shall not be used to create exposures to securities, currencies, indices, or any other financial variable unless such exposures would be allowed by a portfolio s investment guidelines if created with non-derivative securities. Rebalancing Policy The Fund will be rebalanced by Staff any time an asset class reaches the minimum or maximum allocation specified above. Routine cash flows will be used to maintain the allocation as close as practical to the target allocations. If routine cash flows are insufficient to maintain the allocation within the permissible ranges as of any calendar quarter-end, balances will be transferred as necessary between asset classes to bring the allocation back within the permissible ranges. Diversification The Fund is to be broadly diversified so as to limit the impact of large losses in individual investments of the Fund. Total assets managed by any single manager should not exceed 15% of total investments for Rotary International and The Rotary Foundation at the time of purchase, and should not exceed 20% of total investments for Rotary International and The Rotary Foundation at any time. 11

15 Liquidity Needs Liquidity needs will first be met from unrestricted cash. Should there be insufficient unrestricted cash; staff shall arrange for cash withdrawals from investments to meet spending needs. The source of funds for these withdrawals will be based on rebalancing and cost considerations. Proxy Voting The Board has delegated investment management responsibilities to various independent investment managers. The Board delegates the full responsibility to vote proxies to these investment managers and expects each investment manager to vote all proxies prudently and in the interest of the Fund. Securities Lending For funds managed in a separate account format, the Fund may not participate in securities lending unless approved by the Board, based on recommendations from staff, or the investment consultant. Any authorization for securities lending in separate accounts must be reported as an information item at the next Board meeting. Commingled funds and mutual funds are exempt from this restriction. Commingled Funds or Institutional Mutual Funds In recognition of the benefits of commingled funds as investment vehicles (i.e., the ability to diversify more extensively than in a small, direct investment account and the lower costs which can be associated with these funds) these funds may, from time to time, be utilized. The Board recognizes that it cannot give specific policy directives to a fund whose policies are already established. Control Procedures Standards of Conduct for Investment Managers and Advisors The expected standards of conduct for investment managers and advisors are derived from the CFA Institute Code of Ethics and Standards of Professional Conduct. Conflict of Interests on Investments and Restrictions on Investments It is the policy of the RI Board that general officers shall act in a manner consistent with their responsibilities to Rotary International and avoid circumstances in which their financial or other ties to outside persons or entities could present an actual, potential, or the appearance of a conflict of interest or impair the reputation of Rotary International. Review of Investment Objectives The achievement of investment objectives will be reviewed on an annual basis. This review will focus on the continued feasibility of achieving the objectives and the continued appropriateness of the IPS. It is not expected that the IPS will change frequently; in particular, short-term changes in the financial markets should generally not require an adjustment in the IPS. 12

16 Review of Investment Managers The RI Finance Committee will review results of all managers at least semi-annually. With a perspective toward three-year and five-year time horizons, the RI Finance Committee will evaluate whether each manager has: Performed satisfactorily when compared with the specific objectives for its portfolio; Produced results that compare favorably to other investment management organizations managing similar portfolios; Exceeded the returns of appropriate market indices; Made portfolio management decisions that were reasonable and effective in view of capital market developments; and Adhered to the relevant policies and objectives. Among the events that the RI Finance Committee will examine closely in their review of investment managers are: Poor results relative to objectives over a fairly short period of time (e.g., one year); Poor absolute performance over a three-to-five year period; The departure of one or more key investment professionals; Violation of an investment guideline; and Material changes in the manager s organization, such as philosophical and personnel changes, acquisitions or losses of major accounts, a change in ownership or control of the investment management organization, etc. The RI Finance Committee will evaluate investment managers and events in light of the current situation and other related factors. In those situations in which RI is utilizing the same managers as TRF, the manager reviews will be done in conjunction with the Foundation s IC. Review of Investment Consultant A formal written evaluation of Rotary s investment consultant will be conducted every five years, unless circumstances dictate the need for a more frequent evaluation. This evaluation will be conducted in accordance with Rotary s Policy for Investment Consultant Evaluation which is included as Appendix VI. Reporting Requirements Within six weeks after the end of each calendar quarter, staff and/or the Fund s investment consultant will prepare a report containing information on the investment performance of the Fund in total and for each manager. Each active investment manager will be required to submit a quarterly report within six weeks after the end of each calendar quarter containing the following information: 13

17 Review of investment performance (net of fees) for the quarter, fiscal year-to-date (June 30) and since-inception of the account with comments on any policy or strategy changes, which contributed either positively or negatively to that performance. The usage of securities lending, if any. Where appropriate, the use of any derivative product during the quarter, including information concerning the rationale behind the position and the size of the transaction. Comments on any material change in personnel, investment strategy or other pertinent information potentially affecting performance. List of the securities in the portfolio at the end of the quarter. On an annual basis, the investment manager will provide Part II of the Form ADV for the most recent year. 14

18 APPENDIX I Strategic Asset Allocation Over the long-term, the asset allocation policy will be the key determinant of the returns generated by the Fund and the associated volatility of returns. Based on the Fund s objectives, circumstances, and spending policy, the Board has developed the following asset mix guidelines: Percent of Total Fund Minimum Target Maximum Equity U.S. Equities 8% 10% 13% Non-U.S. Equities 8% 11% 13% Global Equities * 17% 21% 25% Total Equity 35% 42% 48% Fixed Income Core Fixed Income 0% 5% 10% Non-Core Fixed Income 5% 10% 15% Total Fixed Income 10% 15% 25% Global Asset Allocation 12% 18% 24% Alternative Assets Real Assets 10% 15% 20% Hedge Funds 7% 10% 13% Total Alternative Assets 15% 25% 35% Cash 0% 0% 15% Total 100% *includes emerging markets From time to time, the General Fund may have short-term liquidity needs. Staff will manage liquidity and maintain market exposure through investments largely consistent with the Asset Allocation Policy. However, there may be periods where cash position exceeds the long-term target rate of 0%; to manage liquidity, there is a range of 0% to 15% allocation to cash. 15

19 APPENDIX II The following performance measurement standards should be followed over an annualized three-to-fiveyear period, on a net-of-fee basis. U.S Equity Performance Measurement Standards All Cap Growth Equity exceed the rate of return of the Russell 3000 Growth Index over a full market cycle rank in the upper 50 percent of the consultant s all cap growth equity manager universe All Cap Value Equity exceed the rate of return of the Russell 3000 Value Index over a full market cycle rank in the upper 50 percent of the consultant s all cap value equity manager universe S/Mid Cap Core Equity exceed the rate of return of the Russell 2000 Index over a full market cycle rank in the upper 50 percent of the consultant s small cap core equity manager universe Non-U.S. Equity Performance Measurement Standards exceed the rate of return of the MSCI ACWI IMI ex-u.s. Index over a full market cycle rank in the upper half of the consultant s non-u.s. equity manager universe Global Equity Performance Measurement Standards exceed the rate of return of the MSCI ACWI IMI Index over a full market cycle rank in the upper half of the consultant s global equity manager universe Emerging Markets Performance Measurement Standards exceed the rate of return of the MSCI Emerging Markets Small Cap Index over a full market cycle rank in the upper half of the consultant s emerging market equity manager universe Fixed Income Performance Measurement Standards Core Bonds provide a return that ranges between, but may exceed, Treasury Bills and the Barclays Capital Aggregate Bond Index over a full market cycle rank in the upper third of the consultant s intermediate core fixed income manager universe Non-Core Bonds exceed the rate of return of the customized benchmark* over a full market cycle * 50% Barclays Capital Aggregate / 25% JP Morgan EMBI + / 25% Barclays Capital HY -2% Issuer Cap rank in the upper third of the consultant s core fixed income manager universe 16

20 Hedge Fund Performance Measurement Standards exceed the rate of return of the Credit Suisse Hedge Fund Index over a full market cycle Real Asset Fund Performance Measurement Standards Wellington Diversified Inflation Hedges exceed the rate of return of the customized benchmark* over a full market cycle * 55% MSCI Global Natural Resources Equity / 20% BC US TIPS 1-10 Yr / 25% GSCI Commodity rank in the upper 50 percent of the consultant s real assets equity manager universe PIMCO All Asset Fund exceed the rate of return of the customized benchmark* over a full market cycle * 40% BC Agg / 30% BC US TIPS / 10% S&P 500 / 10% BC HY / 10% JPM EMBI+ rank in the upper 50 percent of the consultant s real assets equity manager universe Global Balanced Asset Allocation Fund Performance Measurement Standards GMO Global Balanced Asset Allocation exceed the rate of return of the customized benchmark* over a full market cycle * 65% MSCI ACWI / 35% BC Aggregate. BlackRock Global Asset Allocation exceed the rate of return of the customized benchmark* over a full market cycle * 60% MSCI World / 40% CITI WGBI 17

21 APPENDIX III INVESTMENT PREFERENCES FOR DIRECT HEDGE FUND PORTFOLIO Goals and Objectives The goals of the hedge fund assets are: 1. Diversify risk exposures in the overall GF portfolio 2. Dampen the volatility of the overall GF portfolio 3. Achieve attractive long-term risk-adjusted return in a variety of capital market conditions Delegation of Responsibilities The investment consultant has discretion to select the allocation exposure, set strategic targets and hire and terminate investment managers within the preferences defined herein. The investment consultant will communicate to the IC and Staff its decisions as soon as practicable. Investment Guidelines 1. The hedge fund allocation shall be invested in a broad range of direct investment strategies including, but not limited to equity-linked, credit-linked, event driven, multi-strategy and macro strategies among others. Investments will be made via commingled vehicles. The investment consultant will only invest in direct strategies that are consistent with the intent of these preferences. 2. The target allocation and ranges for each hedge fund strategy are: Hedge Fund Portfolio Allocations Minimum Target Maximum Global Macro 8% 10% 20% Credit Linked 10% 15% 30% Equity Linked 15% 25% 35% Event Driven 15% 25% 35% Multi Strategy 0% 25% 30% The target allocation will be reviewed at least annually with the IC, with periodic changes being implemented by the investment consultant. Any changes or modifications made to the allocation, exposure, target or ranges shall be communicated with Staff and the IC as soon as practicable. 3. All strategies shall be reviewed within the portfolio context. This is meant to ensure that redundancy and overlap of exposures are limited. 4. No aggregate investment with any direct hedge fund manager can represent more than 5% of the General Fund. Additionally, manager exposure shall be limited to no more than 25% of the total hedge fund allocation. 5. Certain strategies may have an initial lock-up on investments of one to three years. In building and maintaining the allocation, the investment consultant shall strive to limit lock-ups where possible. 6. All investments must have a mechanism for liquidity/exit. Minimum acceptable standards may include quarterly distributions or fees for early redemptions. In certain cases, this liquidity may be available once a lock-up period has ended. 18

22 APPENDIX IV ROTARY INTERNATIONAL GENERAL SURPLUS FUND INVESTMENT GUIDELINES FOR CASH Scope These investment guidelines extend the Statements of Investment Policy for the Rotary International General Surplus Fund (the Fund) and apply specifically to Rotary International s unrestricted and restricted cash. Distinction of Responsibilities The Treasury and Investment Department will oversee the investments in accordance with these guidelines. Maturities 1. As the assets in this fund represent the temporary investment of operating funds of Rotary International, a substantial portion of the portfolio will consist of overnight and other very short-term investments. 2. A maximum of 25% of the portfolio may be invested in securities or instruments which have a maturity date exceeding 181 days from the date of purchase. 3. A minimum of 5% of the portfolio should be available each business day. This may be satisfied by maturities or demand features. 4. The weighted average maturity of the portfolio will be limited to 90 days. 5. Floating rate instruments and variable rate instruments must have interest rate resets or potential reset frequencies of 90 days or less, and an expected final maturity or weighted average life not exceeding 18 months from the date of purchase. 6. The maturity of a security or instrument shall mean the date when final payment is due. Instruments, which have a variable/floating rate of interest, shall be deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate or the period until the principal amount can be recovered through demand. Diversification Requirements 1. Safety of principal, liquidity and marketability should be prime considerations in the selection of individual securities. 2. The total holdings of any one issue may not exceed 10% of the market value of the portfolio, with the following exceptions: (a) Sovereign debt issues of AAA/Aaa rated countries and agencies thereof; 19

23 (b) Diversified money market funds; (c) Savings accounts at Rotary International s operating banks; (d) Fixed term deposits at Rotary International s operating banks. 3. With the exception of sovereign debt issues of AAA/Aaa rated countries and agencies thereof, total holdings of any one industry may not exceed 25% of the market value of the portfolio. 4. All diversification requirements apply at the time of purchase. Investment Criteria 1. Sovereign debt issues of AAA/Aaa rated countries or agencies thereof. 2. Savings accounts, bankers acceptances, fixed term deposits offered by the bank where the funds are on deposit. 3. With respect to commercial paper and other short-term obligations, investments and reinvestments shall be limited to obligations rated (or issued by an issuer that has been rated) at the time of purchase in a Tier One ratings category by the nationally recognized statistical rating organizations ( NRSROs ) followed by the credit committee of the bank where the funds are on deposit. 4. With respect to bonds and other long-term obligations, investment and reinvestment shall be limited to obligations rated at the time of purchase in one of the three highest ratings by the NRSROs followed by the credit committee of the bank where the funds are on deposit. 5. Repurchase agreements 100% collateralized with direct sovereign debt securities of AAA/Aaa rated countries. 6. Money market funds adhering to the quality guideline described above. Note that if a security held in the fund is downgraded to a quality not permitted herein after purchase, the fund may continue to hold the security if the Investment & Treasury Department reasonably believes that the security will mature at par value. 20

24 General Surplus Reserve Policy APPENDIX V ROTARY INTERNATIONAL CODE OF POLICIES Rotary International s general surplus reserve policy is to maintain a reserve at an amount equal to Board-designated funds, plus 85% of the highest level of annual expenses, during the most recent three-year period, excluding the self-financing expenditures of the annual convention and the Council on Legislation. Board-designated funds are defined as the sum of the convention expense reserve (see section ), plus the investment earnings reserve (see section ), plus any other reserves so designated by the Board. These funds shall be so designated in Rotary International s financial statements. (June 2008 Mtg., Bd. Dec. 290) Budgeted Investment Earnings and Investment Earnings Reserve The investment rate of return assumption used for the budget and five-year financial forecast will be determined annually based on the status of the investment earnings reserve and current financial market conditions. The RI Board has established an investment earnings reserve. If in any year investment earnings are less than budgeted investment earnings, any shortfall will be funded from the investment earnings reserve fund as a transfer of Board-designated funds. If in any year investment earnings are greater than the budgeted investment earnings, that excess will be transferred to the investment earnings reserve fund, subject to a maximum reserve of US$12 million. Any transfer from the investment earnings reserve is to provide for any shortfall in investment earnings and is not for the use of additional general operating expenses. (June 2009 Mtg., Bd. Dec. 271) 21

25 APPENDIX VI Policy for Investment Consultant Evaluation A formal written evaluation of Rotary s investment consultant will be conducted every five years, unless circumstances dictate the need for a more frequent evaluation. Such circumstances include (but are not limited to) arising conflicts of interest, consultant staffing instability or failure to meet Rotary s changing needs. The consultant will be evaluated based on the: 1. Value added through the consultant s recommendations on: Asset allocation. Specifically, to what extent did the consultant s recommendations on asset allocation strategies maximize investment return while minimizing risk. This criterion will be evaluated by comparing the benchmark returns and standard deviations of those returns of each fund (Annual Fund, Endowment Fund, PolioPlus Fund, Rotary Foundation (Canada), General Fund, Retirement Fund) at the inception of the relationship to the benchmark returns and standard deviations of those returns of each fund as recommended by the consultant. Investment managers. Specifically, to what extent did each fund outperform their stated benchmarks over a full market cycle. Investment policy and manager guidelines. Specifically, to what extent did the policies and guidelines recommended by the consultant stipulate appropriate levels of authority, controls, and reporting, such that the Trustee and Directors were able to fulfill their fiduciary duties with respect to the funds. Investment manager terminations. Specifically, to what extent did the investment consultant evaluate current investment managers in a timely manner and recommend termination as needed. 2. Quality and accuracy of quarterly investment reports, including performance measurement. 3. Ability to provide specialized studies and reports on specific investment matters. 4. Stability, depth and competency of the firm as well as the individuals staff interacts with on a daily basis. 5. Ability to work and communicate with staff and various committees, as well as responsiveness of the investment consultant. 6. Minimal, if any, conflicts of interest. 7. Experience in working with organizations similar to Rotary. 8. Peer ratings as published in industry periodicals, or otherwise provided by research organizations. 9. Fee structure. 10. Initiative in bringing forward new ideas and keeping Rotary informed of trends in endowment and foundation investment management. Proposals from other investment consulting firms will be solicited once every ten years to ensure services provided by consultant are competitive in scope and price The firm retained as Rotary s investment consultant will be granted a five-year contract. 22

26 Rotary International 401(k) Plan Investment Policy Statement September

27 CONTENTS I. Overview & Purpose 1 II. Roles and Responsibilities 2 III. 404 (c) Compliance 3 IV. Investment Objectives 3 V. Investment Guidelines 4 VI. Criteria for Selection and Evaluation of Investment Options 4 VII. Review and Amendment of the Policy 6 Appendix A. Current Investment Options 7 24

28 I. OVERVIEW AND PURPOSE The Rotary International 401(k) Plan (the Plan ) was established 1 July 1984 for the exclusive benefit of eligible employees of Rotary International who become participants and their beneficiaries. Its purpose is to help provide employees with a convenient way to save on a regular and long-term basis for retirement and to receive contributions from Rotary International (the Company ). The Plan is intended to be qualified under section 401(a) of the Internal Revenue Code of 1986, as amended, and operated in compliance with the Employee Retirement Income Security Act of 1974, as amended ( ERISA ). Given the Plan s intent to comply with ERISA, the Plan will provide a broad range of investment options to reflect the different risk tolerances common among participants in retirement savings plans. The Plan is intended to provide the participants of the Plan the opportunity to save for retirement through both a traditional pre-tax contribution structure, and a post-tax Roth contribution structure. Participants are given the flexibility to alter their investment options, the direction of existing and future contributions, and whether the contributions are on a pre- or post-tax basis. Since the Plan is operated to comply with Section 404(c) of ERISA, participants alone bear the risk of investment results from the investment options, asset mixes, and tax treatment of contributions that they select. It is the intention of the RI World Headquarters Retirement Committee, ( the Committee ), which was appointed by the Board of Directors of the Company, that the assets of the Plan shall be maintained in compliance with all applicable laws governing the operation of the Plan. Practices that are intended to emphasize such compliance include, but are not limited to, the following: The investment options offered to participants should be selected with care, skill, and diligence that would be applied by a prudent professional investor acting in a like capacity and knowledgeable in the investment of retirement funds. All transactions undertaken on behalf of the Plan shall be for the exclusive purposes of providing benefits to the Plan participants and beneficiaries and defraying reasonable expenses of administering the Plan. Participants should be provided the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the Plan. This Investment Policy Statement ( Policy ) defines the investment objectives and the policies and procedures that have been established by the Committee for the investment of the assets of the Plan. This Policy is intended to: Provide a mechanism to establish and review the Plan s investment objectives; Identify those individuals/functions with responsibility for selecting and reviewing the Plan s investments; Designate the investment options available to participants, beneficiaries and alternate payees with a clear understanding of the role each investment option performs; and 25

29 In accordance with Section 404(c) of ERISA, the Policy is also intended to: Provide participants with a range of investment options such that they have a reasonable opportunity to materially affect the potential return on amounts in their individual accounts and the degree of risk to which such amounts are subject; and Provide investment options that have materially different risk and return characteristics and enable participants by choosing among them to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally considered appropriate for the participants or beneficiaries Identify the criteria that may be considered when selecting the investment options and evaluating the continued appropriateness of each investment option; and Provide a single document outlining the investment and monitoring responsibilities of the Committee. II. ROLES AND RESPONSIBILITIES The Board of Directors of the Company has delegated oversight of the investments and administration of the Plan to the Committee. The responsibilities of the parties listed herein are as follows: The Committee is responsible for the development, maintenance, and review of this Policy annually. The Committee will select investment options based upon the criteria and objectives set forth in this investment policy statement and will monitor the investment options and service providers of the Plan. The Committee is entitled to use the services of an investment consultant to assist in carrying out its responsibilities. Staff will recommend professional service providers to the Committee. Staff, with the aid of investment consultant(s), will also monitor and evaluate fund managers, and establish effective communication and review procedures among the external service providers and the Committee. The Committee may retain an investment consultant (the Investment Consultant ). The Investment Consultant will advise the Committee on the management of the Plan s assets. This includes, but is not limited to, recommending appropriate strategic policy and implementation structure, conducting fund manager due diligence, and assisting with fund manager searches and selection. The Investment Consultant will also aid the Committee in adhering to the guidelines of the Policy and will make recommendations regarding any changes. Participants are responsible for determining their contribution rate, the contribution tax treatment, and allocating their assets among the investment options offered in the Plan. The Investment Fund Managers ( Fund Managers ) have the responsibility for managing the underlying assets by making reasonable investment decisions consistent with the stated approach in the fund prospectus. 26

30 The Committee may retain a service provider to administer the Plan (the Service Provider ). The Service Provider is responsible for the safekeeping of securities, settlement of trades, collection of income, reimbursement of revenue sharing to offset administrative costs, administrative reporting to the Plan, and providing information regarding the investment funds to Plan participants. III. 404(c) COMPLIANCE It is intended that the Plan complies with Section 404(c) of ERISA and related Department of Labor safe harbor regulations by (including, but not limited to): Notifying participants that the Plan is intended to be 404(c) compliant, including a statement that fiduciaries of the Plan may be relieved of certain liabilities for investment choices made by participants and beneficiaries. Providing participants at least three investment option offerings with differing risk/return profiles. Providing participants with sufficient information so each participant can make an informed decision about their investment option selections. Permitting participants to change their investment options at a frequency that is appropriate in light of the volatility of the investments Because each participant shall have the sole responsibility to make investment contribution and allocation decisions, the Committee shall refrain from giving what could be construed as investment advice. IV. INVESTMENT OBJECTIVES Considering the varied attitudes, goals, expectations, investment time horizons, and risk tolerance levels of the Plan s participants, the Plan will offer a broad array of investment options that allows participants to build diversified portfolios consistent with their needs and objectives. The Committee may select from a broad range of mutual funds, commingled funds, separate accounts, or other investment options to pursue this investment objective. Within the categories listed below, the types of investment options may include actively-managed or passively-managed funds, low- to high-risk options, and specialized styles of investment management. In this regard, the Plan may be composed of at least one investment option/feature from, but not limited to, the following categories: Money Market/Stable Value Funds; Diversified Bond Funds; Inflation-Protection Funds; Pre-Mixed Target Retirement Investment Funds; 27

31 Balanced Funds (a mix of stocks and bonds); U.S. Stock Funds; Socially-Responsible Funds; Non-U.S./Global Stock Funds. The specific investments currently offered under the Plan are listed in Appendix A which may updated from time to time. V. INVESTMENT GUIDELINES The Committee acknowledges that fluctuating rates of return characterize the financial markets, particularly during short-term periods. Accordingly, the Committee views the interim fluctuations with the perspective of a prudent investor, considering the long-term horizon of the retirement assets. The Committee reserves the right to close, add, eliminate, or change investment options at any time at its discretion. On a periodic basis, but intended to be not less than quarterly, the Committee will evaluate the Plan s investment options performance relative to (1) the return of an appropriate market index(es) and (2) the returns of a universe of comparable funds, where applicable, over a full market cycle (typically three to five years) or such other period determined by the Committee. Benchmarking The Committee believes it is in the best interest of the Plan s participants that performance objectives be based upon the appropriate market index and the relevant peer group for each investment fund option (see Appendix A). In the case of pre-mixed investment options, performance objectives will be based upon custom benchmarks composed of the weighted market indices. VI. CRITERIA FOR SELECTION AND EVALUATION OF INVESTMENT OPTIONS Pre-Selection The selection of investment options for the Plan will be performed in a manner consistent with generally accepted standards of fiduciary responsibility. The Plan s investment options will be selected and monitored with the skill, care, and diligence of a prudent person acting in such capacity and in accordance with ERISA and other applicable laws. All determinations undertaken on behalf of the Plan will be for the sole benefit of the participants and beneficiaries in the Plan. Criteria will be established for each Fund Manager and investment product search undertaken by the Plan and will be tailored to the specific needs of such a search. In general, the due diligence process for a Fund Manager s selection shall include, but not be limited to: 28

32 Organizational structure: The organizational structure of the Fund Manager should ensure that their interests are aligned closely with investors. Investment management should be a focus of the organization and should be evidenced by the allocation of resources towards that area. Regulatory oversight: Each Fund Manager should be a regulated bank, an insurance company, a mutual fund organization, or a registered investment advisor. Minimum track record: The investment option s inception date should be at least three years earlier than its selection; a shorter track record may be used when the investment professionals of a new organization have a well-established and recognized track record at a previous organization. Assets under management: The investment option should have a sufficient and appropriate asset base. Performance relative to assumed risk: Competitive returns of investment options should be compared to appropriate benchmark data at an acceptable level of volatility or tracking error. Holdings consistent with style: There should be a history of reasonable adherence to investment objectives and correlation to stated asset class or style (if any). Stability of organization: There should be stability in the investment team, firm ownership and client base. Reputation of organization: All pending and recently concluded material legal and compliance actions involving the firm should be reviewed in the context of its potential impact on the investment option under consideration. Performance relative to benchmark and peer group: Performance should be evaluated on a net-offee basis. For actively-managed funds, past performance should be analyzed relative to the risk undertaken, and should be focused on evaluating the Fund Manager s potential to add value on a riskadjusted basis. For passively-managed funds, past performance should be analyzed based on how closely it tracks the appropriate benchmark... Past performance should not be the primary basis for selecting any Fund Manager. Fees: The investment option selected should have a reasonable fee level within its peer universe. All sources of compensation paid to the Fund Manager, derived from the services rendered to the Plan, should be disclosed and be free of potential conflicts of interest, in accordance with ERISA Section 408(b)(2). Post-Selection Review of Fund Managers The Committee, with the aid of the Investment Consultant, will monitor the performance of each Fund Manager on a regular basis, not less than annually, while retaining a long-term focus. The focus of the ongoing evaluation shall include: Material changes to investment philosophy and objectives; 29

33 Assets under management (track substantial changes in total assets); Performance relative to benchmarks and peer groups; Consistency of holdings with style; and Stability of the organization and personnel turnover. Fee Structure The impact of fees on the long-term performance of the investment options within the Plan shall be an important consideration. In addition to reviewing the performance of the Plan s fund managers and investment options, the Committee, with the aid of the Investment Consultant, will periodically review all costs associated with the management of the investment program, including, but not limited to: Costs to administer the Plan, including recordkeeping; Expense ratios of each investment option against the appropriate peer group; Sales loads including front-end or back-end sales charges; and Administrative charges and 12b-1 fees. Terminations The Committee retains the discretion to terminate a Fund Manager for any reason. The Investment Consultant will make recommendations to the Committee with respect to the removal/replacement of funds. Grounds for Fund Manager terminations may include, but are not limited to: Failure to comply with stated guidelines; Significant deviation from the Fund Manager s stated investment philosophy and/or process; Loss of key personnel; Evidence of illegal or unethical behavior by the investment management firm; Loss of confidence by the Committee and/or Consultant in the Fund Manager; or Failure to achieve performance objectives specified in the Fund Manager s guidelines over reasonable measurement periods. 30

34 VII. REVIEW AND AMENDMENT OF THE POLICY The Committee shall review this Policy as appropriate, and at least annually, to determine if it continues to reflect the Plan s objectives and meet the needs of the Plan s participants. The Committee retains the authority to make interim changes to the Policy. The criteria used to evaluate this Policy may include, but are not limited to: (1) demographics of the workforce, (2) growth of the Plan, (3) performance of existing investment options, and (4) the fees associated with investment options. The Committee will communicate any modification on a timely basis to the Plan s other fiduciaries and any other interested parties. 31

35 APPENDIX A: CURRENT INVESTMENT OPTIONS Investment Options Asset Class Benchmark T. Rowe Price Stable Value Stable Value Rolling 3-Year Treasury Bill Index PIMCO Total Return Domestic Bond Barclays Capital Aggregate Bond Index PIMCO All Asset Funds diversified across major asset classes, targeting excess real return Barclays Capital U.S. TIPS 1-10 Year Index Pre-Mixed Target Retirement Investment Funds Funds diversified across major asset classes Custom Indices (for each of the pre-mixed funds) Vanguard Total Stock Market Index Domestic All Cap Equity CRSP U.S. Total Market Index Vanguard Growth Index Domestic Large Cap Growth Equity CRSP U.S. Large Cap Growth Index Calvert Equity Portfolio Domestic Large Cap Growth Equity Socially Responsible Investment Russell 1000 Growth Index Vanguard Value Index Domestic Large Cap Value Equity CRSP U.S. Large Cap Value Index Vanguard Small Cap Index Domestic Small Cap Equity CRSP U.S. Small Cap Index EuroPacific Growth International Equity MSCI ACWI ex-u.s Lazard Emerging Markets Equity Emerging Markets Equity MSCI Emerging Markets Index T. Rowe Price Real Estate Real Estate Wilshire U.S. Real Estate Securities Index 32

36 ROTARY INTERNATIONAL Investment Managers As of June 2015 Manager Fund Name Asset Class Fees Westfield Capital Management All Cap Growth Equity Fund U.S. Equity 0.74% Robeco Investment Funds Robeco Boston Partners All-Cap Value Fund U.S. Equity 0.70% Artisan Partners Global Value Fund Global Equity 1.43% Walter Scott Global Opportunities Fund LLC Global Equity 1.00% Mondrian Investment Group Emerging Markets Small Cap Equity LP Global Equity 1.50% Grantham, Mayo, Otterloo (GMO) International Equity Allocation Fund Non-U.S. Equity 0.73% Pacific Investment Management All Asset Fund Real Assets 0.87% Co. Wellington (PIMCO) Trust Company, NA Diversified Inflation Hedges Real Assets 0.90% BlackRock Global Asset Allocation Global Balanced 0.93% GMO Global Balanced Asset Allocation Global Balanced 0.50% Canyon Value Realization Canyon Value Realization Fund, Ltd. Class A Series and Initial Hedge Funds 1.50%¹ Caxton Global Investments Caxton Global Investments Ltd. Class T (Unrestricted) A( ) and C( ) Hedge Funds 2.60%¹ Criterion Capital Partners Criterion Capital Partners Class A Hedge Funds 1.50%¹ ING Voya Mortgage ING Voya Mortgage Investment Fund USD Inst. Class Series Hedge Funds 1.50%¹ Koppenberg Koppenberg Macro Commodity Fund Ltd Hedge Funds 2.00%¹ LibreMax Capital, LLC LibreMax Offshore Fund, Ltd. Class A Series 1 and 3 Hedge Funds 2.00%¹ Marshall Wace MW Tops Fund Class A USD Hedge Funds 2.00%¹ SEG Partners SEG Partners Offshore, Ltd. A1/1 and A1/3 Hedge Funds 1.00%¹ Senator Global Senator Global Opportunity Offshore Fund II Ltd. Class A1 series 1, 16, and 20 Hedge Funds 1.50%¹ ¹ Fee does not include incentive or performance fee. Performance fees are only granted when the manager s performance is positive and exceeds a stated benchmark. 33

37 Manager Fund Name Asset Class Fees Standard Life Global Absolute Return Strategy Hedge Funds 1.18%¹ Symphony Symphony Long-Short Credit (Offshore) Fund Ltd. Class F Hedge Funds 1.50%¹ Whitebox Whitebox Multi-Strategy Fund, Ltd. Class E and Hedge Funds 1.50%¹ Bank of America (Working Capital) Cash & Equivalents N/A Fund Weighted Average Fee General Fund 0.74% ¹ Fee does not include incentive or performance fee. Performance fees are only granted when the manager s performance is positive and exceeds a stated benchmark. 34

38 Manager ROTARY INTERNATIONAL INVESTMENT MANAGERS HISTORICAL INFORMATION Hire Date Termination Date Length of Term Reason for Termination ARM Capital Advisors 31 May Oct yrs., 5 mos. Non-disclosure of pertinent information; lack of trust BlackRock W May Nov yrs., 6 mos. Preference for active management BlackRock Fixed Income 31 May Nov yrs., 6 mos. Preference for active management Harris Associates 31 May May yrs. Performance Templeton Investment Counsel 31 Dec Dec yrs. Performance; value style bias Montag and Caldwell 31 Oct Dec yrs., 2 mos. Performance; not aggressive enough Putnam Investments 30 Nov Nov yrs., 11 mos. Investment manager improprieties Pacific Investment Management Company (PIMCO) 31 Dec May yrs., 6mos. Allocation exceeded 15% of total portfolio Trustee disagreed with investment philosophy (quantitative LSV Asset Management 31 May Dec yr., 7 mos. approach) The Northern Trust (Working Capital) 30 Jun Sept yrs., 3 mos. Could not service entire North America Reams Asset Management 31 Dec Dec yrs. Performance Trust Company of the West (TCW) 31 Dec Nov yrs., 11 mos. Performance Consolidation of equity value funds to one all cap value Institutional Capital (ICAP) 31 Dec Feb yrs., 2 mos. fund Essex Investment Management 31 Dec Jun yr., 6 mos. Performance; changes within the firm High Rock Capital 31 Dec Jun yrs., 6 mos. Performance Capital Guardian 31 Dec Dec yrs. Change in non-u.s. equity mandate M. A. Weatherbie & Co. 31 Dec Jun yr., 6 mos. Change in growth mandate J.L. Kaplan 30 Jun May yr., 11 mos. Organizational changes Grantham, Mayo, Otterloo (GMO) Foreign Fund 31 Oct Dec yrs., 2 mos. Change in non-u.s. equity mandate Western Asset Management Company (WAMCO) Enhanced S&P Jun Feb yrs., 8 mos. Change in investment strategy, performance Bank of America (Working Capital) 1 Oct 2006 Nuveen Investments (NWQ) 11 Jun Feb yrs., 8 mos. Consolidation of equity value fund to an all cap value fund BlackRock R2000 Value 11 Jun Feb yrs., 8 mos. Consolidation of equity value fund to an all cap value fund 35

39 Manager Hire Date Termination Date Length of Term INTECH 3 Dec Jun yr., 7 mos. Change in growth mandate Friess Associates 3 Dec Jun yr., 7 mos. Change in growth mandate GMO International Equity Allocation Fund 31 Dec 2008 Artio Global Investors International Equity II 31 Dec Jun yrs., 6 mos. Performance Westfield 1 Jul 2009 Reason for Termination WAMCO Global Multi-Sector 26 Jul Aug yrs., 1 mo. Fixed income strategy change Permal 1 Dec Dec yrs., 1 mo. Strategy Change GMO Global Balanced Asset Allocation 1 Dec 2010 BlackRock Global Asset Allocation 1 Dec 2010 Wellington Diversified Inflation Hedges 1 Dec 2010 PIMCO All Asset Fund 1 Dec 2010 J.P. Morgan (JPMAAM) 1 Dec Jan yrs., 2 mos. Strategy Change Atlanta Capital 1 Mar Oct yrs., 7 mos. Overweight market capitalization; overvalued. Robeco Investment Funds 1 Mar 2011 BlackRock MSCI ACWI ex-us 1 Jul Dec mos. Global equity implementation Chicago Equity Partners 1 Jun Oct mos. Fixed income strategy change BlackRock MSCI ACWI 7 Dec Apr mos. Global equity implementation Walter Scott 7 Dec 2012 Artisan Partners 30 Apr 2013 Mondrian Investment Group 3 Feb 2014 Canyon Value Realization 1 Jan 2015 Caxton Global Investments 1 Jan 2015 Criterion Capital Partners 1 Jan 2015 ING Voya Mortgage 1 Jan 2015 LibreMax Capital, LLC 1 Jan 2015 Marshall Wace 1 Jan 2015 SEG Partners 1 Jan

40 Manager Hire Date Termination Date Length of Term Reason for Termination Symphony 1 Jan 2015 Whitebox 1 Jan 2015 Koppenberg 1 Mar 2015 Standard Life 1 Mar 2015 Senator Global 1 Apr

41 ROTARY INTERNATIONAL Historical Investment Return Information US$(000) Interest and dividends 2,438 2,803 3,261 3,231 2,995 2,657 2,069 1,884 1,637 2,173 Net realized gains/(losses) 4,864 9,578 9,530 4,864 5,313 4,355 (112) (3,882) 229 2,256 Increase/(decrease) in unrealized gains * (1,489) (3,532) (7,220) (5,627) 4,762 7,112 1,605 Currency gains/(losses)** Investment fees/other (474) (450) (480) (442) (450) (496) (606) (563) (674) (591) Total Net Investment Return 7,476 12,250 12,359 6,164 4,326 (704) (4,276) 2,201 8,304 5, Average Interest and dividends 2,963 4,792 3,721 3,329 2,177 1,838 2,028 1,768 1,376 1,479 2,531 Net realized gains/(losses) 4,421 4,629 6 (8,278) 1,464 3,705 6,340 6,948 4,855 6,827 3,396 Increase/(decrease) in unrealized gains * (42) 3,557 (7,844) (7,254) 7,188 15,166 (12,308) 3,863 9,754 (10,870) (108) Currency gains/(losses)** (2,288) (222) 854 (2,287) (522) 149 (2,651) (995) Investment fees/other (589) (649) (640) (43) (304) (111) 92 (357) Total Net Investment Return 6,753 12,329 (4,757) (14,404) 10,690 21,729 (6,270) 11,753 16,023 (5,123) 5,113 * The increase/(decrease) in unrealized gains represents paper losses or gains. ** Prior to , currency gains/(losses) were recorded as operating gains/(losses), and were not part of total net investment return. 38

42 ROTARY INTERNATIONAL Historical Investment Return Information Rate of Return RI 15.4% 21.3% 18.0% 9.4% 6.1% -1.9% -5.6% 3.7% 14.7% 7.5% Benchmark 17.3% 19.8% 18.2% 11.7% 8.4% -5.6% -5.2% 4.6% 14.1% 9.0% Rate of Return RI 8.9% 14.3% -5.4% -13.4% 13.6% 22.4% -4.0% 11.2% 17.2% -2.8% Benchmark 7.9% 15.5% -4.5% -14.0% 10.9% 22.9% -2.1% 10.2% 16.4% -1.2% Annualized Rates of Return 5 Years 10 Years 15 Years 20 Years RI 8.3% 5.6% 4.9% 7.4% Benchmark 8.8% 5.6% 4.8% 7.6% 39

43 Rotary International General Surplus Fund Policy Asset Allocations As of 30 June 2015 Board Decisions regarding asset allocation November 1996 (Decision 151) adopt an asset allocation strategy of 55% stocks and 45% bonds for the RI General Surplus Fund. November 2000 (Decision 189) increase the target allocation to non-u.s. equities to 15% with a rebalancing range of 12% to 18%; decrease the target allocation to fixed income securities to 40% with a rebalancing range of 35% to 45%; and maintain the target allocation to U.S. equities at 45%. November 2008 (Decision 113) reduce the target allocation to U.S. equities from 45% to 35%, with a rebalancing range of 30% to 40% and increased the target allocation to non-u.s. equities from 15% to 25%, with a rebalancing range of 20% to 30%. June 2010 (Decision 260) approved new target allocations as found in Appendix I of the RI General Surplus Fund IPS dated June May 2011 (Decision 255) amended the target allocations as found in Appendix I of the RI General Surplus Fund IPS dated June 2010 to reflect the utilization of the Real Assets allocation. May 2014 (Decision 166) amended the IPS to reduce the target allocation to U.S. equities to 10%; reduced global equities to 21%; and increased hedge funds to 10%. 40

44 Glossary of Selected Investment Terms 2 & 20 Standard policy of charging a 2% management fee and then also taking 20% of the profits. Absolute Return Strategies intended to be market neutral (i.e., not dependent on the overall direction of the markets) which include such underlying strategies as: distressed debt, merger arbitrage, fixed income arbitrage, convertible bond arbitrage and equity market neutral (i.e., offsetting long and short positions). Accounting Risk Pertaining to non-u.s. markets, accounting risk can arise when a country does not have in place laws requiring conformity in accounting and financial disclosure. Active Management A portfolio strategy of aggressively managing assets by continually repositioning portfolios to take advantage of the most favorable opportunities. Alpha Return achieved in excess of an investment manager s stated benchmark. Typically stated in terms of basis points (bp). Alternative Strategies A broad classification of investments that includes any investment that is considered less traditional or non-traditional (traditional assets include stock instruments and debt instruments, such as direct investments or mutual fund investments in equities, bonds, and money market instruments). Specific examples of alternative strategies include private equity, venture capital, hedge funds, distressed (or private) debt, and real assets (such as real estate, oil and natural gas, timber and commodity funds). Alternative investments often have a low or negative correlation to traditional assets, can contribute to lower portfolio risk (as measured by volatility), and can contribute to a higher expected return. Annualized Return A figure (as in a percentage) calculated by a formula to find the "average" performance per year. Annuity Trust A trust that pays an agreed-upon sum of money at agreed-upon internals, drawing from the trust s principal when income from the trust is insufficient to make the agreed-upon payments. Appreciation Increase in the value of an asset such as a stock, bond, commodity, or real estate. Arbitrage A financial transaction or strategy that seeks to profit from a perceived price differential with respect to related instruments and typically involves the simultaneous purchase and sale of those instruments. Assets All stocks, bonds, cash, interest earned, etc., owned by a given account. Asset Allocation Allocating investments among different asset classes (e.g., stocks, bonds, and real estate) to find the optimal risk/reward mix. Tactical asset allocation implies a relatively short-term, and strategic asset allocation, a longer-term approach. Asset Mix The proportions of a portfolio invested in various types of investments, such as common stock, bonds, guaranteed investment contracts, real estate and cash equivalents. Asset-Backed Security A fixed income instrument comprising collateralized assets that pay interest, such as consumer credit cards and automobile loans. Assets Under Management (AUM) The sum total of the market value of all assets for which a given company acts as Investment Manager. Average Life The arithmetic weighted average life of a bond where the weights are the proportion of the principal amount being redeemed. Barbell Portfolio of bonds distributed in the shape of a barbell, with most of the portfolio in short-term and long-term bonds. 41

45 Basis Point (BP) One one-hundredth of one percent. One hundred basis points equal one percent. Balanced Fund Manager A mutual fund manager whose investment policy is to balance the fund s portfolio by investing in more than one asset class typically stocks, bonds, and cash to obtain a good return, while minimizing risk. Barclays Aggregate Bond Index An index that covers the U.S. investment grade, fixed-rate bond market with index components for government, corporate, mortgage pass-through and asset-backed securities. Bear Market A market characterized by a trend of falling security prices. A bear market in stocks is usually brought on by the anticipation of declining economic activity, and a bear market in bonds is caused by rising interest rates. Bearish Pessimistic about the market; anticipating a decline in prices. Benchmark A standard by which investment performance or trading execution can be judged. Beta A way of evaluating risk (i.e., volatility ) for a particular mutual fund or stock, relative to the market as a whole. A fund with a beta of 1 has the same risk as the market. A fund with a beta of 2 is twice as risky, so that an investor is likely to double his or her profits (or losses) compared to the market. A beta of less than one means the mutual fund or stock moves comparatively less than the market as a whole. Bond An instrument of debt issued by a corporation or government to raise capital. Bonds are interest bearing and promise to pay the holder a specified sum of money at its maturity plus interest at given intervals. Bond Rating A grade given to a bond that indicates the quality of the investment. Ratings range from AAA (very unlikely to default) to D (in default). Moody s Investment Services and Standard & Poor s are the two major bond-rating companies. Bond Return Consists of two components, 1) current yield and 2) price performance. Current Yield is the amount of coupon income received, expressed as a percentage of the current market value of the bond or portfolio. Price Performance of a bond is determined by changes in interest rates. If rates rise, bond prices fall. If rates fall, bond prices rise. Bottom-up Managers Bottom-up managers focus on the qualities or valuations of individual stocks, one by one, rather than on economic trends. This approach assumes that, even in an industry that is not doing well, individual companies can perform well. Bull Market A market characterized by rising security prices. Bullish Optimistic about the market; anticipating a rise in security prices. Buyout The purchase of a company or a controlling interest of a corporation's shares. Buyout firms purchase underperforming companies aiming to improve the company s operations and selling or taking them public for a profit. Call Option The right to buy an asset at a specified exercise price on or before a specified expiration date. Callable Bond A bond that the issuer may repurchase at a given price at some specified future date. Capital Appreciation Increase in value (i.e., price) of an asset such as a stock or bond. Capital Gain/Loss The amount of profit or loss attributable to the difference between the purchase and sale prices. Stock bought for $100 and sold for $125 has produced $25 in capital gain. Capital Markets Markets in which capital funds (debt and equity) are issued and traded. Included are private placement sources of debt and equity, as well as organized markets and exchanges. 42

46 Capitalization The current equity value of a company determined by multiplying the number of outstanding common shares by the current market price of a share. Companies are typically categorized into small cap (less than $2 billion), mid cap ($2 - $14 billion), and large cap (greater than $14 billion) based on the previous capitalization formula. Cash and Cash Equivalent Assets with maturities of less than one year (e.g., Treasury bills, commercial paper, certificates of deposit and nonconvertible bonds) which are highly liquid and comparatively risk free. Charitable Gift Annuity A contract between the donor and a charity in which the donor transfers assets to the charity. The charity agrees to pay a specified sum of money each year to the donor, for a fixed period (usually life). The assets exceed the present value of the expected payments to the donor, and the charity receives the surplus (mortality tables are used to make this calculation). The donor can claim as a charitable tax deduction the difference between the present value of the expected payments and the value of the assets. Charitable Remainder Trust The assets left in a charitable trust, gift annuity, or pooled income fund that eventually pass to a qualified charity. The present value of the charitable remainder is equal to the charitable tax deduction. Cheap Inexpensive; having a price perceived to be undervalued. Credit Default Swap (CDS) A swap designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. Co-Invest A minority equity investment made directly into an operating company, alongside a financial sponsor or other private equity investor. Collateral Property acceptable to the lender as security for a loan or other obligation. Collateralized Mortgage Obligation (CMO) A type of mortgage-backed security that creates separate pools of passthrough rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus. Commercial Mortgage-Backed Securities (CMBS) A type of mortgage-backed security that is backed by pools of loans on commercial property. Commingled Investment Fund A vehicle that pools the assets of investors to gain broader diversification than is normally possible in a separate account. Common Stock Securities that show ownership in a corporation. Stockholders share profits or losses in the corporation through dividends and changes in the stock s market value. Consumer Durables Products bought by consumers that are expected to last three years or more. These include automobiles, appliances, boats, and furniture. Core Bonds Core Bond managers primarily invest in investment grade debt securities such as Treasuries, Agency debentures, corporate bonds, Agency mortgage-backed securities, asset-backed securities and commercial mortgagebacked securities. Managers may also invest in out-of-benchmark securities, but generally investments are riskcontrolled Corporate Bond Debt instrument issued by a private corporation, as distinct from one issued by a government agency or municipality, usually with a term in excess of five years. Correlation A statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in 43

47 lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. Cost The purchase price of a security, including fees, commissions, etc. Coupon Annual yield, generally paid semi-annually, and stated as a percentage of par. Credit Risk The risk that an issuer may default on its securities. Relative degrees of credit risk are delineated by the rating agencies. Credit Rating A measure of credit quality. Bond- rating agencies such as Moody s Investors Service, Standard & Poor s and Fitch Ratings publish issuer ratings that, in their view, reflect the likelihood that the issuer will default on interest or principal payments. Rating systems vary from agency to agency. Generally, bonds rated triple A (AAA or Aaa) are of the highest quality, while those rated below triple B (BBB or Baa) are of the lowest quality and are considered speculative or non-investment grade. Currency Risk Fluctuations in exchange rates can add to, or detract from, investment returns. Custodial Bank Trustees or "caretakers" for all securities in an account. Executes all trades as directed by the investment manager and warehouses all securities. Cyclical Something that happens periodically, i.e. on a regular basis. Cyclical Stock Stock that tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Examples are housing, automobiles, and paper. Debt General name for bonds, notes, mortgages, and other forms of paper evidencing amounts owed and payable on specified dates or on demand. Dedicated Bond Portfolio A portfolio of debt-oriented securities that is structured to meet a specific liability such as the payment of benefits to a group of retirees for the remainder of their lives. The portfolio is dedicated to the objective of meeting the identified liability. Defensive Stocks Stocks, such as electric utilities, foods, tobaccos and drugs, that are relatively immune to business cycles and thus tend to resist general market declines. Derivative A financial instrument whose value depends upon the value of another instrument or asset (typically an index, bond, equity, currency, or commodity). Examples are futures, forwards, and options. Distressed Debt (Restructured Debt) A strategy where an investor takes a significant, or controlling, interest in companies with poorly organized capital structures or failing operations. Diversification Reducing risk by investing in more than one type of security, such as stocks, bonds, and money market instruments. Dividend A cash or other distribution to preferred or common stockholders. Dividend Yield Annual percentage of return earned by an investor on a common or preferred stock. The yield is determined by dividing the amount of the annual dividends by the current market price. Donor Advised Fund A fund held by a community foundation where the donor, or a committee appointed by the donor, may recommend eligible charitable recipients for grants from the fund. The community foundation s governing body must be free to accept or reject the recommendations. Duration A measure of average maturity that incorporates a bond's yield, coupon, final maturity and call features into one measure. Duration measures the sensitivity of a bond or portfolio's price to changes in interest rates. 44

48 EAFE The Europe, Australia, and Far East Index from Morgan Stanley Capital International. An unmanaged, market-value weighted index designed to measure the overall condition of overseas markets. Economic Sector A group of companies with similar products, services, or markets (e.g., technology, utilities, financials, etc.). Efficient Market A securities market in which prices accurately reflect all available knowledge and adjust immediately to any new information. Academicians who subscribe to the efficient market hypothesis maintain that a professional money manager can only achieve consistently superior investment results by taking greater than market risk. Emerging Growth Stock The stock of a relatively small company that is growing very rapidly, but is not large enough or has not been in business long enough to be of investment quality. Endowment The principal amount of gifts and bequests that are accepted subject to a requirement that the principal be maintained intact and invested to create a source of income for a foundation. Energy Investing Investments include exploration & production, generation, storage, transmission, distribution, renewable energy sources, clean technologies, energy technologies and other like-kind investments. Enhanced indexing Also called indexing plus, a strategy whose objective is to exceed or replicate the total return performance of a stated index. Unlike a traditional index strategy, an enhanced index strategy may overweight or underweight securities within the stated index being tracked. Enhanced index strategies may also use derivatives to replicate the stated index. Equity, Equities (Stock) 1) The total ownership interest in a company of all common and preferred stockholders. 2) Ownership interest in companies, often producing current income paid in the form of quarterly dividends, which can be traded in public equity markets. Emerging Market A financial market of a developing country, usually a small market with a short operating history. In investment management, Emerging Markets commonly refers to the countries of Brazil, Russia, India, and China. ERISA The Employee Retirement Income Security Act of 1974 (ERISA) protects the retirement assets of Americans, by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets. Event Driven Strategy Seeks to take advantage of anticipated corporate events and to capture price movement generated by these events. Two of the better known event driven strategies are merger arbitrage and distressed debt. Excess Return Returns in excess of the risk-free rate or in excess of a market measure (such as market index). A positive excess return indicates that the manager outperformed the benchmark for the period. Execution Costs Total execution costs (the cost of buying and selling stocks) have three components: (1) the actual dollars paid to the broker in commissions, (2) the market impact (i.e., the impact that a manager s trade has on the market price for the stock, this varies with the size of the trade and the skill of the trader), and (3) the opportunity cost (positive or negative) that is the result of not executing the trade instantaneously. Face value See Par value. Fiduciary A person, committee, or institution that holds assets in trust for another. The property may be used or invested for the benefit of the owner, depending on the agreement. Fiduciary Risk The potential exposure of fiduciaries to legal and regulatory actions precipitated by a breakdown in controls, or the failure to execute due diligence on behalf of the beneficiaries. Fire Sale Price An undervalued asset price due to distress in the security and/or the market. 45

49 Fixed Income Securities/investments in which the income during ownership is fixed or constant. Generally refers to any type of bond investment. Fixed Income Arbitrage A strategy to capture the disparities of pricing across the global fixed income markets and related derivatives. Some of the more common fixed income arbitrage strategies find opportunity in yield curve anomalies, volatility differences, and bond futures versus the underlying bonds. Leverage is often used to enhance returns. Foundation An entity which exists to support a charitable institution and which is funded by an endowment or donations. Fully Invested - A portfolio with minimal cash reserves. Fund of Funds An approach to investing in which a manager invests in various funds formed by other investment managers. The benefits of this approach include diversification, the expertise of the fund-of-funds manager, access to hedge fund managers who may be otherwise unavailable, and a less intense commitment of staff resources by the investor. Futures Contracts to buy or sell anything (a stock, a basket of stocks, commodities such as grain, gold, etc.) on a specified day in the future for a preset price. These contracts are traded on exchanges. General Partner A partner in a business who has unlimited liability. Often a general partner is also the managing partner, which means this person is active in the day-to-day operations of the partnership. Global Asset Allocation Global asset allocation (GAA) is a method of obtaining broadly diversified asset class exposure within one portfolio. A GAA manager is free to allocate among and within a variety of asset classes such as stocks, bonds, currencies, real assets and commodities depending on where they are finding the best values in the global markets. Global Balanced Allocation A strategy in which the investment manager manages to a specified balanced benchmark; typically a 60/40 or 65/35 equity/fixed income mix. Global Macro A global, top-down approach to investing in which managers will take long or short positions in fixed income, equity, currency, and commodity markets. Government A security issued by the U.S federal government and its agencies (all are U.S. treasury obligations). Government Agencies Obligations of the federal government other than direct obligations such as Treasury Notes, Bonds, or Bills. Examples of these are GNMAs, FHLMCs, etc. Government Bond A security issued by a federal, state, or city government to evidence borrowing, with a term usually in excess of 10 years. Growth Equity Provides expansion capital for small, growing businesses that are generating cash flow and profits. Generally, these types of investments have minimal exposure to technology risk. Growth Investing To seek investments whose future potential for growth is above the expectation for stocks in general. Companies with new technologies, well positioned in rapidly growing industries or with a proprietary product or service that will provide above-average earnings growth are the types of holdings found in a growth portfolio. Growth Stock Stock of a corporation that has exhibited faster than average gains in earnings over the last few years and is expected to show high levels of profit growth. Hedge Funds An investment vehicle accessed by accredited investors, which is allowed to use a range of strategies in its pursuit of returns that are unavailable to most long only funds; including shorting stocks, bonds and indices, 46

50 engaging in the use of derivatives and applying financial leverage to its portfolio. It is not required to be fully invested at all times. Hedging A technique to reduce risk; e.g., taking two positions that should offset each other if prices change. High Yield Bond Debt issued by a company that is experiencing financial difficulty and may not be able to meet payments on its obligations. These securities carry a higher interest rate than other corporate bonds due to their higher risk. Immunization A process for designing fixed income portfolios to obtain a target rate of return over a specified time period, within a narrow range, despite market conditions. Income Money earned on a security from interest or dividends. Index A statistical yardstick composed of a basket of securities with a set of characteristics. An example of this would include the "S&P 500, which is an index of 500 stocks. Index Fund A portfolio of stocks structured to replicate the performance of a commonly used index, such as the S&P 500. Inflation A general rise in prices, usually measured by changes in prices of major indices, such as the Consumer Price Index. Information Ratio The Information Ratio to a manager series vs. a benchmark series is the quotient of the annualized excess return and the annualized standard deviation of excess return. This is one estimate of how much value is being added through active management decisions. Interest An amount charged to a borrower by a lender for the use of money, expressed in terms of an annual percentage rate upon the principal amount. Interest Rates The percentage paid as a fee for the use of money, expressed as an annual percentage of the principal amount. The rate is influenced by a variety of factors including economic growth, inflation, supply/demand and international factors. Interest-Rate Risk When interest rates rise, the market value of fixed-income securities (such as bonds) declines. Similarly, when interest rates decline, the market value of fixed-income securities increases. Intermediate A bond with a maturity of intermediate length. Depending on the particular market, the range for this length may vary. In the corporate bond market, an intermediate security would have a maturity between 1 and 12 years. Investment The utilization of money in the expectation of future returns in the form of income or capital gain. Investment Grade Bonds rated in the top four rating categories (AAA, AA, A, BBB) are commonly known as investment grade securities. Investment Return The total amount that an investor or an investment fund earns from its investments, including both realized and unrealized capital gains (appreciation) and income (dividends and interest). Junk Bond A bond with a rating of BB or less. Also know as non-investment grade. Large-Cap Fund A fund that invests in stocks with larger market capitalizations, generally $5 billion or more. Laddering A fixed income portfolio strategy in which assets are distributed evenly over a range of maturities. 47

51 Leverage Means of enhancing return or value without contributing additional funds. Buying securities with borrowed money (on margin) is an example of leverage. Leveraged Buyout The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Liquidity The ability to convert an investment into cash promptly with a minimum risk of principal. Limited Partner Unlike a general partner, a limited partner does not play an active role in the business and has limited liability for losses from the partnership. Limited partners also enjoy rights to the partnership's cash flow. Lock-up Period Time during which investors must keep their money in the fund to avoid liquidity problems. Long Signifies an ownership position of a security. Opposite is "short". Long/Short Equity Long/short equity funds take long and short positions in listed equities generally with a net long position Managers seek to find (buy) stocks which are undervalued by the market and short stocks whose prices are overvalued by the market. Macro Macro managers use long and short strategies based on their view of the overall market direction as influenced by major global economic trends and events. Investments can include stocks, bonds, currencies, and commodities in the form of cash or derivative instruments of both developed and emerging economies. Macro strategies often use moderate amounts of leverage. Management Buyout When the managers and/or executives of a company purchase controlling interest in a company from existing shareholders. Market 1) The prices at which a security can actually be bought and/or sold. 2) A locale where a security is known to be traded. Market Price The most current price of a security as indicated by the latest trade recorded. Market Risk The possibility of loss due to large movements in market prices (e.g., due to changes in interest rates, foreign exchange rates, volatility, correlation between markets, capital flows). Maturity The date on which a loan, bond, mortgage or other debt security becomes due and is to be paid off. Merger Arbitrage Long and short positions are held in both companies that are involved in a merger or acquisition. Merger arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquirer. The principal risk of this strategy is deal risk. Mid-Cap Fund A fund that specializes in stocks with market capitalizations generally in the range of $2 billion to $10 billion. Mezzanine Financing A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. Modern Portfolio Theory The theoretical framework for designing investment portfolios based upon the risk and reward characteristics of the entire portfolio, which is held not to be equivalent to the aggregation of the individual securities of the portfolio. The major tenet of the theory holds that reward is directly related to risk, which can be divided into two basic parts: 1) systematic risk (portfolios' behavior as a function of the market's behavior), and 2) unsystematic risk (portfolios' behavior attributable to selection of individual securities). Because un-systematic risk can be largely eliminated through diversification, the portfolio will be subject principally to systematic risk. 48

52 Money Market Fund A fund managed by an investment banking firm, or insurance company in which short-term funds of individuals, institutions, and corporations may be invested. These funds are invested in money market instruments. Money Market Instruments A short-term debt security, including Treasury bills, bank CDs, commercial paper, Eurodollar CDs, and Yankee CDs, among others. Money market instruments have maturities of a year or less. Mortgage An interest in real property given as security for the payment of a debt. Mortgage Bond A bond backed by a claim against real property. Mortgage-Backed Securities Bonds which are a general obligation of the issuing institution, but are secured by a pool of mortgages. Multi-Strategy Fund A fund providing exposure, in a single investment, to several investment styles and strategies in addition to a disciplined asset-allocation process and ongoing rebalancing. A multi-strategy fund seeks to add alpha over a full market cycle, while providing significant risk reduction through diversification of manager and investment styles. Mutual Fund An investment company that pools money of individuals and invests it into stocks, bonds and other securities under the guidance of a professional manager. Market Capitalization Also referred to as market cap, it reflects the total equity of a company. A company s market capitalization is determined by multiplying the number of shares outstanding by the current stock price. Stock markets are frequently subdivided in terms of capitalization. Non- Core Bonds Non-core bond managers will use core bonds as an anchor to their portfolios; however, they have the ability to invest significant portions of the portfolio in below investment grade securities, emerging markets debt, global bonds, or other fixed income sectors based on their relative value views in the marketplace. Non- Cyclical Stock Stocks that are not directly affected by economic changes. Examples include foods, insurance, and drugs. Options A contract conveying the right to buy or sell a security, commodity or property interest for an agreed-upon sum during a stipulated period. If it is not exercised during that time, the option expires and becomes worthless. Paper Loss A loss, which has occurred but has not yet been realized through a transaction, such as a stock which has fallen in value but is still being held. Also called unrealized loss. Paper Profit Profit which has been made but not yet realized through a transaction, such as a stock which has risen in value but is still being held. Also called unrealized gain or unrealized profit or paper gain or book profit. Par Value For a bond, principal value at maturity. Also known as face value. Passive Management Buying and holding all (or most) of the stocks in an index (such as S&P 500 Index). There is no research done to select individual securities. Political Risk Pertaining to non-u.s. markets, changing government régimes can possibly add risk to that country s financial market. Portfolio The various investments owned by an individual or mutual fund, such as stocks, bonds, and money market accounts. Price/Book Ratio The ratio of a stock s price to its book value per share. This number is used by securities analysts and money managers to judge whether a stock is undervalued or overvalued. A stock selling at a high price/book ratio, such as 3 or higher, may represent a popular growth stock with minimal book value. A stock selling below its book 49

53 value may attract value-oriented investors who think that the company s management may undertake steps, such as selling assets or restructuring the company, to unlock the hidden value on the company s balance sheet. Price/Earnings Ratio The ratio of a company s stock price to its earnings per share. Price/Earnings ratio is a common measure of the relative valuation of a stock. Principal The amount of money originally invested. Private Equity Equity capital invested in a private company. Private Placement A way to raise capital by offering direct private securities to a limited number of investors. Put option The right to sell an asset at a specified exercise price on or before a specified expiration date. Quality Rating see Bond Rating. Rate of Return The yield obtainable on a security based on its purchase price or its current market price. This may be amortized yield to maturity on a bond or the current income return. Real Assets Assets that directly or indirectly hedge inflation risk and are sometimes referred to as hard assets or inflation hedges. They include investments such as energy, timber, commodities, and infrastructure. Treasury Inflation Protected Securities, or TIPS, are also a widely-used inflation hedge, although they are financial assets rather than real assets. The most common examples of liquid strategies include TIPS, publicly-traded stocks in the energy, gold, infrastructure, or timber sectors, and commodity indices. Common examples of illiquid strategies include real estate, energy, timber and infrastructure. Real Rate of Return A return adjusted for inflation. For example, an investor earning 8% on a certificate of deposit during a period of 5% inflation is receiving a real rate of 3%. Realize To make something real from a transaction, such as to recognize the profit from an investment that has appreciated by selling it. REIT Real Estate Investment Trust. Return The amount of money received annually from an investment, usually expressed as a percentage. Risk Uncertainty as to whether or not an investment choice will perform as expected, particularly due to factors beyond one s control (in other words, the odds an investment will make or lose money). Riskless Without credit risk. Treasury issues and government-guaranteed issues are regarded as the only riskless issues. Risk/Reward The trade-off between preserving your investment and maximizing your profit. In general, the higher the return, the more likely you are to lose your initial investment. Lower risk usually results in less profit. Rule 144a Securities A Securities and Exchange Commission (SEC) rule that allows companies to issue debt without registering the debt with the SEC. Purchase of 144a securities is limited to institutional investors with assets greater than $100 million. Russell 2000 An index of 2,000 small to medium capitalization stocks. It represents the lower two-thirds of the 3,000 largest publicly traded companies. Secondaries A private equity investment where the interest is generally purchased at a discount from motivated owners of private equity interests. Securities The generic term for stocks, bonds, and money market investments. 50

54 S&P Standard and Poor's Corporation. S&P 500 An index of 500 of the largest stocks (by capitalization) in the United States. The S&P 500 is a common proxy for the performance of the broad stock market. Sector A group of securities with similarities (for example, industry type, coupon rate, maturity date and/or rating). Secular Trend A long-term (5 years or more) movement in the price of a security or of interest rates, either upward or downward, which is not related to seasonal or technical factors. Sharpe Ratio A ratio developed to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. Short To have sold without ownership in anticipation of subsequently purchasing at a lower price. Short Position Situation that arises when securities that are not owned are sold. Short-Term A type of obligation with a maturity of less than one year. Small-Cap Fund A fund that specializes in stocks with lower market capitalizations; small cap stocks are usually $2 billion or less in market capitalization. Socially Responsible Investing A practice wherein investors screen or restrict certain investments based on social, environmental, or political criteria. Restrictions can vary broadly based on the investor s philosophy and may include restrictions based on issues of human rights, environmental impact, gambling, firearms, tobacco, etc. Sovereign Debt Treasury bond issues of non-us countries. Special Situations A private equity investing strategy whereby the investor trading to profit on a unique event; for example, buying a company s shares prior to an anticipated spin-off, rather than due to company fundamentals. Spending Rate The amount of spending specified by the board from the endowment, usually expressed as a percentage of the beginning or average market value of the fund. Spread The yield or price differential between two different securities. Standard Deviation A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Stock A certificate of ownership. A contract between the issuing corporation and the owner which gives the latter an interest in the management of the corporation the right to participate in its profits. T-Statistic Information ratio multiplied by the square root of the number of observations. A T-statistic of greater than 2 generally signifies that the variable being measured is statistically significant. If two funds have identical information ratios but these information ratios were measured using track records of differing length, then the T-statistics will be different. The fund that has the longer track record will have the higher T-statistic because there is more confidence in this alpha figure (of the fund with the longer track record) as it has been exhibited over a longer time period. Thin As applied to a market, means that bids and offerings are scarce and the market is subject to wide fluctuations and small-sized executions. 51

55 Tight Highly competitive. A tight market is characterized by a small spread between the bid and offer levels for a given security. TIPS Treasury Inflation Protected Securities, which are inflation-indexed bonds issued by the U.S. Government. The principal value of these securities is adjusted periodically according to the rate of inflation. Top-Down Managers Top-down managers look at trends and forecasts of the economy. They select industries and companies that should benefit from those trends. For example, if such managers believe inflation rates are going down, they may conclude that the retail industry group will do well because consumers will have more to spend. The next step is to identify companies that will do well within the retail group. Total Return The aggregate increase or decrease in the value of the portfolio resulting from the net appreciation or depreciation of the principal of the fund, plus or minus the net income or loss experienced by the fund during the period. Tracking Error A divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. Tracking errors are reported as a "standard deviation percentage" difference. This measure reports the difference between the return you received and that of the benchmark you were trying to imitate. Transaction Costs Another term for execution costs. (See Execution Costs for definition) Treasuries Negotiable debt obligations of the U.S. government secured by its full faith and credit and issued at various schedules and maturities. Treasury Bills Short-term debt instruments of the U.S. government with maturities of one year or less. Bills are sold on a discount basis so that the income is the difference between the purchase price and the face value. Treasury Bonds Long-term debt instruments of the U.S. government with maturities of ten years or longer. Treasury Notes Intermediate securities of the U.S. government with maturities of one to ten years. Trustee A bank designated as the custodian of funds and official representative of bondholders to enforce their contract with the issuer. Turnover The rate at which securities within a portfolio are bought and sold. Unrealized Having occurred but not yet reflected through a transaction. For example, if a security increases in price and is not sold, there would be an unrealized gain on the security. Underwater Funds An individual true or restricted fund that has a market value that has decreased below its historic dollar value as defined by the Uniform Management of Institutional Funds Act (UMIFA). Historic dollar value is the aggregate fair value in dollars of (i) an endowment fund at the time established, (ii) subsequent contributions to the fund, and (iii) other additions to the fund required by the donor or law. UPMIFA (Uniform Prudent Management of Institutional Funds Act) This new uniform law, which was approved by the National Conference of Commissioners on Uniform State Laws in 2006 and has now been enacted in virtually all of the states, clarifies previously existing standards for the investment and expenditure of all types of charitable endowment funds. Valuation Placing a value or worth on an asset. Stock analysts determine the value of a company s stock based on the outlook for earnings and the market value of assets on the balance sheet. Stock valuation is normally expressed in terms of price/earnings (P/E) ratios. A company with a high P/E is said to have a high valuation. Value Investing A philosophy of investing that emphasizes the purchase of stocks below their intrinsic value in the belief that patient investors will be rewarded. 52

56 Value Added Real Estate Investment strategy which focuses on improving the quantity and quality of cash flow from a property by curing physical, management and marketing deficiencies. Value Stock A stock that is considered to be a good stock at a great price, based on its fundamentals, as opposed to a great stock at a good price. Generally, these stocks are contrasted with growth stocks that trade at high multiples to earnings and cash. Venture Capital Investments in early stage companies that have an innovative or disruptive business idea for a proprietary product or service. Investments are made in the early life of the company, seed stage, early stage and prerevenue. Volatility The extent to which market values and investment return are uncertain or fluctuate. Another word for risk, volatility is measured through beta, mean absolute deviation, and standard deviation. Weighting A measure of the contribution made to total return in a portfolio by overweighting or underweighting a position, an industry group, or a sector relative to the comparable weight in the S&P 500 or other benchmark. Yield The rate of annual income return on an investment expressed as a percentage. Income yield is obtained by dividing the current dollar income by the current market price of the security. Yield Curve A graphic depiction of interest rates across all maturities, 0-30 years. The shape of the curve is largely influenced by the Federal Reserve Policy as well as factors listed under "Interest Rates" above. Yield Curve Risk Price exposure that a security or portfolio has in the event of nonparallel shifts in the yield curve. Yield To Maturity Implicit rate of return assuming no change in market interest rates. 53