FINANCIAL MANAGEMENT ASSOCIATION Investment Committee Policy Statement The University of Hawaii Financial Management Association Prepared by FMA and Faculty Advisor 10/27/2008 Investment Committee portfolio s Policy statement Prepared for the University of Hawaii s Financial Management Association University of Hawaii at Manoa, 2404 Maile Way E-402, Honolulu HI, 96822 www.hawaii.edu/fma/
Introduction and Purpose The purpose of this Investment Policy Statement is to provide an appropriate set of objectives, goals, and procedures for the FMA Investment Committee, Portfolio Management Team and the Compliance Officer to adhere to when managing the Investment Portfolio. The Investment Portfolio is comprised of all the assets (stocks, bonds and cash) held in FMA Trust s Scottrade account. Investment Portfolio Goals and Objectives In 1978, the FMA received a generous gift of $1,000 from Mr. Henry Clark of Castle and Cook. This gift established the Investment Portfolio with the objective of providing FMA members an opportunity to actively manage a stock portfolio. Members learn about the duties and responsibilities of corporate ownership because all actions taken with respect to the voting of shares, attendance at annual meetings and dividend record keeping are done by FMA members. The Investment Committee s purpose is to actively research and analyze the economy, various industry sectors, and specific companies to come up with good stock investment recommendations. Using these recommendations, the Portfolio Management Team will work to optimize the Investment Portfolio with the following broad objectives: Moderate long-term growth Over the long-term, exceed the return on the S&P 500 (Note: the S&P 500 will be the Benchmark for which the Investment Portfolio s performance will be measured) Maximize returns within reasonable risk level Maintain a diversified portfolio Preserve principal
Investment Procedures Investments will be undertaken in a four-step process: Step 1: Determining stocks to buy and sell The Investment Committee s job is to decide what stocks the FMA Trust should buy and/or sell. In arriving at these decisions, the Investment Committee should follow the following procedures: The Investment Committee will hold a bi-monthly meeting to discuss and vote on specific stocks to place on the Investment Portfolio s Buy List and Sell List The CFO will run the bi-monthly meetings All Investment Committee recommendations must be based on a sound financial and market analysis including but not limited to: o Security valuation models (Dividend Growth, Discounted FCF, etc.) o Financial ratio analysis (D/E, FCF, P/E, P/B, ROE, etc.) o Financial Statements (B/S, I/S and CF) o Industry and company comparisons o Potential growth in sale and earnings o Competitive position and market share To build expertise and improve the quality of analysis, Investment Committee members will be divided up into Industry Specialist Teams. These teams will focus on and make investment recommendations in a specific industry. The industry Sectors covered should include: o Technology o Financials (Banks, REITs, securities brokerage, insurance) o Industrials o Services (Retail, Broadcasting, Hotels, Airlines) o Basic Materials (Oil, Gas, Steel, Aluminum and other commodities) o Consumer Goods o Healthcare o Utilities In order to recommend a stock for the Buy List or Sell List, an Industry Specialist Team must present the stock to the Investment Committee for review and complete a summary of the company s financial data on the Portfolio Management Team s Company Data Base. At least a 60% majority vote by the Investment Committee members at a meeting is required to make to place a stock on the Investment Portfolio s Buy List or Sell List. Voting should be anonymous. Step 2: Managing the portfolio
The Portfolio Management Team s job is to manage the overall diversity of the portfolio to maximize returns and minimize risk. To achieve this objective, the team should use portfolio optimization theory, technical analysis and other finance tools. Members will decide when and how much of the stocks included on the Investment Committee s Buy List will be purchased and Sell List will be sold. In addition, they will manage the Investment Portfolio s asset allocation; how much will be held in equities, bonds, cash and/or Short ETF positions. While the Portfolio Management Team has considerable flexibility in its decision making process, it must abide by the following Investment Procedures and Constraints: At the time of purchase, a stock s value must not exceed 8% of the total portfolio value. The Investment Portfolio must not have a value of more than 25% in one Sector. For diversification, Investment Grade bond mutual funds may be purchased; however, the amount cannot exceed 30% of the total Investment Portfolio Short selling of the markets will be allowed only under the following restrictions. o Only Exchange Traded Funds (ETF) that are negatively correlated to the market or sector indexes (e.g. Short S&P, Short Fnl) can be used for short selling. o No purchases of levered short ETFs (e.g. UltraShort) are permitted. o No more than 20% of the Investment Portfolio s value may consist of short ETF positions. o When purchasing a short ETF, a simultaneous stop loss must be executed to prevent excess losses. If the short ETF falls by more than 12% from its original purchase price, it must be sold. o Short ETF positions will only be considered as a strategic investment to hedge long positions in a bear market. No trading or buying on margin is permitted. Only liquid assets may be purchased. A purchased stock must have an average of at least 300,000 shares traded daily (Average Daily Volume) over the most recent 3 month period. A stock to be purchased must have at least a $4.00 bid price. Only stocks recommend by the Investment Committee (Buy List stocks) may be purchased. Stock can be sold under two scenarios: 1) stock is recommended for sale by the Investment Committee (Sell List stocks) or the Portfolio Management Team determines the stock is no longer appropriate for the Investment Portfolio. Stop Loss Provision on Individual Stocks: Prior to purchasing a stock, the Portfolio Management Team (in consultation with the Industry Specialist) must determine a Stop Loss Price for that stock position. The Stop Loss Price cannot be less than 75% of the stock s purchase price. Stop Loss Provision on Portfolio: If equity portion of the Investment Portfolio loses more than 25% from the beginning semester value, all equities must be liquidated and held in a cash position for the rest of the semester. At the beginning of the semester the Compliance Officer will provide the CFO and FMA Faculty Advisor with a beginning balance statement of the account as well as a 25% Stop Loss number.
The CFO will be responsible for monitoring Stop Loss Provisions and following through with execution, if and when necessary. Investment decisions made by the Investment Committee require a minimum of five members voting and will be determined by a simple majority. The CFO and Faculty Advisor must be present and vote on all decisions. Step 3: Executing trades Under instructions from the Portfolio Management Team, the Trustee(s) will sign and execute trades in the FMA Trust s Scottrade account. A written record (statements, receipts, etc.) of all trades must be immediately given to the Compliance Officer.
Step 4: Monitoring portfolio A) Reporting: The Compliance Officer is responsible for producing a Monthly Performance Statement made available on the FMA website for professionals and students to view. A printed version of this report will be promptly delivered to the each member of the Portfolio Management Team and the Faculty Advisor. This report should include: Details of all trades that have occurred during the month. Breakdown of the entire Investment Portfolio with a summary of all positions, Industry Sectors, asset allocations, etc. A list of each stock owned in the Investment Portfolio with the Investment Committee analyst that originally recommended the purchase and the current Industry Group Head responsible for monitoring the position. A list of each investment (stock or bond) with the purchase price and current market value. Summary of each stock s and the Investment Portfolio s monthly, year-to-date, semesterto-date and long-term performance. Comments from the Portfolio Management Team on risk management, performance, etc. The Compliance Officer is responsible for checking that all Investment Procedures and Constraints have been met on an ongoing basis. If any procedure or constraint has been violated, the Compliance Officer must notify the CFO and Faculty Advisor immediately. B) Market Monitoring: The CFO is responsible for monitoring the market, for example, movements in the S&P 500 index, interest rate volatility, and major news events. If market conditions warrant a special meeting of the Portfolio Management Team, the CFO is responsible for organizing a meeting as soon as possible. This meetings objective is to determine if immediate corrective action (buying or selling Investment Portfolio assets) is required. C) Stock Monitoring: After a stock has been purchased, the Investment Committee s Industry Group Head that recommend purchasing the stock is responsible for monitoring the position. If at some point, the Industry Group Head determines that the stock is no longer a good investment, then it is their responsibility to recommend the stock be placed on the Sell List at the next Investment Committee meeting.