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HSU Policies

HSUAF 12-03 HSU Advancement Foundation Investment Policy for the Non-Endowed Assets

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Month/Year Posted: 
07-2012
Policy Number: 
HSUAF 12-03

HSU Advancement Foundation

Investment Policy for the Non-Endowed Assets

Approved at March 9, 2012 Board Meeting

(Replaces and Supersedes Policy Approved March 18, 2011)
 
I. POLICY STATEMENT
 
This Investment Policy is intended to provide guidelines for the prudent investment of the non-endowed asset portfolios (“Non-Endowed Assets”) within the Humboldt State University Advancement Foundation (the “Foundation”).

II. INVESTMENT OBJECTIVE

The purpose of this policy is to establish a framework for the investment of the Non-Endowed Assets. This policy will establish appropriate risk and return objectives in light of the risk tolerance and investment time horizon for the Non-Endowed Assets. Asset allocation guidelines and suitable investments shall be established for the Non-Endowed Assets consistent with the policy.

 
Each portfolio’s total return target should be equal to a weighted strategic benchmark created by weighting appropriate indexes (i.e.: 90 day Treasury, Merrill Lynch 1-3 Year Treasury, Barclays Aggregate, S&P 500, etc.) according to the portfolio’s actual asset class weighting at the beginning of each month.
 
The general policy shall be to diversify investments among both equity and fixed income securities so as to provide a balance that will enhance total return while avoiding undue risk concentration in any single asset class or investment category. Target asset allocations and spending policies for the Non-Endowed Assets are detailed in Schedule I.
 
III. RESPONSIBILITIES
 
The following parties associated with the Foundation shall discharge their respective responsibilities in accordance with all applicable fiduciary standards as follows: (1) in the sole interest of the Foundation’s contributions and beneficiaries; (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and of like aims; and (3) by diversifying the investments so as to minimize the risk of large losses.
 
A.                Board of Directors: The members of the Board of Directors are the fiduciaries of the Foundation and are ultimately responsible for the investments of the Foundation.
 
B.                 Finance Committee: The members of the Finance Committee have been delegated authority by the Board of Directors to provide oversight to management of the day-to-day administrative issues associated with the Foundation’s assets. They have recommendatory authority to the Board of Directors with respect to the implementation of this Investment Policy and shall make detailed reports to the Board of Directors regarding the status of the Foundation’s investments.
 
                        Specific responsibilities include the following:
 
1.      Recommend investment goals and objectives for approval by the Board of Directors.
2.      Establish and, when deemed necessary, recommend modifications to the Investment Policy.
3.      Select and terminate professional investment managers as appropriate.
4.      Negotiate and/or monitoring Foundation investment expenses.
5.      Monitor and evaluate investment performance on a quarterly and ongoing basis.
6.      Assure proper custody of the investments.
7.      Report to the Board of Directors, at least annually, regarding the Foundation’s investment results, its composition and other information the Board of Directors may request.
8.      To assist in this process, the Finance Committee may retain an investment consultant.
 
C.                 Investment Consultant: When appropriate, an investment consultant will be charged with the responsibility of advising the Finance Committee on investment policy, spending policy, asset allocation, manager structure, investment manager selection, performance analysis and monitoring and education.
 
D.                Investment Manager(s): When appropriate, investment manager(s) is (are) delegated the responsibility of investing and managing the Foundation’s assets in accordance with this Investment Policy and all applicable law. Each investment manager must either be (1) registered under the Investment Company Act of 1940, (2) registered under the Investment Advisors Act of 1940, (3) a bank, as defined in that Act, (4) an insurance company qualified under the laws of more than one state to perform the services of managing, acquiring or disposing of the Foundation’s assets, or, (5) such other person or organization authorized by applicable law or regulation to function as an investment manager.
 
IV. PRUDENCE, ETHICS AND CONFLICT OF INTEREST
 
All participants in the investment process shall act responsibly. The standard of prudence to be applied by the Finance Committee, staff, and external service providers shall be the “prudent investor” rule, which in part, states: “A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”
 
All investment personnel shall refrain from personal business activity which could create a conflict with proper execution of the investment program, or which could impair the ability to execute impartial investment decisions. All investment personnel shall disclose to the Executive Director(hereafter referred to as ED) any material financial interests in financial institutions which conduct business within the jurisdiction and shall disclose any material financial investment positions which could be related in a conflicting manner to the performance of the Foundation’s investment portfolio. The ED shall report in writing to the Chairperson of the Board any issues, which could reflect any conflict in the performance of the Foundation’s investments.
 
V. INVESTMENT MANAGEMENT - ASSET CLASS GUIDELINES
 
The Non-Endowed Assets may be invested in mutual funds. In such cases, the manager(s) of these funds will have full discretion over the portfolio management decisions with the following guidelines and those established by respective prospectuses.
 
                                A. Equity Investments:
 
The equity portion of the Non-Endowed Assets shall be invested under the following guidelines:
 
1.      Allowed investments include publicly traded common stocks, preferred stocks, stock warrants and rights, convertible bonds, securities issued by non-U. S. companies traded on U. S. exchanges, as well as REITs (real estate investment trusts) and any other investments as allowed by respective prospectuses.
 
2.      Equity securities shall be diversified in number so that no one commitment to any company shall exceed 5% of the value of the Foundation’s equity portfolio based on cost at the time of acquisition or 7% at market value of the equity portfolio.
 
3.      The Foundation shall not hold more than 5% of the equity securities, or those securities convertible into equity securities, of a single issuer.
 
B. Fixed Income Investments:
 
The fixed income portion of the Non-Endowed Assets shall be invested under the following guidelines:
 
1.      Allowed investments include corporate and government bonds, asset-backed securities and any other fixed income investments as allowed by respective prospectuses.
 
2.      Average credit quality shall be A or better.
 
3.      With the exception of U. S. Government and Agency issues, no more than 10% of the bond portfolio at market will be invested in the securities of a single issuer or 5% of the individual issue.
 
4.      There shall be a maximum limitation on below-investment-grade bonds of 10% of the bond portfolio.
 
5.      There shall be a maximum limitation on non-U. S. bonds of 30% of the bond portfolio.
 
C. Short Term Investments
 
Cash shall be continuously invested until needed in the following: U.S. Treasury Bills, quality (A1/P1 or equivalent at the time of purchase) commercial paper, savings accounts, and other money market investments as approved by the Finance Committee.
 
                                D. Alternative Investments:
 
Alternative investments are non-traditional investments that have low correlation with most traditional asset classes. Only alternative investments available via a mutual fund will be considered for the Non-Endowed Assets. Definitions, as well as manager performance objectives, for alternative investments can be found in Exhibit A of this Policy.
 
The investment criteria and guidelines for alternative asset class investment managers and all other investment managers utilizing a mutual fund will be subject to the prospectus, offering circular, or other offering documents prepared by the investment manager. It is the policy of the Foundation, where possible, to seek investment vehicles which do not generate Unrelated Business Taxable Income (UBTI).
 
If the Foundation receives property, which is not a qualified investment under these guidelines, the Finance Committee is directed to dispose of the property and reinvest the proceeds in qualified investment within a reasonable period. Exceptions require the approval of the Executive Committee.
 
 
VI.             INVESTMENT MANAGEMENT – GENERAL GUIDELINES
 
A.                Proxy Voting: The investment manager(s) shall have the sole and exclusive right to vote any and all proxies solicited in connection with the securities held by the Foundation. The investment manager(s) shall furnish the Finance Committee with a written proxy voting policy statement, and shall keep records with respect to its voting decisions and submit a report annually to the Finance Committee summarizing votes cast.
 
B.                 Trading and Execution: The investment manager(s) shall use their best efforts to obtain execution of orders through responsible brokerage firms at the most favorable prices and competitive commission rates.
 

C.                 Investment Performance Review and Evaluation:
 
1.      The Finance Committee will review the investment results of the investment manager(s) at least quarterly. Performance comparisons will be made against a representative performance universe and the performance objectives set forth in this policy statement. A comprehensive annual report from the Finance Committee will be presented to the full Board of Directors.
 
2.      The Finance Committee, with the assistance of the investment consultant, shall periodically review the qualitative developments of each investment manager. This evaluation should include: changes in ownership, personnel turnover, adherence to investment style and philosophy, and any other qualities that the Finance Committee deems appropriate. This review should also include an assessment as to whether each investment manager has operated within the scope of this Investment Policy.
 
3.      The investment manager(s) must disclose all major changes in organization or investment philosophy to the Finance Committee members within 30 days. Further, all registered investment advisors must present updated ADV-2 forms on an annual basis to the Finance Committee.
 
4.      It is expected that professional management responsible for these funds shall report not less than quarterly on the performance of the portfolio, including comparative gross returns for the funds and their respective benchmarks, as well as a complete accounting of all transactions involving the Foundation’s investments during the quarter, together with a statement of beginning balance, fees, capital appreciation, income and ending balance for each account.
 
Professional investment management is encouraged to report routinely to the ED and the Finance Committee. Additional meetings with the Finance Committee or the Board may be requested.
 
D.                Corrective Action:
 
Corrective action should be taken naturally as a result of the ongoing review process of investment managers. While there may be unusual occurrences at any time, the following are instances where corrective action may be in order:
 
1.      Any organizational change that may materially affect the management process will be noted by the investment management and discussed with the Finance Committee. If the Finance Committee deems appropriate, the investment manager may be called upon to discuss changes.
 
2.      Violation of terms of contract without prior approval for the Finance Committee constitutes grounds for termination.
 
3.      As part of its overall asset allocation strategy, the Finance Committee will select managers with certain styles and approaches to portfolio diversification. Therefore, it is critical that managers adhere to the original intent of the Finance Committee. Should either the consultant or staff ascertain that significant changes in investment style have occurred, this may be grounds for termination.
 
4.      Managers may be replaced at any time as part of an overall restructuring.
 
E.                 Policy Changes:
 
The investment consultant shall advise the ED and/or the Finance Committee of any restrictions within this Investment Policy that may prevent the investment manager(s) from obtaining the objectives and goals set forth herein. Any violation of the investment guidelines or other sections of the Investment Policy discovered by the investment consultant in the preparation of its regular performance review shall be reported immediately to the Finance Committee and discussed at their next regularly scheduled meeting.
 
F.                  Investment Policy Review and Revisions:
 
The Board of Directors reserves the right to amend the Investment Policy at any time they deem such amendment to be necessary, or to comply with changes in federal law as these changes affect the investment of the Foundation’s assets.
 
The Investment Policy shall also be reviewed annually to ensure compliance and relevance to the current law, financial and economic trends, and to meet the cash flow requirements of the Foundation.
 
 VII. SOCIALLY RESPONSIBLE INVESTING
 
The Board of Trustees of the California State University adopted a resolution urging auxiliary boards, which make corporate investments to issue statements of social responsibility and to follow those precepts in examining past and considering future investment policies. The Foundation Board of Directors recognizes and accepts its social responsibility with respect to the investment of funds.



SCHEDULE I
 
Allocation of Assets and Spending Policy
 
The target asset allocations for the Non-Endowed Assets are determined by the Finance Committee to facilitate the achievement of each portfolio’s investment objectives within the established risk parameters. The Non-Endowed Assets shall have the following target allocations and spending policies:
 
Hydrogen Demonstration Non-Endowed Assets
 
Asset Class
Minimum Percent
Target
 Percent
Maximum Percent
Large Cap U.S. Equities
15%
25%
35%
Small Cap U.S. Equities
5%
11%
20%
Non-US Equities
10%
19%
25%
Fixed Income
15%
25%
40%
Cash & Equivalents
0%
0%
3%
REITs
0%
10%
15%
All Asset Strategies
0%
10%
15%
 
 
The amount withdrawn in each fiscal year will be targeted at 4.5 percent or less of the Hydrogen Non-Endowed Assets’ average total market value during the 12 quarters ending with the last quarter of the previous calendar year. Under circumstances deemed appropriate by the Finance Committee, the amount withdrawn may exceed the 4.5 percent target described in this paragraph.
 
5 Year Portfolio
 
Asset Class
Minimum Percent
Target
 Percent
Maximum Percent
Large Cap U.S. Equities
10%
15%
25%
Small Cap U.S. Equities
0%
5%
10%
Non-US Equities
5%
14%
20%
Low Duration Fixed Income
5%
10%
20%
Int. Duration Fixed Income
25%
38%
50%
Cash & Equivalents
0%
0%
5%
REITs
0%
6%
10%
All Asset Strategies
0%
12%
20%
 
Individual programs will have discretion regarding the amount withdrawn in each fiscal year. However, there is no guarantee that losses will not be incurred in the portfolios. The Finance Committee’s objective is to create a diversified portfolio that can generate a competitive total return with a low probability of losses in any 5-year period.
 
Liquidity:
 
The Finance Committee will monitor cash flow on a regular basis, and sufficient liquidity shall be maintained to fulfill the Non-Endowed Assets’ spending objectives and operational costs. When withdrawals become necessary, the Finance Committee will notify the investment manager(s) as far in advance as possible to allow them sufficient time to acquire the necessary liquid reserves.
 
Up to the total amount of the Non-Endowed Assets approved spending and fees for the next three years may be held in low duration fixed income investments to reduce the expected volatility of these assets prior to distribution. Any such low duration fixed income investments will be excluded from the target allocations described in the table above and will be subject to the same investment management guidelines detailed in this Investment Policy for fixed income investments.
 
Rebalancing
 
The Finance Committee, on an ongoing basis and in accordance with market fluctuations, will rebalance the investment portfolio so it remains within the range of targeted asset allocations, and the planned distribution among investment managers. 
 
A rebalancing procedure as deemed appropriate by the Finance Committee will be implemented, at least annually, or when significant cash flows occur to maintain the allocation of assets within the appropriate ranges.
 
Formal asset allocation studies may be conducted at least every two years, with annual evaluations of the validity of the adopted asset allocation.



EXHIBIT A
 
            Performance Monitoring Return Expectations
 
Performance measurement shall be based on total rate of return and shall be monitored over a sufficient time period to reflect the investment expertise of the investment manager(s) over one full market cycle, or five years, whichever is less.
 
            Total Portfolio
 
            The total account will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
 
1.         Exceed the return (net of fees) of a weighted benchmark created by weighting appropriate indexes (i.e.: 90 day Treasury, Merrill Lynch 1-3 Year Treasury, Lehman Bros. Aggregate, S&P 500, etc.) according to the portfolio’s actual asset class weighting at the beginning of each month.
 
The performance expectations for the individual asset classes set forth below apply only to actively managed portfolios. All indexed investments are expected to provide a return that is comparable to the tracked benchmark on a gross of fees basis.
 
            U.S. Equities - Large Capitalization
Large capitalization U.S. equity represents investments made in companies within the United States, with market capitalizations typically greater than $10 billion. The capitalization of a company is calculated by multiplying the number of shares outstanding by the price per share. Large capitalization U.S. equity accounts will be evaluated quarterly. Specific performance objectives for actively managed funds include, but may not be limited to, the following:
 
            1.   Exceed the return of the S&P 500 Index or Russell 1000 style benchmark net of fees over a market cycle, or five years, whichever is less.
 
2.     Rank above median in a nationally recognized universe of equity managers possessing a similar style.
 
            U.S. Equities – Small/Mid Capitalization
            Small/mid capitalization U.S. equity represents investments made in companies within the United States, with market capitalizations typically less than $10 billion. The capitalization of a company is calculated by multiplying the number of shares outstanding by the price per share. Small capitalization U.S. equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
 
            1.     Exceed the return of the appropriate Russell 2000, Russell 2500 or Russell Midcap style benchmark net of fees over a market cycle, or five years, whichever is less.
 
2.         Rank above median in a nationally recognized universe of equity managers possessing a similar style.
           
            Non-U.S. Equities
            Non-U.S. equity represents investments made in companies headquartered and traded on stock exchanges outside of the United States. Non-U.S. equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
 
            1.     Exceed the return of the appropriate MSCI All Country World exUS or MSCI EAFE style benchmark net of fees over a market cycle or five years, whichever is less.
           
            2.     Rank above median in a nationally recognized universe of international equity managers possessing a similar style.
 
            Fixed Income
            Fixed income represents investments in the bonds issued by corporations and government and related organizations, typically within the United States. Fixed income accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
 
1.   Exceed the return of the Barclays Aggregate Index net of fees over a market cycle, or five years, whichever is less.
 
2.   Rank above median in a nationally recognized universe of fixed income managers possessing a similar style.
 
            Real Estate Investment Trusts (REITs)
A REIT is a corporation or business trust that invests in real estate, mortgages or real estate-related securities. Exposure to REITs may be obtained through mutual funds. REIT managers will be evaluated quarterly. Specific performance objectives for active managers include, but may not be limited to, the following:
 
1.      Exceed the return on the MSCI US REIT or NAREIT Equity index net of fees over a market cycle, or five years, whichever is less;
 
2.      Rank above median in a nationally recognized universe of managers possessing a similar style.
 
 
All Asset Strategies (TAA)
All asset strategies, also called real return strategies, target a return that exceeds inflation by a premium (ex. CPI + 5%). All asset managers typically invest in a core of “real” return assets, such as TIPS, commodities, and real estate, as well as traditional asset classes such as equity and fixed income. Additionally, managers attempt to add value by tactically allocating to asset classes they perceive to be undervalued, thus contributing to the “real” return orientation. All asset strategy managers will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
 
1.   Exceed the increase in the consumer price index (CPI) by at least five percent (5%) annually net of fees over a market cycle, or five years, whichever is less.
2.   Exceed the return of a custom index comprised of the benchmarks of the underlying asset classes utilized by the fund annually net of fees over a market cycle, or five years, whichever is less
 

 

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