Investment Policy for CSU Auxiliary Organizations
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Exemplar CSU Investment Policies

Investment policies of three CSU campuses have been selected to illustrate the six characteristics of a strong investment policy described by Mr. Yoder. These examples are helpful tools for developing successful policies; however, the substance of any element should be adapted to each organization's unique situation. The three CSU institutions are:
The investment policies for the three institutions are linked above. Excerpts from each of the policies, grouped according to the seven characteristics are linked below.
Return Objectives
  • CSU, Bakersfield Foundation
    The objective of these investment management guidelines is to prescribe a course of action for the endowment and building funds' managers. The objective is to promote growth in the investment funds sufficient to offset normal inflation plus reasonable spending, thereby preserving the constant-dollar value and purchasing power of the funds for future generations, and to preserve the principal of operating cash and reserves while producing market-level income. The minimum total-return objective for the full portfolio shall be inflation plus 5 percent. (p. 47)


  • Humboldt State University Advancement Foundation
    The purpose of acquiring charitable funds is to support the University and its mission over the long term. Accordingly, the purpose of this policy is to establish a framework for the investment of Foundation assets, and to ensure that future growth of these assets is sufficient to offset normal inflation plus reasonable spending, thereby preserving the constant dollar value and purchasing power of the assets for future generations. This policy will establish appropriate risk and return objectives in light of the fund's risk tolerance and investment time horizon. Asset allocation guidelines and suitable investments shall be established by the Foundation consistent with the policy.

    The objectives of the Investment Policy shall be defined as follows: Absolute - which shall be measured in real (i.e. net of inflation) rate-of-return terms and shall have the longest time horizon for measurement; Relative - which shall be measured as time-weighted rates of return versus capital market indices; and Comparative - which shall be measured as performance of the investment manager(s) as compared to a universe of similar investment funds. (p. 1)

    The amount withdrawn in each fiscal year will be targeted at 4.5 percent of the Foundation's average total market value during the 12 quarters ending with the last quarter of the previous fiscal year. The Foundation may also spend any additional funds that were available to spend but were not withdrawn in previous fiscal years. (p. 2)


  • California Polytechnic State University Foundation
    Goals and Objectives
    1. Business Objectives. Underlying the Fund's investment goals are its needs to maintain the purchasing power of endowment income and protect the real value of endowment principal in perpetuity.


    2. Investment Return Objectives. Provide a total return, net of fees, of 5.5% after the general inflation rate as measured by the U.S. Department of Labor Consumer Price Index-Western Region. The return should be reasonably stable and predictable and will be measured in rolling ten-year periods. Total return can include dividends, interest and both realized and unrealized market value changes. 5.5% is the sum of the spending rate (4.5%) plus the estimated higher education inflation premium (1.0%) over the general inflation rate. The investment mix of equities and fixed income securities shall be consistent with the target return and stability objectives. It is acknowledged that these objectives will require substantial investment in equities.


    3. Spending Objectives. Follow a spending rule (payout rate) that provides a stable, predictable level of spending for the endowed purposes, and for a rate of growth in the endowment that approximates the rate of inflation. (pp. 1-2, Policy S tatement)


    Spending Rules
    1. The spending rate of each endowment will be 4.5% of its average market value on the last day of each of the twelve quarters immediately preceding the year in which the payouts are to be made.

      Payouts for scholarships will generally be made at the beginning of the academic year. Payouts for awards will generally be made during the spring quarter. Payouts for university programs will generally be made at the end of the academic year.


    2. A spending reserve will be established for every endowment. Spending reserves will consist of the endowment's dividends, interest, capital appreciation and depreciation and, if applicable, transfer in of funds already held by the University. Payouts will be netted against the spending reserve.


    3. To the extent that the current year's total return is insufficient to meet the announced payout, reinvested prior year's income held in the spending reserve may be drawn upon. In the event that the spending reserve is not sufficient to make the entire current year's payout, only those funds available in the spending reserve will be distributed. If there are no funds available in the spending reserve, no payout will occur.


    4. Payouts for endowments reaching threshold in the current fiscal year will be based on 4.5% of the average market value of the last day of the preceding calendar year. (p. 3, Policy Statement)
Relevant Risks
  • CSU, Bakersfield Foundation
    The endowment and designated assets have an indefinite time horizon literally coterminous with the endurance of the institution, in perpetuity. As such, these funds can assume a time-horizon that extends well beyond a normal market cycle, and can assume an above average level of risk as measured by the standard deviation of annual returns. It is expected, however, that both professional management and sufficient portfolio diversification will smooth volatility and help to assure a reasonable consistency of returns. (p. 47)


  • Humboldt State University Advancement Foundation
    (Not included in the investment policy)


  • California Polytechnic State University Foundation
    General policy shall be to diversify investments among both equity and fixed-income securities. Allowable investments will be:
    1. Equity Investments. The principal category of equity investments will be common stocks. Stock investments should be diversified by industry, capitalization size, relative value and nation of origin. Accordingly, the Board's Standing Committee on Investments (Investment Committee) will establish, document and make available for review by the Board the appropriate allocations and limits within these diversifying categories.


    2. Fixed Income Investments. The principal category of fixed income investments will be domestic, high-quality intermediate or long-term corporate and Treasury bonds. Investments in professionally managed below-grade instruments or international instruments may be included subject to limitations adopted by the Investment Committee.

      Short-term, cash-equivalent investments are appropriate as a depository for income distributions or as needed for temporary placement of funds directed for later investments to longer-term capital markets.


    3. Other Investments. Other investments such as individual real estate, private distressed securities, venture capital, domestic and foreign private equity, directional and non-directional hedge funds or commodities (including energy and natural resources) may be utilized in the endowment portfolio if authorized by the Investment Committee after appropriate review and analysis of the role of the investment in the portfolio and a determination that the expected risk and return profile are in alignment with overall portfolio objectives and policies. It is expected that such other investments will be made utilizing diversified pools of assets.


    4. Prohibited Investments. The fund may not purchase investments in letter stock or individual commodities other than as a broad group of commodities might exist in a diversified fund which has been approved by the Investment Committee. In addition, the fund will not engage in short sales or purchases on margin other than as they might exist in a diversified fund which has been approved by the Investment Committee. Gifts of prohibited investments will be liquidated as soon as feasible. (p. 2, Policy Statement)
Asset-allocation Guidelines
  • CSU, Bakersfield Foundation
    The general policy shall be to diversify investment among 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. As a long-term guideline, equity investments will normally constitute at least one-half, and fixed income securities no more than one-half, of investment assets. Further, it is expected that the preferred long-term mix will be sixty-five percent equity and thirty-five percent fixed income in the Endowment Funds and forty-five percent equity and fifty-five percent fixed income in the Building Funds. (p. 48)


  • Humboldt State University Advancement Foundation
    The Foundation may be invested in separately managed accounts, commingled funds, or 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.
    1. Equity Investments:
      The overall investment objective of the equity portion is to provide top quartile long-term total returns relative to the broad equity market and to the returns of other funds with similar objectives and investment styles. The equity portion 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.

    2. Fixed Income Investments:
      The overall investment objective of the fixed income portion is to provide (above average) top quartile long-term total return relative to the fixed income market and to the returns of other fixed income funds through traditional fixed income management techniques. The fixed income portion 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 20% of the bond portfolio.

    3. 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 Committee.


    4. Real Estate:
      The Foundation may invest in a commingled real estate fund that offers broad geographical diversification utilizing a wide range of property types. Investment in a commingled fund offers much greater liquidity by allowing the Foundation to purchase shares of the fund, as opposed to a direct investment in real estate, which requires ownership in actual land and buildings. Although leverage is allowed, the total shall not exceed 30% across the entire portfolio. It is the policy of the Foundation, where possible, to seek investment vehicles which do not generate UBTI. UBTI (Unrelated Business Taxable Income) is income earned by a tax-exempt entity that does not result from tax-exempt activities. The entity may owe taxes on this income, and therefore it should be carefully reviewed. Other specific real estate investments will be evaluated on a case by case basis by the Finance Committee and, if deemed appropriate, recommended to the Executive Committee for approval.


    5. Alternative Investments:
      Alternative investments are non-traditional investments that have low correlation with most traditional asset classes. Alternative investments are usually transacted through a partnership structure and are often characterized by limited liquidity, infrequent valuations, and the need for greater administrative workload and oversight. The Committee recognizes that additional investment classes may reduce the Foundation's investment performance volatility and/or enhance overall performance. It is the intent of the Committee to place a portion of assets specified in SCHEDULE I in investment categories such as:

      - Absolute Return Strategies
      - All Asset Strategies (TAA)
      - Private Equity

      Definitions, as well as manager performance objectives, for each alternative asset class specified above 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 or commingled 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/Investment 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.


  • California Polytechnic State University Foundation
    (See table in the Benchmarks section)
Asset-allocation Rationales
  • CSU, Bakersfield Foundation
    Equity Investments
    Common Stock: The principal category of equity investments will be common stocks with primary emphasis on high quality investment grade stocks in companies that are financially sound and that have favorable prospects for earnings growth. Stock investments should be diversified by industry, capitalization size, relative value, and nation of origin. It is expected that not more than 20 percent of stock investments should be in companies not within the United State, that no more than 5 percent of the equity portion of the investment's assets should be invested in any single issue, and not more than 15 percent of the equity portfolio should be invested within a single industry sector. Preferred Stock and Convertible securities shall be considered Equity, as it would relate to this policy. The suggested mix and diversification of stock investments accomplished through investment(s) in the Common Fund, or a like institution, is consistent with this policy.

    Real Estate: Equity investments may also include equity real estate, held in the form of professionally managed, income producing commercial property. Such investments, however, shall not exceed 10 percent of total equity investment in order to achieve diversification over time.

    Hedge Funds, Venture Capital, and other Private Equity Partnerships: Equity investments may also include hedge funds, private equity, or venture capital investments, held in the form of professionally managed pooled limited partnership investments. Such investments shall not exceed 5 percent of total equity investments.

    Fixed-Income Investments
    Intermediate and Long-Duration Bonds: It is expected that at least two-thirds of all fixed income investments will normally be invested in domestic, high quality corporate and Treasury bonds of intermediate to long duration. In addition, investments may include no more than 15 percent of the fixed income portion in the professionally managed below investment grade portfolios (high yield or distressed debt issues), and no more than 20 percent of the fixed income portion, or not more than 15 percent of the investments assets, in international sovereign (Treasury) securities. The suggested mix and diversification of fixed income investments accomplished through investments in the Common Fund, or a like institution, is consistent with this policy.

    Short Duration Bonds: While it is not expected that securities with average maturity of less than five years will normally be included in the portfolio, monies in transition, monies expressly restricted by the donor, and other assets generally as may from time to time be considered prudent by professional management may be invested in high quality government and corporate bonds with a maturity of 1-5 years.

    Money Market or Cash Equivalent Investments: Short term, cash equivalent investments are not considered an appropriate vehicle for endowment assets. However, such vehicles are appropriate as a depository for income distributions from longer-term investments, or as needed for temporary placement of funds directed for later investment to the longer-term capital markets. In addition, such vehicles are the norm for contributions to the current fund, or for current operating cash. Investment eligible for this class include only the highest quality (A1-P1 Moody's and S&P rated) commercial paper and Treasury Bills. (pp. 48-49)
  • Humboldt State University Advancement Foundation
    (Not included in the investment policy)


  • California Polytechnic State University Foundation
    II.  Philosophy and Approach
    1. The Fund will be broadly diversified both by asset class (e.g., U.S. and foreign, large and small company stocks) and by individual security holdings within each asset class. Diversification is used as a means to dampen performance return volatility and provide reasonable assurance that no single issue or class of asset has a disproportionate impact on performance.


    2. The fund may use active or passive managers.


    3. The fund will have an overall value style tilt.


    4. The policy preference guiding portfolio design will be to dampen fund volatility while achieving long-tem benchmark returns rather than minimizing short-term benchmark tracking error.


    5. The investment approach generally rejects attempts to time markets.


    6. The fund will generally maintain fully invested positions. (p. 2, Investment Guidelines)
Provisions for Rebalancing
  • CSU, Bakersfield Foundation
    Re-balancing of Asset Allocation will be at any time there is a 5 percent variance from the adopted target allocation in any fund at the end of the quarter. Should a substantial variance occur before the end of the quarter, the Investment sub-committee should be advised. The Foundation management shall bear the responsibility of monitoring the target asset allocation. The following chart illustrates the preferred Asset Allocation.


  • Fund Equity Fixed Cash
    Endowment 65% 30% 5%
    Intermediate/Building 45% 45% 10%
    Operating 0% 75% 25%
    (p. 48)


  • Humboldt State University Advancement Foundation
    The 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 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. (p. 9, Schedule I)

  • California Polytechnic State University Foundation
    V.   Rebalancing Guidelines
    1. In general, asset ranges will be relatively tight and portfolio exposures will be maintained close to target levels regardless of calendar or timing of Investment Committee meetings.
    2. New cash may be averaged-in at the direction of the Investment Committee or the discretion of the investment consultant.
    3. The portfolio will be rebalanced periodically and any sustained variance from equity or fixed income targets greater than 5% must be approved by the Investment Committee.
Portfolio and Asset-class Benchmarks
  • CSU, Bakersfield Foundation
    It is expected that professional management responsible for the investment of 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. (p. 50)


  • Humboldt State University Advancement Foundation

    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. Achieve an annual total rate of return above 8% percent over a market cycle, or five years, whichever is less;


    2. Rank at a minimum in the top 40% of a nationally recognized universe of total funds and above median in a universe of other endowment/foundation funds.

    U.S. Equities - Large Capitalization
    Large capitalization U.S. equity represents investments made in companies within the United States, with capitalization of greater than $8 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 include, but may not be limited to, the following:
    1. Exceed the return of the S&P 500 Index by one percentage point (1%) annually net of fees over a market cycle, or five years, whichever is less.


    2. Exceed the return of the appropriate style benchmark by one percentage point (1%) annually net of fees over a market cycle, or five years, whichever is less.


    3. Rank in the top quartile of a nationally recognized universe of equity managers possessing a similar style.

    U.S. Equities - Small Capitalization
    Small capitalization U.S. equity represents investments made in companies within the United States, with capitalizations of less than $2 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 Russell 2000 by one percentage point (1%) annually net of fees over a market cycle or five years, whichever is less.


    2. Exceed the return of the appropriate style benchmark by one percentage point (1%) annually net of fees over a market cycle, or five years, whichever is less.


    3. Rank in the top quartile of 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 MSCI EAFE Index by one percentage point (1%) annually net of fees over a market cycle or five years, whichever is less.


    2. Rank in the top quartile of 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 Lehman Aggregate Index by one-half of a percentage point (1/2%) annually net of fees over a market cycle, or five years, whichever is less.


    2. Rank in the top quartile of a nationally recognized universe of fixed income managers possessing a similar style.

    Real Estate
    Real estate represents investments in many individual properties, accessed through commingled funds. Common property types associated with real estate investing are apartments, office buildings, retail centers, and industrial parks. Domestic real estate investment portfolios generally own many geographically diverse properties across the United States. Real estate managers will be evaluated quarterly. S pecific performance objectives include, but may not be limited to, the following:
    1. Exceed the return on the NCREIF by at least one-half percent (1/2%) annually net of fees;


    2. Exceed the increase in the C.P.I. by at least four percent (4%) annually net of fees.

    Absolute Return
    Absolute return represents a type of hedge fund of funds that uses different strategies, such as short selling and hedge equities to seek positive returns, regardless of market direction. The rewards of hedge fund managers are usually heavily geared towards the performance of their funds. A fund of funds is when managers invest in a group of single manager hedge funds or managed accounts, which may utilize a variety of investing strategies, creating a diversified investment vehicle for its investors. Absolute return managers will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
    1. Exceed the return of the HFRI Fund of Funds Index by at least one percent (1%) annually net of fees over a market cycle, or five years, whichever is less.


    2. Exceed the increase in CPI by at least six percent (6%) annually net of fees.

    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 C.P.I. by at least five percent (5%) annually net of fees.

    Private Equity
    Private equity represents investments in Venture Capital, Buyouts, Mezzanine, and Distressed Debt. Typically Private Equity is accessed through a fund of funds approach. A fund of funds is when managers invest in a group of funds or managed accounts, each of which creates funds of managers employing different strategies, thus creating a diversified investment vehicle for its investors. Private equity managers will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:
    1. Exceed the increase in the S&P 500 Index by at least five percent (5%) annually net of fees;


    2. Exceed the Venture Economics Private Equity median return for the appropriate vintage year. (pp. 10-12, Exhibit A).

  • California Polytechnic State University Foundation
    IV. Asset Classes
    1. No single security (except those issued or guaranteed by the U.S. Government) shall exceed 5% of the market value of the fund.


    2. Illiquid investments may be allowed with the approval of the Investment Committee.


    3. Individual asset class and style targets follow:

    4. Asset
      Class
      Target
      %
      Management
      Style
      Performance
      Benchmark
      Equities
      Large cap stocks 27.5 Active/Passive S&P 500
      Small cap stocks 9.0 Active/Passive Russell 2000
      International large cap stocks 14.0 Active EAFE
      International small cap stocks 2.5 Active EAFE Small Cap
      Emerging markets stocks 2.0 Active MSCI Emg. Mkts. (Free)
       
      Inflation-Hedges
      Real estate (REITs) 15.0 Active NAREIT
       
      Total Equities 70.0    
       
      Fixed Income
      Government-quality bonds 15.0 Passive US Treasury Index
      Investment-grade Bonds 6.5 Active LBrothers Aggregate Bond
      Non-US bonds (hedged) 4.5 Active LBrothers Non-US Hedged
      High yield bonds (U.S.) 4.0 Active/Passive LBrothers High Yield Index
       
      Cash 0.0   90-Day T-bills
       
      Total Fixed 30.0    
       
      Grand Total 100.0   Multi-Asset + Traditional
      (p.4, Investment Guidelines)

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Last Updated: June 07, 2016