GF570 Unit 3 Foundation Investment Policy Statement Example

Rules a Stranger Could Follow: A Unit 3 Investment Policy Statement for a $184 Million Foundation

[Student Name]

Purdue University Global

GF570: Portfolio Management

Unit 3 Investment Policy Statement

[Instructor Name]

[Date]

The foundation and every figure are composite, carried from the Unit 2 profile; the publications cited are real.

1. Purpose and Scope

This statement governs the investment of all assets of the foundation, about $184 million at adoption. It sets the objectives, limits and procedures the investment committee will follow and the standards by which the trustees will judge results. A policy written this way lets anyone who reads it build and monitor the portfolio without further instruction (CFA Institute, 2010).

2. Roles

Trustees adopt and amend this statement, approve the asset allocation and hire or dismiss the investment consultant. The investment committee selects managers within the approved allocation, monitors compliance and reports quarterly. The consultant provides research, performance reporting and recommendations but holds no discretion over assets. Managers invest within their written guidelines.

3. Return Objective

The primary objective is a total return, after fees, of at least 7.95 percent a year, measured over rolling ten-year periods. This equals the 5 percent minimum distribution, 2.3 percent expected inflation and 0.5 percent of costs, compounded. The secondary objective is to exceed the policy benchmark in Section 8, after fees, over rolling five-year periods.

4. Risk Limits

1. Expected annual volatility of the total portfolio, at target weights and under the committee's capital market assumptions, no higher than 13 percent.

2. Expected one-year loss at the fifth percentile no worse than 15 percent.

3. No single holding other than the acquirer shares in Section 6 above 5 percent of assets.

These limits reflect the trustees' stated tolerance for losses, which is lower than the foundation's financial ability to bear them.

5. Liquidity

1. At least 60 percent of assets redeemable within thirty days.

2. Illiquid investments, including private funds, no more than 20 percent of assets, counting unfunded commitments at half their value.

3. Cash and money market holdings sufficient to cover the next six months of grants and expenses.

6. The Restricted Acquirer Shares

The acquirer shares, about 12 percent of assets, count toward U.S. equity. Once the sale restriction lapses, they will be sold in four equal quarterly tranches unless the committee documents a reason to delay. Until then, other U.S. equity holdings will exclude the acquirer and underweight its industry to limit concentration.

7. Asset Allocation

Target weights and permitted ranges:

1. U.S. equity: 32 percent, range 27 to 37.

2. Non-U.S. equity: 23 percent, range 18 to 28.

3. Core bonds: 16 percent, range 12 to 20.

4. Inflation-linked bonds: 6 percent, range 3 to 9.

5. Real assets: 6 percent, range 3 to 9.

6. Private equity: 12 percent, range 0 to 15 while commitments are being drawn.

7. Cash: 5 percent, range 2 to 8.

Until private equity reaches its target, the uninvested share is held in global public equity.

8. Policy Benchmark

The policy benchmark weights an index for each asset class at its target: a broad U.S. stock index, a non-U.S. stock index, a U.S. aggregate bond index, a U.S. inflation-linked bond index, a global listed infrastructure index, a global stock index plus 3 percent lagged one quarter for private equity, and Treasury bills.

9. Rebalancing

The committee reviews weights monthly. When any asset class falls outside its range, it is rebalanced halfway back toward target, using cash flows first. Costs, including the federal excise tax on realized gains, are documented before each trade.

The policy limits risk twice, by volatility and by a fifth-percentile loss, because the trustees' real concern is a bad year rather than average swings, and the second limit speaks to that concern in terms they used themselves.

Manager Selection and Monitoring

Managers are chosen for a clear and repeatable process, reasonable fees and fit with the asset class role, not for recent returns alone. Each manager receives written guidelines stating its benchmark, permitted holdings and risk limits. The committee reviews every manager quarterly against those guidelines and annually in depth. A manager is placed on watch after three years of trailing its benchmark net of fees or after any change in key staff, and is replaced only after the committee documents why the shortfall is unlikely to reverse.

Proxy Voting and Exclusions in Commingled Funds

The committee delegates proxy voting to managers but asks for an annual summary of votes on the acquirer and on any holding in the excluded industries held indirectly through commingled funds.

10. Spending

Grants and expenses are set at 5.5 percent of the average of the last twelve quarter-end asset values, so that spending moves slowly with markets while meeting the distribution requirement.

11. Exclusions

Direct holdings in tobacco manufacturers and firearms makers are excluded. Commingled funds are exempt where no exclusion-compliant alternative exists at reasonable cost.

12. Review

The trustees will review this statement each year and after any change in the foundation's mission, spending needs or tax status. Policies that are reviewed regularly and changed rarely tend to serve long-horizon investors best (Swensen, 2009).

13. Adoption

Adopted by the trustees on the date shown in the minutes, replacing all earlier guidance (Maginn et al., 2007).

References

CFA Institute. (2010). Elements of an investment policy statement for institutional investors. CFA Institute.

Maginn, J. L., Tuttle, D. L., Pinto, J. E., & McLeavey, D. W. (2007). Managing investment portfolios: A dynamic process (3rd ed.). Wiley.

Swensen, D. F. (2009). Pioneering portfolio management: An unconventional approach to institutional investment (2nd ed.). Free Press.