|Document Title||Foundation Investment Policy|
May 6, 2005
|Approved by||Fredonia College Foundation|
May 6, 2005
|Revision History||Revised: 2/03/06|
Revised: 10/2/15 update charts/appendix A
Revised: 8/4/16 updated chart and wording on spending rate
I. GENERAL INFORMATION
The principal reason for developing a long-term investment policy statement is to protect against ad hoc revisions to the College Foundation’s long-term investment strategy for its investment portfolio. The written investment policy will help maintain a long-term perspective when short-term market movements may be distressing and emotional reactions are most apt to occur.
The development of an investment policy for the Fredonia College Foundation follows the basic approach underlying financial planning: assessing the current financial condition of the organization, setting goals, developing a strategy to meet the goals, implementing the strategy, regularly reviewing the results, and adjusting the strategy or the implementation as circumstances dictate. Instituting an investment policy encourages a disciplined and systematic investment approach, thus improving the probability of satisfying the investment goals for the Foundation.
B. PURPOSE OF THE FOUNDATION
The Fredonia College Foundation exists for four major reasons:
C. SCOPE OF THE INVESTMENT POLICY
This statement of investment policy reflects the policy, objectives and constraints of that portion of the Fredonia College Foundation assets being managed by external investment managers.
D. PURPOSE OF THE INVESTMENT POLICY
This investment policy is set forth by the Board of Directors of the Fredonia College Foundation in order to establish a clear understanding of the investment goals and objectives and management policies applicable to the investment portfolio. This Investment Policy Statement will:
The Board of Directors assumes and expects all parties involved in the investment management process to manage the Foundation assets according to the prudent person standards as established in the laws of the State of New York.
II. ASSIGNMENT OF RESPONSIBILITY
A. RESPONSIBILITY OF THE BOARD OF DIRECTORS
The Board of Directors is charged by its By-Laws with the responsibility for the management of the Foundation’s assets. The Board of Directors shall discharge its duties in good faith with the care an ordinary prudent person in a like position would exercise under similar circumstances and in a manner the Directors reasonably believe to be in the best interest of Fredonia. The specific responsibilities of the Board of Directors relating to the investment management of Fund assets include:
The Board of Directors of the Fredonia College Foundation in their fiduciary capacity have delegated the responsibility and authority for investing the Foundation’s assets to the Investment Committee of the Board of Directors. As such, the Investment Committee is authorized to hire professional experts in various fields. These include, but are not limited to: investment management consultant(s), investment manager(s), broker/dealer(s) and custodian(s).
B. RESPONSIBILITY OF THE INVESTMENT MANAGEMENT CONSULTANT(S):
The consultant will assist the Board of Directors in establishing investment policy, developing an overall asset allocation and performance criteria (both absolute and risk adjusted) for each asset class utilized in the portfolio, recommending specific investments and/or managers for each asset class and reviewing such investments and/or managers over time. The consultant will monitor, measure and report quarterly the performance of the overall portfolio and sub-components of the portfolio against the appropriate benchmarks, rebalance the portfolio within the defined asset allocation policy, and other tasks as deemed appropriate. The consultant is expected to make recommendations and provide advice that addresses major changes in economic and investment conditions in order to maintain and/or improve the Foundation’s investment performance. Such recommendations may include, but need not be limited to, adjustments in additions to asset classes, and/or allocation of resources within or between asset classes.
C. RESPONSIBILITY OF THE INVESTMENT MANAGER(S):
Each Investment Manager will acknowledge in writing its acceptance of responsibility as a fiduciary. Upon receipt of this policy, each Investment Manager will acknowledge that they have received, reviewed and are in compliance with all of the guidelines set forth in the policy pertinent to that manager. Each Investment Manager will have full discretion to make all investment decisions for the assets placed under its jurisdiction, while observing and operating within all policies, guidelines, constraints, and philosophies as outlined in this policy statement. Specific responsibilities of the Investment Manager(s) include:
D. RESPONSIBILITY OF THE CUSTODIAN(S):
The custodian will physically (or through agreement with an approved sub-custodian) maintain possession of securities owned by the Fund, collect dividend and interest payments, redeem maturing securities, and effect receipt and delivery following purchases and sales. The custodian will also perform regular accounting of all the assets owned, purchased, or sold as well as movement of assets into and out of the Fund accounts.
Such experts employed are also deemed to be fiduciaries and they must acknowledge such in writing. All expenses for such experts must be customary and reasonable, and will be borne by the Fund as deemed appropriate and necessary.
III. GENERAL INVESTMENT PRINCIPALS
A. GENERAL GUIDELINES
IV. GENERAL INVESTMENT PRINCIPALS
In order to meet its needs, the investment strategy of the Fredonia College Foundation is to emphasize total return. Total return for the purpose of this policy is defined as the sum of all income earned, including income from dividends and interest, plus realized and unrealized capital appreciation.
A. INVESTMENT GOAL
B. SPENDING POLICY
In determining the amount to be spent annually from endowment funds, the Investment Committee will review the following eight factors, and will report to the Board on their consideration of each factor:
The Foundation follows a total return objective consisting of the spending rate, plus CPI, plus all related costs associated with the management and maintenance of the various endowments. For purposes of establishing the total return objective, the Foundation expects over time to have a spending rate of 4.5% of the trailing twenty-quarter, average market value of the fund.
C. FUNDS VALUED BELOW HISTORICAL GIFT VALUE
In the case of those endowment funds where the donor has instructed that the Foundation not spend below the original dollar value (historical gift value) of the fund, the Executive Director or controller are responsible for reporting to the Executive Committee, within one month after the end of each calendar quarter, on the number of underwater funds, the aggregate amount of the deficiency, and the availability of funds for distribution.
V. MANAGEMENT OF THE FUND PORTFOLIO
A. EXPECTED MARKET RETURNS AND VOLATILITY
The Board of Directors understands that in order to achieve its objectives for Fund assets, the Fund will experience volatility of returns and fluctuations of market value. The Board of Directors will tolerate long-term volatility consistent with the long-term risk/return relationships described below.
Based upon actual market performance history (1926-2015), the following are historical annual market index returns and volatility for the various asset classes indicated:
While past performance is not necessarily indicative of future results the Board of Directors fully understands, accepts, and expects volatility and returns to increase as capitalization is reduced. By diversifying among numerous asset classes, the Investment Committee is attempting to reduce the volatility of the overall portfolio. Nevertheless, short-term fluctuations in portfolio value are tolerable.
Investment theory and historical capital market return data suggest that, over long periods of time, there is a relationship between the level of risk assumed and the level of return that can be expected in an investment program. In general, higher risk (i.e., volatility of return) is associated with higher return.
Given this relationship between risk and return, a fundamental step in determining the investment policy for the portfolio is the determination of an appropriate risk tolerance. The three primary factors that affect this determination are the financial ability to accept risk (specifically, dramatic negative short term performance), the psychological ability to accept risk, and the long-term investment return requirements.
C. STRATEGIC ASSET ALLOCATION POLICY
The Board of Directors have adopted an asset allocation target for the Foundation’s investment portfolio as defined in Appendix A.
The Investment Committee reviewed potential outcomes for the portfolios with these asset allocations and has determined the risk profile is prudent relative to the potential returns based on historical risk and return characteristics. Moreover, this allocation provides a reasonable opportunity for the Fund to meet its spending requirements, plus all related costs associated with management and maintenance of the Fund.
D. PERFORMANCE BENCHMARKS
Based on the adopted asset allocation policy, a customized performance benchmark index will be used to measure the overall investment performance of the Fund’s portfolio. This index will be a policy-weighted composite of the benchmark indices as they relate to the target asset allocation. The index weights comprising the benchmark are specified in Appendix A.
E. TIME HORIZON
Given that the Investment Fund has an infinite life, the time horizon applicable to this policy is long-term. This time horizon will generally be used for making judgments about asset allocation, whereas investment manager performance will typically be judged for periods equal to the lesser of a full market cycle or 36 months.
Because different asset classes will perform at different rates, the investment management consultant(s), and the investment manager(s) will keep close scrutiny on asset allocation shifts caused by performance. Accordingly, the investment management consultant(s) and the investment manager(s) will review the relative market values of the asset segments, and will generally place new money under investment in the categories that are furthest below their target allocations in this policy.
To the extent that adequate rebalancing among asset categories cannot be effected via the allocation of new contributions, the investment management consultant will re-direct monies from one asset category to another as market fluctuations skew the allocation away from the specified targets identified in Appendix A and report any such re-direction of monies to the Investment Committee of the Foundation on a quarterly basis.
G. TYPES OF ASSETS
In order to provide the Investment Managers with the freedom to invest in various types of assets, they are further guided by the following definitions and delineations of activities:
The investment list includes but is not limited to common stocks, open-end mutual funds, exchange traded funds, preferred stocks, corporate bonds, U.S. Government and Agency securities, commercial paper, convertible securities and money market funds. As indicated above, investments will be allocated to the following categories:
H. PROHIBITED TRANSACTIONS
The use of actively managed derivative investments (options, futures, etc.), hedging techniques, and leveraging, as these investments and techniques are normally defined, commodities, warrants, unregistered or restricted stock, and conditional sales contracts are prohibited unless expressly authorized in writing by the Board of Directors prior to their use. No more than seven percent (7%) of the market value of the Fund’s assets shall be invested in any single security issues, excluding the U.S. Government, and no more than thirty percent (30%) of the market value of the Fund’s assets in any single industry.
Other investment categories may be used with authorization by the Board of Directors.
To minimize the possibility of a loss occasioned by the sale of a security forced by the need to meet a required payment, the Controller of Fredonia College Foundation will periodically provide investment manager(s) with an estimate of expected net cash flow. The Controller will notify the investment manager(s) in a timely manner, to allow sufficient time to build up necessary liquid reserves.
Because of the infrequency of cash outflows and the liquidity of all Fund assets, the Board of Directors does not require the maintenance of a cash or cash equivalent reserve.
J. MARKETABILITY OF ASSETS
The Board of Directors requires that all Fund assets be invested in liquid securities, defined as securities that can be liquidated efficiently and within seven (7) business days for the Fund, with minimal impact on market price.
VI. INVESTMENT MANAGER PERFORMANCE REVIEW AND EVALUATION
The investment performance of the total portfolio, as well as asset class components, will be measured against commonly accepted performance benchmarks. Consideration shall be given to the extent to which the investment results are consistent with the investment objectives, goals, and guidelines as set forth in this statement. The Board of Directors intends to evaluate the portfolio over at least a three-year period, but reserves the right to terminate a manager for any reason including the following:
Investment managers shall be reviewed annually regarding performance, personnel, strategy, research capabilities, organization and business matters, and other qualitative factors that may impact their ability to achieve the desired investment results.
VII. INVESTMENT POLICY REVIEW
To assure the continued relevance of the guidelines, objectives, financial status, and capital markets expectations as established in this statement of investment policy, the Board of Directors plans to review investment policy at least annually.
APPENDIX A & B