Ohio UniversityBusiness Policy and Procedure

50.001:  Non-Endowment Invested Funds


Status:

Approved on September 21, 2005Signatures and dates
on archival copy

Effective:

when approved 

Initiated by:

Janelle Gellermann
Assistant Treasurer
 

Reviewed by:

Herman ("Butch") Hill, Chair
Policy and Procedure Review Committee
 

Endorsed by:

Larry Corrigan
Interim Vice President for Finance and Administration
 

Approved by:

Kathy Krendl
Provost
 


Previous PolicypurposepolicyprocedurereviewersformsNext Policy


Numeric Index -Policy and Procedure- Alpha Index


Purpose

The Board of Trustees of Ohio University is vested by statute (Sec. 3345.05 of the Ohio Revised Code) with the following responsibility: "Notwithstanding any provision of the Revised Code to the contrary, the title to investments made by the board of trustees of a state-supported university or college with funds derived from revenues described in this section shall not be vested in the state but shall be held in trust by the board." This policy governs the management of these funds, which are described herein as the University's non-endowment invested funds.


Policy

This policy was adopted by the board in public session, and requires all fiduciaries to discharge their duties 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 with like aims. The details that follow are subject to modification by Board of Trustees action.


I.  Investment Overview

  1. The University has two primary pools of invested funds - cash and pooled investments, as shown on the balance sheet, and endowment funds. The primary objective for the cash and pooled investments (non-endowment funds) is to enable the University to meet its financial obligations as they come due. A secondary objective is to achieve prudently managed investment returns.

  2. The endowment funds are governed by The Ohio University Foundation Investment Policy as it pertains to endowment funds, and are administered in conjunction with The Ohio University Foundation Endowment funds. [Board Resolution dated 9/12/2002]


II.  Investment Objectives

The primary objectives, in priority order, of the University's non-endowment investment activities shall be:

  1. Safety: Safety of principal is the foremost objective of the investment program. Investments of the University shall be undertaken in a manner that ensures, over time, the preservation of capital in the overall portfolio.

  2. Liquidity: The University's investment portfolio will remain sufficiently liquid to enable the University to meet all its operating requirements. Portfolio liquidity is defined as the maturity or ability to sell a security on a short notice near the purchase price of the security. To help retain the desired liquidity, no issue shall be purchased that is likely to have few market makers or poor market bids. Additionally, liquidity shall be assured by keeping an adequate amount of short-term investments in the portfolio to accommodate the cash needs of the University.

  3. Return on Investments: The University's non-endowment portfolio shall be structured with the objective of attaining the highest possible "total return" for the investment portfolio while adhering to the restraints and obligations inherent in the current legal construct of a prudent fiduciary [Third Restatement of Trusts (1990) and the Uniform Prudent Investor Act of 1994].


Procedures


I.  Investment Structure

The cash and pooled investments shall be divided into three funds:

Allocation of Assets by Pool

PoolTargetExpected Range
Cash Pool25%20 - 30%
Liquidity Pool50%40 - 60%
Diversified Investment Pool25%20 - 30%


II.  General Objectives


A.  Reserve Requirement

A reserve equal to at least twenty-five percent of the average amount of the investment portfolio over the course of the previous fiscal year must be invested in publicly traded securities that fall into one or more of the following categories:

  • securities of the United States government or of its agencies or instrumentalities,

  • the treasurer of state's pooled investment program,

  • obligations of this state or any political subdivision of this state,

  • certificates of deposit of any national bank located in this state or State of Ohio chartered bank,

  • written repurchase agreements (collateralized with permissible securities having a market value of at least 102% of the investment) with any eligible Ohio financial institution that is a member of the federal reserve system or federal home loan bank,

  • money market funds, or

  • bankers acceptances maturing in two hundred seventy days or less which are eligible for purchase by the federal reserve system.


B.  Cash Pool

The objective of the Cash Pool shall be to meet the day to day obligations of the University. It shall be invested in highly liquid instruments with little or no risk of principal loss (e.g., STAR Ohio).


C.  Liquidity Pool

The objective of the Liquidity Pool shall be to provide a liquid source of funds in the event the Cash Pool is insufficient to meet the University's cash needs. The investment strategy opportunity for this pool is that its time horizon, and flexibility, is such as to permit investment in permitted instruments that offer substantially greater return than money market yields. The duration of this pool shall be between 80% and 120% of the duration of the Lehman Brothers Aggregate Bond Index.


D.  Diversified Investment Pool

The objectives of the Diversified Investment Pool shall be to provide:

  1. A flow of financial support to university programs that will grow at least as fast as the rate of inflation (as measured by the Higher Education Price Index),

  2. A source of funds in the very unlikely event that the Cash Pool and Liquidity Pool are insufficient to meet the University's day to day obligations.

Up to 25% of the target amount for the Diversified Investment Pool funds can be utilized in the University's Investment Loan Program (see Policy 50.002, "Investment Loan Fund").


III.  Asset Allocation

Deliberate management of the asset mix among classes of investments is both a necessary and desirable responsibility. In the allocation of assets, diversification of investments among asset classes that are not similarly affected by economic, political, or social developments is a highly desirable objective.


A.  Cash Pool

The Cash Pool may be managed by one or more short-term investment managers, each maintaining a portfolio with an average weighted maturity between one day and one year. Investments in STAR Ohio are permitted without regard to the qualification on average weighted maturity.


B.  Liquidity Pool

The Liquidity Pool shall be managed by one or more fixed-income managers, each maintaining a portfolio with a duration between 80% and 120% of the duration of the Lehman Brothers Aggregate Bond Index.


C.  Diversified Investment Pool

The University's general approach to the Diversified Investment Pool shall be to diversify investments among equity securities so as to provide a balance that will enhance total return, while avoiding undue risk concentrations in any single asset class or investment category. The diversification does not necessarily depend upon the number of industries or companies in a portfolio or their particular location, but rather upon the broad nature of such investments and of the factors that may influence them.

The Diversified Investment Pool funds not utilized in the University Investment Loan Program shall be invested consistent with provisions of this policy. In making asset allocation judgments, it is not expected that the University Treasurer, or investment managers, will necessarily seek to "time" subtle changes in financial markets, or that frequent or minor adjustments would be needed. Instead, the Treasurer is expected to develop, and the Board of Trustees is expected to adopt, expressed guidelines for broad allocations on a long-term basis, in light of current and projected investment environments.

For the Diversified Investment Pool portion of non-endowment funds, the Board of Trustees has agreed to recommend adoption of the asset allocation as set forth in The Ohio University Foundation Investment Policy and Procedure for Institutional Funds, except that the Diversified Investment Pool will not have an allocation to fixed income securities.

The University's Treasurer will monitor the asset allocation structure of the Diversified Investment Pool and will attempt to stay within the ranges allowed for each asset class. If the portfolio becomes over-weighted or exceeds the range of percentage for that asset class, the University Treasurer will develop a plan of action, either for an immediate rebalancing of the portfolio or for a rebalancing that will occur over the subsequent few months.


IV.  Monitoring of Objectives and Results

Due to the inevitability of short-term market fluctuations, it is intended that the following performance objectives will be achieved by the investment manager(s) over a 5-year moving period, net of investment management fees. Nonetheless, the University Treasurer reserves the right to evaluate and make any necessary changes regarding the investment manager over a shorter term using the criteria established in subsection V, "Evaluation of Investment Managers," below.

The moving 5-year period performance objectives shall be as follows:


A.  Market Benchmark

  1. The total return for the Cash Pool and for each Cash Pool investment manager shall exceed the rate of return on 3-month U.S. Treasury Bills.

  2. The total return for the Liquidity Pool and for each Liquidity Pool investment manager shall exceed the Lehman Brothers Aggregate Bond Index.

  3. The total return for the Diversified Investment Pool shall exceed a target Balanced Index composed of the allocable percentages of the: S&P 500 Index, the Russell 2000 Index, the EAFE Index, and STAR Ohio. Furthermore, the total return for each active Diversified Investment Pool investment manager shall exceed the relevant benchmark (Domestic Large Cap - S&P 500 Index; Domestic Small Cap - Russell 2000 Index; and Core International - EAFE Index). Passive Diversified Investment Pool investment managers shall approximate the return of the relevant benchmark.


B.  Variability

  1. The standard deviation for each Cash Pool investment manager shall not exceed the standard deviation of 52-week Treasury Bills.

  2. The standard deviation for each Liquidity Pool investment manager shall not exceed 1.2 times the standard deviation of the Lehman Brothers Aggregate Bond Index.

  3. The beta (volatility) for each active Diversified Investment Pool equity investment manager shall not exceed 1.2 times that of the relevant equity benchmark. Furthermore, each active equity investment manager is expected to achieve a positive alpha (risk-adjusted return). Passive investment managers shall approximate the risk level of the relevant benchmark.


C.  Peer Group Ranking

  1. The total return for each Liquidity Pool investment manager shall rank in the top half of the Intermediate-Term Fixed Income Universe.

  2. The total return for each active Diversified Investment Pool investment manager shall rank in the top half of the appropriate universe (Large Cap Equity, Small Cap Equity, Small Cap Growth, International Equity, and Alternative Investment).


V.  Evaluation of Investment Managers

The investment managers will be reviewed on an ongoing basis and evaluated based upon the following additional criteria:

  1. Ability to exceed the performance objectives stated in this Investment Policy Statement.

  2. Adherence to the philosophy and style which were articulated to the University at, or subsequent to, the time the investment manager was retained.

  3. Ability to exceed the performance of other investment managers who adhere to the same or similar style.

  4. Continuity of personnel and practices at the firm.


VI.  Investment Manager Guidelines


A.  Flexibility

In today's rapidly changing and complex financial world, no list or types of categories of investments can provide continuously adequate guidance for achieving the investment objectives. Any such list is likely to be too inflexible to be suitable of the market environment in which investment decisions must be made. Therefore, it is the process by which investment strategies and decisions are developed, analyzed, adopted, implemented and monitored, and the overall manner in which investment risk is managed, which determines whether an appropriate standard of reasonableness, care, and prudence has been met for these investments.


B.  Performance Objectives

The requirements stated below apply to investments in non-mutual and non-pooled funds, where the investment manager is able to construct a separate, discretionary account on behalf of the University. Although the University cannot dictate policy to pooled or mutual fund investment managers, the University's intent is to select and retain only pooled or mutual funds with policies that are similar to this policy statement. All managers (pooled or mutual and separate), however, are expected to achieve the performance objectives below:

  1. Cash Pool investment managers must invest at least 50% of the portfolio in U.S. Government Securities or U.S. Government Agency issues.

  2. No more than 10% of the portfolio, at cost, can be invested in any single issue, except the investments in U.S. Government Securities or U.S. Government Agency issues.

  3. The weighted average credit quality is to be no less than "AAA" (or its equivalent rating by two national rating agencies) for the Cash Pool accounts, "AA" for the Liquidity Pool accounts, and "A" for the Diversified Investment Pool accounts. In addition, the minimum acceptable credit quality at the time of purchase for individual securities shall be "AA" for the Cash Pool accounts , "BBB" for the Liquidity Pool accounts , and "B" for the Diversified Investment Pool accounts . In the event that an investment drops below investment grade, the manager will immediately notify the Treasurer, who will confer with the Investment Committee.

  4. Portfolio holdings will be sufficiently liquid to ensure that 10% of the portfolio can be sold on a day's notice with no material impact on market value.

  5. Commercial paper must be, at the time of purchase, rated within the highest classification established by not less than two national rating services.

  6. Eligible instruments for the Cash Pool are those permitted by the Treasurer of the State of Ohio or other like investments with similar risk and reward relationships.

  7. For each Liquidity Pool investment manager, the duration of the portfolios they manage shall be between 80% and 120% of the duration of the Lehman Brothers Aggregate Bond Index.

  8. Bankers' Acceptances are to be rated within the top two rating classifications by any one national rating service. Foreign bank issues are capped at 10% of the total investment in this category.

  9. Certificates of deposit shall not be invested with any one bank in excess of FDIC limitations without appropriate collateralization.

  10. Investments in non-marketable securities shall not exceed this policy's guidelines.

  11. The investment managers are precluded from using derivatives to effect a leveraged portfolio structure. Subject to other provisions in this Investment Policy Statement, investment managers are permitted to use Collateralized Mortgage Obligations (CMO's) and components of CMO's, provided that these instruments are not used to effect a leveraged portfolio structure.

  12. The investment manager shall handle the voting of proxies and tendering of shares in a manner that is in the best interest of the University and consistent with the investment objectives contained herein.

  13. For diversification purposes, each equity portfolio manager should have in excess of 20 positions.

  14. The investment manager shall immediately notify the University in writing of any material changes in its investment outlook, strategy, portfolio structure, ownership, or senior personnel.


VII.  Management of Investments

Except as provided herein, the Treasurer shall be authorized to implement and administer this policy on behalf of the Board of Trustees and manage the non-endowment funds in accordance with this Policy.


VIII.  Periodic Review

This statement of investment policy shall be reviewed annually. The investment performance will be reviewed on a quarterly basis, aligned with the Board of Trustees' meeting schedule, and the report will be provided by an independent third party. The investment managers may provide any suggestions regarding appropriate adjustments to this statement or the manner in which investment performance is reviewed.


Reviewers

Proposed revisions of this policy should be reviewed by:

  1. Policy and Procedure Review Committee

  2. Cabinet Officers


Forms

There are no forms that are specific to this policy.


Previous PolicypurposepolicyprocedurereviewersformsNext Policy


Numeric Index -Policy and Procedure- Alpha Index


Copyright © 2005 Ohio University. All Rights Reserved.



Dick Piccard revised this file (http://www.ohio.edu/policy/50-001.html) on May 15, 2013.

Please E-mail any comments or suggestions to "policy@ohio.edu".