SUPERCEDED Ohio University Policy and Procedure

Statement of Objectives and Policies for Non-Endowment Invested Funds

SUPERCEDED on September 21, 2005

Current Version




Procedure No.:   50.001

Page No.:        1,2,3,4,5,6 and 7 of 7

Date Issued:     10/5/98

Issued By:       Dick Siemer



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PURPOSE:

Purpose: The Board of Trustees of Ohio University is vested by statute with responsibility for the oversight of the University. This statement of investment objectives and policies governs the management of the University's non-endowment invested funds. It is anticipated that this statement will be effective until modified as conditions warrant by the Board.


A. 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 is to enable the University to meet its financial obligations as they come due. A secondary objective is to achieve investment returns above that of money market instruments.

  2. The endowment funds are governed by the Endowment Investment Policy and administered in conjunction with the Ohio University Foundation Endowment funds. [Board Resolution dated 1/15/77]

B. INVESTMENT OBJECTIVE

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 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].

C. INVESTMENT STRUCTURE

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

Pool Allocation

Expected Range
                                         Target     Expected Range

Cash Pool 25% 20 - 40%

Liquidity Pool 50% 30 - 60%

Diversified Investment Pool 25% 0 - 30%



[Here begins page 2 of the hardcopy version.]

D. GENERAL OBJECTIVES

  1. 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).

  2. 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 greater return than money market yields. The weighted average life of the pool shall be no longer than five years.

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

    • The University's programs a flow of financial support that will grow at least as fast as the rate of inflation (as measured by the Higher Education Price Index),
    • 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 (DIP) funds can be utilized in the University's Investment Loan Program # Procedure #50.002).

E. 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.

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.

Liquidity Pool

The Liquidity Pool shall be managed by one or more intermediate-term investment managers, each maintaining a portfolio with an average weighted maturity between one year and five years.

Diversified Investment Pool

The University's general policy towards the Diversified Investment Pool shall be to diversify investments within both equity and fixed income 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.



[Here begins page 3 of the hardcopy version.]


The Diversified Investment Pool (DIP) funds not utilized in the internal 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.

To insure broad diversification in the long-term investment portfolios among the major categories of investments, asset allocation, as a percent of the total market value of the Diversified Investment Pool, will be set by Board resolution with the following framework cross referenced to benchmark indexes that follow:

	
Type of Securities     Target Range

Equity x%

Domestic Large Cap a%

Domestic Small Cap a%

International a%

Fixed Income y%

Cash y%

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 overweighted or exceeds the range of percentage for that asset class, the University's Treasurer will develop a plan of action, either for immediate rebalancing of the portfolio or a rebalancing that will occur over the subsequent few months.

F. 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 reserves the right to evaluate and make any necessary changes regarding the investment manager over a shorter term using the criteria established in the "Evaluation of Investment Manager" section of this statement.

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

  1. Market Benchmark

a.   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.

b.   The total return for the Liquidity Pool and for each Liquidity Pool investment manager shall exceed the Merrill Lynch 1-3 Year Government Bond Index.



[Here begins page 4 of the hardcopy version.]


c.   The total return for the Diversified Investment Pool shall exceed a target Balanced Index composed of: a% of the S&P 500 Index, b% of the Russell 2000 Index, c% of the EAFE Index, y% of the Lehman Brothers Aggregate Bond Index, and z% 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; Core International - EAFE Index; and Fixed Income - LB Aggregate Bond Index). Passive Diversified Investment Pool investment managers shall approximate the return of the relevant benchmark.

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

    b.   The standard deviation for each Liquidity Pool investment manager shall not exceed 1.2 times the standard deviation of the Merrill Lynch 1-3 Year Government Bond Index.

    c.   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). The standard deviation for each active Diversified Investment Pool fixed income investment manager shall not exceed 1.2 times the standard deviation of the LB Aggregate Bond Index. Passive investment managers shall approximate the risk level of the relevant benchmark.

  • Peer Group Ranking
  • a.   The total return for each Liquidity Pool investment manager shall rank in the top half of the Intermediate-Term Fixed Income Universe.

    b.   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, Small Cap Value, International Equity, and Fixed Income).

    G. 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.



    [Here begins page 5 of the hardcopy version.]


    H. INVESTMENT MANAGER GUIDELINES

    1. 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.

    2. 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/mutual fund investment managers, the University's intent is to select and retain only pooled/mutual funds with policies that are similar to this policy statement. All managers (pooled/mutual and separate), however, are expected to achieve the performance objectives.

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

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

      c.   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 .

      d.   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.

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

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

      g.   The average weighted maturity for each Liquidity Pool investment manager shall be between one year and five years. The duration for each Diversified Investment Pool fixed income investment manager shall be no greater than (+20% that of the Lehman Brothers Aggregate Bond Index.

      h.   Bank Certificates of Deposit and 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.



      [Here begins page 6 of the hardcopy version.]


      i.   Certificates of deposit shall not be excessively invested with any one bank.

      j.   There shall be no investments in non-marketable securities.

      k.   The investment managers shall not utilize derivative securities to increase the actual or potential risk posture of the accounts. Subject to other provisions in this Investment Policy Statement, the use of primary derivatives, including, but not limited to, Structured Notes1, lower class tranches2 of Collateralized Mortgage Obligations (CMO's), Principal Only (PO) or Interest Only (IO) Strips, Inverse Floating Securities, Futures Contracts, options, short sales, margin trading and such other specialized investment activity is prohibited.

      Moreover, the investment managers are precluded from using derivatives to effect a leveraged portfolio structure (if options and futures are specifically approved by the University, such positions must be offset in their entirety by corresponding cash or securities).

      l.   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.

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

      n.   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.


      1. Permit investments in "conservative structured notes which are principal guaranteed, unleveraged, and of short to intermediate maturity.

      2. Lower class defined by Federal Financial Institutional Examination Council (FFIEC)




      [Here begins page 7 of the hardcopy version.]


      I. 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.

      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.


      Acknowledged_________________________    Date:________
                  On Behalf of Ohio University


      Acknowledged_________________________    Date:________
                  On Behalf of Investment Consultant


      Acknowledged_________________________    Date:________
                  On Behalf of Investment Manager



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    Dick Piccard revised this file (http://www.ohiou.edu/policy/s50-001.html) on September 23, 2005.

    Please E-mail any comments or suggestions to "polproc@www.ohiou.edu".