Bd. Min. 12-6-91, Amended Bd. Min. 12-9-93; Amended Bd. Min. 11-14-94; Amended Bd. Min. 12-13-96; Amended Bd. Min. 9-26-97; 1-21-98; Revised 02-01-00; Amended Bd. Min. 7-13-00; Amended Bd. Min. 9-27-02; Amended Bd. Min 11-22-02; Revised 1-5-04; Amended Bd. Min. 9-9-04; Amended Bd. Min. 1-26-07; Amended Bd. Min. 2-6-09.
A. Introduction -- The University's Endowment Fund includes all gifts, bequests and other funds directed to be used to support a University program in perpetuity. Some donors require such a commitment as a condition of their gift. (These donations are referred to as "true endowments.") Also, funds may be assigned to function as endowments by the Board of Curators or by University administration. (These funds are referred to as "quasi endowments.") Examples of activities supported by true and quasi endowments include:
o chairs, professorships, and lectureships
o scholarships
o research support
o unrestricted use
This Investment Policy is established to provide direction for the investment and management of the endowment assets.
B. Responsibilities and Authorities -- The Board of Curators of the University of Missouri bears the ultimate responsibility for the management and oversight of endowment assets. The Board has delegated implementation of the Board's policies to the President of the University. The University officials with operating and supervisory responsibilities are the Vice President for Finance and Administration and the Treasurer.
C. Objectives -- The primary objective of the management of the endowment assets is to ensure that the endowment fund supports continually the purposes established by the Board in conformance with donor stipulations. It is the objective of the University to achieve investment results over time that will i) support the purposes for which the endowment was established and ii) maintain the purchasing power of the endowment. In pursuing these objectives, compliance will be maintained with the fiduciary duties applicable to investments set forth in Section 105.688 of the Revised Statutes of Missouri, as the same may be amended from time to time.
D. Development of Investment Philosophy and Strategy
1. Spending Limits -- The University Endowment Fund must be managed to provide ongoing support of endowed programs for perpetuity. The investment implication: a prudent approach to spending and reinvestment, using a spending formula, is necessary to provide protection against inflation over time. The spending formula to be used distributes annually 5% of a trailing 12-quarter average of the endowment's total market value, with the understanding that this spending rate over the long-term will not exceed total real return (return net of inflation) from investments. To achieve some uniformity in amounts to spend from one year to the next, the actual amount available to spend in any given year will not exceed 106% of the prior year's expenditure, or be less than 96% of the prior year's expenditure.
2. Asset Mix -- Simulations were done using various investment scenarios and asset mixes, resulting in a broad spectrum of investment risk and return. The implication: the probability of meeting long-term real return targets is higher through a diversified portfolio with a heavy exposure to equities and alternative investments (encompassing real estate, absolute return strategies, and private equity); increased real spending from the endowment is more likely with a heavy emphasis on equities and alternative investments; and, over time, there is a slightly higher probability of shortfall from real return targets with a heavier equity exposure. The simulations show the importance of maintaining a long-term orientation to investment of the assets. The University should have a substantial commitment to equity securities and alternative investments. Investment sectors include (but are not limited to) U.S. equities, international equities, real estate, and private equities. Other sectors include fixed income investments (including Treasury Inflation-Protected Securities) and absolute returns. The role of fixed income investments is to provide cash flow and diversify exposure. The role of absolute returns is to provide a positive real return over the return on cash investments.
3. Other -- The University of Missouri has an active and ongoing interest in doing business with firms that are owned, controlled, and operated by citizens of the state of Missouri. In addition, the University is committed to supporting the participation of minority and women-owned and controlled asset management firms (as defined in Section 33.750 (3), (4), and (5), RSMo 2000) in the management of its Funds. In order to facilitate the consideration of such firms by the Finance and Audit Committee, all groups of candidates brought forward for the Committee's consideration for investment mandates will include candidate(s) which have the above attributes whenever such a qualified candidate or candidates meet the University's threshold manager selection criteria. The University urges firms to identify any affiliations they might have with the state of Missouri for this purpose.
E. Investment Sectors
1. Asset sectors were analyzed with regard to long-term expected rates of return, volatility and correlations among asset sectors. As a result, approved investment sectors include:
a. U.S. equity
b. International equity
c. Emerging markets equity
d. Absolute return strategies
e. Private equity
f. Real estate
g. Global fixed income
h. TIPS (Treasury Inflation-Protected Securities)
2. Each sector's assets will be invested by professional managers. Sector strategies and managers will be structured to enhance the probability of meeting the fund's objectives.
3. Diversification will be maintained both between and within sectors.
4. The attached individual sector guidelines (and, within the sector guidelines, individual manager guidelines) are incorporated as part of this Statement of Investment Policy (See Attachments A, B, C, D, E, F, G, and H).
F. Target Asset Mix
1. On the basis of a long-term orientation, the asset mix is as follows:
|
Sectors |
Target Asset Mix |
Allowable Range |
|
U.S. equity |
32.0% |
27.0-37.0% |
|
International equity |
19.0% |
14.0-24.0% |
|
Emerging markets equity |
7.5% |
2.5-12.5% |
|
Absolute return strategies |
5.0% |
0.0-10.0% |
|
Private equity |
5.0% |
0.0-10.0% |
|
Real estate |
7.5% |
2.5-12.5% |
|
Global fixed income |
17.0% |
12.0-22.0% |
|
TIPS (Treasury Inflation-Protected Securities) |
7.0% |
2.0-12.0% |
|
Total |
100.0% |
2. Short-term changes in market behavior may result in variations from the target within the allowable range. The portfolio will be monitored on an ongoing basis. Rebalancing will take place at least annually, and more often if necessary to maintain allocations within the allowable range.
G. Fixed Income Pool -- In addition to the University's main endowment fund, there is a fixed income fund, called the Fixed Income Pool, which, due to donor restrictions, can only be invested in fixed income securities. The spending policy of the pool is to distribute all income earned. The pool shall have a medium term investment outlook in order to dampen the effect of changes in short-term rates. Investment sectors include (but are not limited to) fixed income securities issued by the United States government and its agencies, corporate fixed income, commercial paper, and repurchase agreements. The assets of the Pool will be invested by professional managers within the University of Missouri's Treasurer's Office. The investment results will be measured on a quarterly basis and analyzed upon the completion of a full market cycle. Investment results will be compared against the Lehman Brothers Government/Credit Bond Index. The investment objectives of the Pool are to provide a 2.75% premium over the rate of inflation over a full economic/market cycle and to counteract the effect of interest rate shifts on endowment distributions. On an annualized fee-adjusted basis the Pool is expected to deliver an excess of 0.50% over the risk benchmark return. The risk benchmark will be the Lehman Brothers Government/Credit Bond Index, which approximates the characteristics of the U.S. fixed income market. Fixed income securities must have a quality rating of "A" or better as determined by Standard and Poor's Rating Service.
H. Separately Invested Accounts -- In addition to the University's main endowment fund, there are separately invested accounts for individual endowment funds which, due to donor restrictions, cannot be commingled for investment purposes.
I. Master Custodian -- A master custodian shall be retained by the Fund to provide a variety of services, including, but not limited to: safekeeping of securities, collection of income and other inflows, disbursement for investment management fees, and a monthly accounting of all transactions.
J. Securities Lending -- The Treasurer is authorized to implement a securities lending program. Securities participating in the program shall be fully collateralized and marked to the market daily.
K. Proxy Voting -- Proxy voting power is an asset of the Fund and is subject to the same management as all other Fund assets. Accordingly, the investment manager has the responsibility and liability for voting proxies appurtenant to the Fund-owned securities under its management. The voting of proxies must be done in a prudent manner and solely in the interest of the Fund.
L. Cash Flows -- The Treasurer is responsible for identifying the sources and destinations of all cash flows consistent with this investment policy, including gifts, distributions and transfers.
M. Benchmarks
1. Market Cycles -- The investment program is constructed to deliver a premium above inflation over market cycles for all sectors. A market cycle is defined to include both a period of declining prices and a period of rising prices. Generally, a full cycle will include a "bear" leg of at least two calendar quarters. The duration of a complete cycle would be a minimum of 3 to 5 years, and possibly longer.
2. Active/Passive Management -- Active management (security selection) will be used when it is expected to add value in excess of passive implementation (investment in a market index). Passive management will be implemented when value cannot be added through active management.
3. Benchmarks -- Investment results will be compared against a hybrid market index constructed as follows:
|
Benchmarks |
|
|
Russell 3000 domestic equity index |
37.0% |
|
EAFE international equity index |
19.0% |
|
IFC Investable Composite Index (emerging markets) |
7.5% |
|
T-bills plus 5% (absolute returns) |
5.0% |
|
NCREIF real estate index |
7.5% |
|
Barclays Global Aggregate bond index |
17.0% |
|
Lehman Brothers US TIPS bond index |
7.0% |
N. The Treasurer will monitor and report on a regular basis on the overall structure and results of the investment program and recommend changes as required to meet the established objectives.
Investment policy as set forth in this statement will be reviewed annually and policy amendments will be submitted to the Board of Curators as necessary.
Attachment A: Sector Guidelines -- U.S. Equity
A. Investment Objective -- to provide a 5.0% premium over the rate of inflation and to give the Fund the ability to participate in the growth of the U.S. equity market.
B. Implementation -- Assets will be actively or passively managed by professionals with proven track records.
C. Diversification by Style -- To ensure diversification by style, a variety of managers will be employed providing different and complementary strategies of equity investing.
D. Foreign Assets -- ADR's (dollar-denominated foreign securities) may be held in the portfolio, in those instances in which country allocation judgment has been demonstrated, and if expressly authorized in individual portfolio guidelines.
E. Exposure to the Equity Market -- Unless specifically otherwise authorized in the individual manager guidelines, all portfolios are expected to remain fully invested, with average cash levels below 10%.
F. Risk Benchmark -- The Russell 3000 index has been selected as a proxy for the readily investable universe of U.S. domestic stock issues. The composite of all equity portfolios will be measured on a regular basis to keep characteristics in the composite in line with those of the Russell 3000 index.
G. Rate of Return Benchmarks
1. Measured over a full economic/market cycle, the U.S. equity sector is expected to deliver both a 5.0% premium over the inflation rate and, on an annualized and fee-adjusted basis, a 0.75% excess over the return of the Russell 3000 index.
2. Over shorter measurement periods, the U.S. equity sector is expected to deliver a fee-adjusted return equal to or better than the index return.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment B: Sector Guidelines -- International Equity
A. Investment Objective -- To provide a 5.8% premium over the rate of inflation, to provide the Fund the ability to participate in the growth of non-U.S. economies and markets, and to provide additional diversification with U.S. equity investments to further enhance long-term real growth.
B. Implementation -- Assets will be actively or passively managed by professionals with proven track records.
C. Diversification by Style -- A variety of managers of different and complementary styles shall be used to provide diversification.
D. U.S. Assets -- U.S. assets and ADR's (dollar-denominated foreign securities) may be held in the portfolio, in those instances in which country allocation judgment has been demonstrated, and if expressly authorized in individual portfolio guidelines.
E. Exposure to the Equity Market -- Unless specifically otherwise authorized in the individual manager guidelines, all portfolios are expected to remain fully invested with average cash levels below 10%. Where cash is held pending investment, it may be held in foreign currency.
F. Exposure to Currency Effect -- Each manager may hedge their currency exposures back to the U.S. dollar based on the manager's outlook and strategy at the time of the hedge. However, unless otherwise agreed to, the manager will be compared against an unhedged benchmark.
G. Risk Benchmark -- The MSCI EAFE (Europe, Australia and the Far East) equity index will be used as a proxy for the readily investable universe of foreign stock issues. The composite of all international equity portfolios will be measured on a regular basis to ensure that exposure characteristics in the composite are in line with those of the index.
H. Rate of Return Benchmarks
1. Measured over a long time period, such as five years or a full U.S. domestic economic/market cycle, the international equity sector is expected to deliver a 5.8% premium over inflation and, on an annualized fee-adjusted basis, a 1% excess over the return of the EAFE equity index.
2. Over shorter measurement periods, the international equity sector is expected to deliver a fee-adjusted return equal to or better than the index return.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment C: Sector Guidelines -- Emerging Markets Equity
A. Investment Objective -- To provide a 6.8% premium over the rate of inflation, to allow the Fund to participate in emerging economies and their higher expected growth rates, and to provide additional diversification with U.S. equity investment to further enhance long-term real growth.
B. Implementation -- Assets will be actively or passively managed by professionals with proven track records.
C. Diversification by Style -- A variety of managers of different and complementary styles shall be used to provide diversification.
D. U.S. Assets -- U.S. assets and ADR's (dollar-denominated foreign securities) may be held in the portfolio, in those instances in which country allocation judgment has been demonstrated, and if expressly authorized in individual portfolio guidelines.
E. Exposure to the Equity Market -- Unless specifically otherwise authorized in the individual manager guidelines, all portfolios are expected to remain fully invested with average cash levels below 10%. Where cash is held pending investment, it may be held in foreign currency.
F. Exposure to Currency Effect -- Each manager may hedge their currency exposures back to the U.S. dollar based on the manager's outlook and strategy at the time of the hedge. However, unless otherwise agreed to, the manager will be compared against an unhedged benchmark.
G. Risk Benchmark -- The IFCI Composite emerging markets equity index will be used as a proxy for the readily investable universe of emerging markets stock issues. The composite of all emerging markets equity portfolios will be measured on a regular basis to ensure that exposure characteristics in the composite are in line with those of the index.
H. Rate of Return Benchmarks
1. Measured over a longer time period such as five years or a full U.S. domestic economic/market cycle, the emerging markets equity sector is expected to deliver a 6.8% premium over inflation and, on an annualized fee-adjusted basis, 2%-4% excess over the return of the IFCI Composite equity index.
2. Over shorter measurement periods, the emerging markets equity sector is expected to deliver a fee-adjusted return equal to or better than the index return.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment D: Sector Guidelines -- Absolute Return Strategies
A. Investment Objective -- To provide a 5.0% premium over the 3-month T-bill rate.
B. Implementation -- Assets will be actively managed by professionals with proven track records.
C. Diversification -- A variety of managers of different and complementary styles shall be used to provide diversification.
D. Risk Benchmark -- The three-month U.S. Treasury Bill has been selected as a proxy for the readily investable universe of absolute return funds. The composite of all absolute return portfolios will be measured on a regular basis.
E. Rate of Return Benchmarks -- Measured over a full economic/market cycle and on an annualized and fee adjusted basis, the absolute return sector is expected to deliver a 5% premium over the 3-month T-bill rate.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment E: Sector Guidelines -- Private Equity
A. Investment Objective -- To provide a 3.0% premium over the rate of return of the public equity markets, to give the Fund the ability to participate in the growth opportunities in the private equity sector, and to provide additional diversification to further enhance long-term real growth.
B. Implementation -- Assets will be actively managed by professionals with relevant experience and qualifications.
C. Diversification -- A variety of partnerships, funds, and managers, with different and complementary products, styles, and strategies, shall be used to provide diversification.
D. Risk Benchmark -- The Russell 3000 index has been selected, although the pricing conventions for private equity investments make volatility calculations and comparisons difficult.
E. Rate of Return Benchmarks -- Over time, this composite is expected to outperform the publicly traded markets, as measured by the Russell 3000 index, by 3%, in compensation for the illiquidity of these investments. The primary rate of return tool for the private equity sector will be an Internal Rate of Return (IRR) calculated for each private equity partnership over the life of the investment. These investments will be compared with other partnerships of similar vintage periods and strategies.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment F: Sector Guidelines -- Real Estate
A. Investment Objective -- To provide a 4.0% premium over the rate of inflation.
B. Implementation -- Assets will be actively managed by professionals with proven track records.
C. Diversification -- To ensure diversification within the real estate sector, a variety of managers will be employed providing different and complementary strategies of real estate investing.
D. Risk Benchmark -- The NCREIF real estate index, which approximates the characteristics of the real estate sector, will be used as a proxy for the investable universe of real estate. The composite of all real estate portfolios will be measured on a regular basis.
E. Rate of Return Benchmarks -- Over a full economic/market cycle and on an annualized and fee-adjusted basis, real estate investments are expected to deliver a 4.0% premium over the rate of inflation.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment G: Sector Guidelines -- Global Fixed Income
A. Investment Objective -- To provide a 3.25% premium over the rate of inflation, to counteract the effect of interest rate shifts on endowment distributions and to provide for diversification of total fund assets.
B. Implementation -- Assets will be actively managed by professionals with proven track records.
C. Diversification -- To ensure diversification within the global fixed income sector, a variety of managers will be employed providing different and complementary strategies of global fixed income investing.
D. Exposure to the Global Fixed Income Market -- Unless specifically authorized in the individual manager guidelines, all portfolios are expected to remain fully invested with average cash levels below 10%. Where cash is held pending investment, it may be held in foreign currency.
E. Exposure to Currency Effect -- Each manager may hedge their currency exposures back to the U.S. dollar based on the manager's outlook and strategy at the time of the hedge. However, unless otherwise agreed to, the manager will be compared against an unhedged benchmark.
F. Risk Benchmark -- The Barclays Global Aggregate bond index, which approximates the characteristics of the global fixed income market, has been selected as a proxy for the readily investable universe of global fixed income securities.
G. Rate of Return Benchmarks
1. Measured over a full economic/market cycle, the global fixed income sector is expected to deliver on an annualized fee-adjusted basis, a 3.25% premium over the rate of inflation.
2. Over shorter measurement periods, the global fixed income sector is expected to deliver a fee-adjusted return equal to or better than the index return.
H. Bond Quality Ratings -- U.S. fixed income securities must have a quality rating of "A" or better as determined by Standard and Poor's, or a comparable rating service. Non-U.S. fixed income securities must have a quality rating comparable to that offered by the U.S. rating services.
I. Allocations to U.S./NON-U.S. Bonds -- Each manager has the ability to shift between U.S. and non-U.S. bonds.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Attachment H: Sector Guidelines -- Treasury Inflation-Protected Securities (TIPS)
A. Investment Objective -- To provide an inflation hedge, to counteract the effect of interest rate shifts on endowment distributions, and to provide for diversification of total Fund assets.
B. Implementation -- Assets will be actively managed by professionals with proven track records.
C. Diversification -- To ensure diversification within the TIPS sector, a variety of managers will be employed.
D. Exposure to the TIPS Market -- Unless specifically authorized in the individual manager guidelines, all portfolios are expected to remain fully invested with average cash levels below 10%.
E. Risk Benchmark -- The Lehman Brothers US TIPS bond index, which approximates the characteristics of the TIPS market, has been selected as a proxy for the readily investable universe of TIPS.
F. Rate of Return Benchmarks
1. Measured over a full economic/market cycle, the TIPS sector is expected to deliver a return at least comparable to the return on the TIPS bond index.
2. Over shorter measurement periods, the TIPS sector is expected to deliver a fee-adjusted return equal to or better than the index return.
G. Bond Quality Ratings -- Treasury Inflation-Protected Securities must have an investment grade quality rating as determined by Moody's, Standard and Poor's, or a comparable rating service. Non-rated fixed income securities are permissible if it can be demonstrated they are of like or higher quality than the rated securities described herein.
Sector guidelines will be reviewed and revised as necessary in conjunction with annual review of investment policy.
Responsibilities
The Board of Curators delegates to the President of the University the following responsibilities:
1. Recommend to the Board policies to meet investment objectives for the Endowment Fund.
2. Implement and monitor investment policies.
3. Recommend custodians, investment managers, and consultants as needed for the management of the funds and report actions to the Board.
4. Evaluate and monitor custodians, investment managers, and consultants and report to the Board.
5. Report periodically to the Board on the status of the funds relative to the satisfaction of the investment objectives.
6. Monitor the effects of the spending policy and recommend modifications as appropriate.
7. Maintain accurate records for the Fund.
