University of Missouri System

Collected Rules and Regulations

Financial Management

Chapter 140: Investments

140.012 Investment Policy for Retirement, Disability and Death Plan

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 2-01-00; 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.

1. Introduction -- The University's Retirement, Disability and Death Benefit Plan was established to provide retirement income and other stipulated benefits to qualified employees in amounts and under the conditions described in the Plan. A Trust was established in 1958 and is being funded to provide the financial security of those benefits. This Investment Policy was established to provide direction to the investment and management of Plan assets.



2. Responsibilities and Authorities -- The Board of Curators of the University of Missouri bears the ultimate responsibility for the trust 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.



3. Objectives -- The primary objective to be achieved in the active management of trust assets is to provide for the full and timely payment of retirement, disability and death benefits to qualified employees. In order to fulfill this objective the University must maintain a prudent actuarially sound funding of the Plan's liabilities. This funding requirement is derived from two principal sources; the total investment return on Plan assets and the amount of University contributions. In order to minimize the University's required contributions it is imperative that total investment returns be maximized. 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.



4. Development of Investment Philosophy and Strategy
   1. The University of Missouri wishes to reduce contributions to a minimum while maintaining prudent actuarial funding. The execution of this investment program is to be conducted at a level of investment risk deemed appropriate for the University's overall financial status. A diversified investment structure dominated by equity securities is necessary for the University to achieve these goals.
   2. The impact of different asset mixes on the level of retirement plan assets, funded ratios, and contributions were simulated for various investment scenarios. The objective was to determine the appropriate tradeoff between possible investment risks and returns for the University. These simulations indicated the importance of earning a premium return above the actuarial investment return assumption of 8.0% to accomplish the dual goal of minimizing contributions and maintaining the funded ratio. The simulations also indicated the possible risks attributable to poor investment results, which might result from various portfolios of equity and fixed income assets. The simulations show the importance of maintaining a long-term orientation to investment of the assets.
   3. It is concluded that an investment structure with a heavy exposure to equity securities and alternative investments (encompassing real estate, absolute return strategies, and private equity) will provide over the long term the level of return sufficient to achieve the University's investment goals while remaining within the University's ability to bear investment risk. It is also concluded that the investment structure should be broadly diversified by asset class and investment manager. Investment sectors, including (but not limited to) U.S. equities, international equities, real estate, and private equities are all considered appropriate for the University. The role of fixed income investments (including TIPS) is to provide stability of returns. The role of absolute returns is to provide a positive real return over the return on cash investments.
   4. 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.
      
      
5. 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:
      1. U.S. equity
      2. International equity
      3. Emerging markets equity
      4. Absolute return strategies
      5. Private equity
      6. Real estate
      7. Global fixed income
      8. 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 Plan'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).
      
      
6. Target Asset Mix
   1. On the basis of long-term orientation, the target asset mix is as follows:

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.
   
   
7. Master Custodian -- A master custodian shall be retained by the Plan 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.
   
   
8. 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.
   
   
9. Proxy Voting -- Proxy voting power is an asset of the Plan and is subject to the same management as all other Plan assets. Accordingly, the investment manager has the responsibility and liability for voting proxies appurtenant to the Plan-owned securities under its management. The voting of proxies must be done in a prudent manner, solely in the interest of the Plans' participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries.
   
   
10. Cash Flows -- The Treasurer is responsible for identifying the sources and destinations of all cash flows consistent with this investment policy, including benefit payments, contributions and transfers.
    
    
11. 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 -- -- Expecting that active management (security selection) will add value in excess of passive implementation (investment in a market index), all sector investments will be actively managed by professionals specialized in that sector. The results of their decisions will be measured on a quarterly basis and analyzed upon the completion of a full market cycle.
       
       

Investment results will be compared against a hybrid market index constructed as follows:

Sectors
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%
50% Citigroup World Government Bond Index (hedged) and 50% Lehman Brothers Global Aggregate bond index	17.0%
Lehman Brothers US TIPS bond index	7.0%

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

 

1. 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.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. Diversification by Style -- To ensure diversification by style, a variety of managers will be employed providing different and complementary strategies of equity investing.
   
   
4. 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.
   
   
5. 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%.
   
   
6. Risk Benchmark -- The Russell 3000 index will be used 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.
   
   
7. 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

 

1. 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 investment to further enhance long-term real growth.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. Diversification by Style -- A variety of managers of different and complementary styles shall be used to provide diversification.
   
   
4. 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.
   
   
5. 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.
   
   
6. 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.
   
   
7. 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.
   
   
8. 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 international equity sector is expected to deliver a 5.8% premium over inflation and, on an annualized fee-adjusted basis, 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

 

1. 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.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
3. Diversification by Style -- A variety of managers of different and complementary styles shall be used to provide diversification.
   
   
4. U.S. Assets -- U.S. assets and ADR's (dollar-dominated 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.
   
   
5. 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.
   
   
6. 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.
   
   
7. 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.
   
   
8. 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 a 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

 

1. Investment Objective -- To provide a 5.0% premium over the 3-month T-bill rate.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. Diversification -- A variety of managers of different and complementary styles shall be used to provide diversification.
   
   
4. 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.
   
5. 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 5.0% 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

 

1. 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.
   
   
2. Implementation -- Assets will be actively managed by professionals with relevant experience and qualifications.
   
   
3. Diversification -- A variety of partnerships, funds, and managers, with different and complementary products, styles, and strategies, shall be used to provide diversification.
   
   
4. Risk Benchmark -- The Russell 3000 index has been selected, although the pricing conventions for private equity investments make volatility calculations and comparisons difficult.
5. Rate of Return Benchmark -- 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 the Internal Rate of Return (IRR) calculated for each private equity investment 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

 

1. Investment Objective -- To provide a 4.0% premium over the rate of inflation.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. 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.
   
   
4. 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.
   
5. 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

 

1. Investment Objective -- To provide a 3.25% premium over the rate of inflation, to counteract the effect of interest rate shifts on calculated plan liabilities and to provide for diversification of total Plan assets.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. 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.
   
   
4. Exposure to the Global Fixed Income -- 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.
   
   
5. 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.
   
   
6. Risk Benchmark -- A blended benchmark consisting of 50% Citigroup World Government Bond Index (hedged) and 50% Lehman Brothers Global Aggregate bond index, which approximates the characteristics of the global fixed income market, will be used as a proxy for the readily investable universe of global fixed income securities.
   
   
7. 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, 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.
   
   
8. Bond Quality Ratings -- U.S. fixed income securities must have a quality rating of "A" or better as determined by Standard & Poor's rating service. Non-U.S. fixed income securities must have a quality rating comparable to that offered by the U.S. rating services.
   
   
9. Allocations to U.S./NON-U.S. Bonds -- Each manager has the ability to shift between U.S. and non-U.S. bonds. This will result in wide variations over time in the percentages held in U.S. versus non-U.S. bonds. It is expected that the allocation to U.S. bonds will vary between a low of 15% and a maximum of 60%. The allocation to non-U.S. bonds can be expected to fall between a band of 40% to 85%.
   
   

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)

 

1. Investment Objective -- To provide an inflation hedge, to counteract the effect of interest rate shifts on calculated plan liabilities, and to provide for diversification of total Plan assets.
   
   
2. Implementation -- Assets will be actively managed by professionals with proven track records.
   
   
3. Diversification -- To ensure diversification within the TIPS sector, a variety of managers will be employed.
   
   
4. 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%.
   
   
5. 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.
   
   
6. 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.
   
   
7. 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 Plan.
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. Recommend contributions to the Plan.
7. Recommend annuity, mortality and other tables as may be useful in actuarial determination.
8. Recommend actuarial valuations made by experts retained for that purpose.
9. Maintain data necessary for actuarial valuations of the assets of the Plan.
10. Maintain accurate records for the Plan.