Missouri Botanical Garden Endowment Investment Policy Statement Adopted May 6, Missouri Botanical Garden Endowment and Similar Funds

Transcription

1 Investment Policy Statement Adopted May 6, 2015 Missouri Botanical Garden Endowment and Similar Funds Investment Policy Statement I. Purpose of Statement of Investment Policy A. This Statement of Investment Policy shall serve as communication regarding the investment practices of the Missouri Botanical Garden aggregate endowment funds (Endowment). This Policy outlines the objectives, goals, restrictions and responsibilities in order that: 1. There is a clear understanding on the part of the Investment Committee (Committee), staff, investment consultant, investment managers and custodian as to the objectives and policies of the Endowment. 2. The investment managers are given guidance and limitations regarding their investment of the Endowment s assets. 3. The Committee has a meaningful basis for the evaluation of: investment performance of the individual investment managers, investment performance of the Endowment as a whole and success of overall investment strategy through achievement of defined investment objectives. This will aid the Committee in fulfilling their fiduciary responsibility to prudently invest and monitor the investment of the Endowment s assets. B. The Endowment shall at all times be managed in accordance with all state and federal laws, rules and regulations and any applicable trust restrictions. C. The intention of this Policy is to also state the general attitudes, philosophy and guidelines regarding: risk, capital market experience, relationship of investments to overall operating budget and investment return expectations. It is intended that the Policy be sufficiently specific to be meaningful, but adequately flexible as to be practical. Therefore, there shall be no material deviation from the Policy by any responsible party without the written permission of the Committee, or in cases of exigent circumstances, the Garden s Controller. II. Identification of Duties and Investment Responsibilities In order to properly carry out its investment strategies, the Committee relies on both staff and outside service providers (e.g., investment consultant, investment managers and custodian banks). Because of the number of parties involved, each entity s role as fiduciary must be clearly identified to ensure operational efficiency, clear lines of communication, and accountability in all aspects of operation. A. Investment Committee: The Investment Committee has the responsibility of managing the investment process. In fulfilling this responsibility, the Committee will review and maintain investment policies and objectives. Within this framework, the Committee will recommend, monitor, and evaluate the investment managers, custodian and other parties 1

2 to ensure that actual results meet objectives. Specific responsibilities include: 1. Reviewing the Garden s financial needs and risk tolerance level and communicating such in the form of investment objectives, an asset allocation and a spending policy. 2. Recommend and review permissible investments. 3. Regular review of this Investment Policy Statement. 4. Assist with the evaluation, selection and termination of investment managers. 5. Monitoring and evaluating performance results to assure that policy guidelines are being adhered to and objectives are being met. 6. Regular review of investment costs. 7. The determination of investment strategy and security selection is delegated to the investment managers. The Committee s role will be supervisory rather than advisory. B. Controller: The Controller is responsible for planning, organizing and administering the operations of the Garden under the broad policy guidance and direction of the Committee. The Controller, with assistance of staff, shall monitor the performance of the investments; ensure funds are invested in accordance with policies; rebalance the various portfolios back to target allocations as necessary; study, recommend and implement policy and operational procedures that will enhance the investment program of the Endowment; and ensure that proper internal controls are developed to safeguard the assets of the Endowment. C. Investment Consultant: It is at the Committee s discretion to retain an investment consultant to assist in the management of the investment process. This includes meeting periodically with the Committee to provide perspective as to the Endowment s goals, structure and the investment management team. The consultant will work with the Committee and staff to develop and maintain a properly diversified portfolio. Fund allocation and performance will be regularly reviewed and recommendations made when appropriate. The consultant will assist the Committee in the area of investment manager selection, when needed, and will promptly inform the Committee and discuss the impact of material changes taking place within any manager s investment process. D. Investment Managers: The investment managers will construct and manage investment portfolios consistent with the investment philosophy and disciplines for which they were retained. They will buy and sell securities and modify the asset mix within their stated guidelines. The Committee believes that investment decisions are best made when not restricted by excessive procedure. Therefore, full discretion is delegated to the investment managers to carry out investment policy within their stated guidelines. 1. The investment managers shall respect and observe the specific limitations, guidelines, attitudes, and philosophies herein, or as expressed in any written amendments. 2

3 2. The investment managers will be responsible for making all investment decisions on a discretionary basis regarding all assets placed under its jurisdiction and will be held accountable for achieving the investment objectives indicated herein. Such discretion shall include decisions to buy, hold, and sell securities in amounts and proportions that are reflective of the investment manager s current investment strategy and compatible with the Endowment s investment guidelines. 3. Whenever investment managers believe that any particular guideline should be altered or deleted, it will be the investment manager s responsibility to initiate written communications with the Controller and/or investment consultant expressing its views and recommendations. 4. Investment Transactions: Managers will buy and sell specific securities within their guidelines. Compliance with these guidelines is mandatory. No deviation will be permitted without express written permission, in advance, from the Controller. 5. Any external manager employed by the Endowment is expected to communicate, in writing, any developments that may impact the portfolio to the Controller and investment consultant within five business days of occurrence. Examples of such events include, but are not limited to: a) A significant change in investment philosophy. b) A loss of one or more key management personnel. c) A new portfolio manager being assigned to the portfolio. d) A change in the ownership structure of the investment management firm. e) Any occurrence that might potentially impact the management, professionalism, integrity or financial position of the investment management firm. E. Bank Custodian: The bank custodian will hold all cash and securities (except for those held in the commingled funds and mutual funds), and will regularly summarize these holdings for the Committee s review. In addition, a bank or trust depository arrangement will be utilized to accept and hold cash prior to allocating it to the investment managers, and to invest such cash in liquid, interest-bearing instruments. III. Spending Policy A. The Committee has adopted a total return spending policy to create a balance between the need for current income and the long-term needs of 1) maintaining the real (inflation adjusted) purchasing power of the Endowment while providing a predictable and stable stream of income and 2) growing the Endowment over time (i.e. capital appreciation), net of inflation and spending. B. Each year the Committee will make available a specific dollar amount for spending. 1. A total return spending policy will be applied to the Endowment Fund. 2. In order to smooth fluctuations in the income stream and avoid excessive and untimely withdrawals of principal, a three-year historical average of the market value shall be utilized to calculate annual income. Such amount shall be 3

4 calculated annually as of June 30 to provide the information necessary for budget planning. 3. The current spending target is %. The spending policy for the endowment will be reviewed at least twice a year or more often as determined by the Finance Committee as it considers requirements of UPMIFA including the financial markets, the overall economy, and the Garden s financial needs. 4. We operate under the Uniform Management of Institutional Funds Act (UPMIFA), approved by the Missouri General Assembly effective August A key component of the statute is that there is no longer an absolute prohibition on spending principal of an endowment where the value has decreased below the original amount of the contribution. Certain reasonable person standards apply and the following summarizes these considerations in the new legislation: In making a determination to appropriate or accumulate, the institution shall act in good faith with the care that an ordinary prudent person in a like position would exercise under similar circumstances and shall consider, if relevant, the following factors: (1) The duration and preservation of the endowment fund; (2) The purposes of the institution and the endowment fund; (3) General economic conditions; (4) The possible effect of inflation or deflation; (5) The expected total return from income and the appreciation of investments; (6) Other resources of the institution; (7) The investment policy of the institution. With the new legislation in place, the Garden can maintain the spending policy of 4-5% for the restricted endowment fund. Taking into account the new legislation, the Garden s current operating needs and the Garden s desire for the endowment to increase over time in order to provide an increasing amount of funds for operation, staff proposes the following spending policy for approval by the Finance Committee. The Garden classifies as permanently restricted assets the original value of gifts donated to the permanent endowment and the original value of subsequent gifts to the permanent endowment. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Garden in a manner consistent with the standard of prudence prescribed by UPMIFA. IV. Investment Philosophy In order to achieve a specified rate of return for the Endowment, the Committee relies on the prevailing financial theory at that point in time, which currently is an investment strategy utilizing 4

5 an appropriate long-term diversified asset allocation model. The Committee recognizes that even though its investments are subject to short-term volatility, it is critical that a long-term investment focus be maintained. This prevents ad-hoc revisions to its philosophy and policies in reaction to either speculation or short-term market fluctuations. In order to preserve this long-term view, the Committee will consider the following review schedule: Agenda Item Investment Performance Investment Policy Broad Asset Allocation Within-Class Asset Allocation Asset/Spending Study Review Schedule Quarterly Every Year Every Year Every Year Every Three Years In determining its philosophy towards risk, the Committee considers in addition to its fiduciary obligation, the entity s purpose, characteristics, and financial condition; liquidity needs; sources and level of income and gifts/endowments; and general business conditions. V. Investment Goals and Objectives A. The overall investment objective of the Endowment is to provide a return on investment, consistent with the Endowment s spending policy that supports the Garden and prevents erosion of purchasing power by inflation. Achievement of the return will be sought from an investment strategy, which provides an opportunity for superior returns within acceptable levels of risk and volatility of returns. This return is formalized below. B. The current investment goal of the Endowment is to achieve a total annualized rate of return equal to or greater than 7.50% (Total Return Goal) net of fees over a market cycle: 1. The total annualized return shall consist of the sum of all dividends, interest, and other income plus both realized and unrealized capital appreciation (or depreciation). 2. The Committee has adopted this Total Return Goal to create a balance between the need for current cash flow to finance the stated activities (spending of %) and the long-term need to maintain the purchasing power of the Endowment (assumed inflation of 2.5%). 3. The Total Return Goal will be constructed based upon the Endowment s current spending policies, the Endowment s asset allocation, assumed asset class returns, and an inflation rate assumption. 4. The Total Return Goal will be reviewed at least annually to evaluate whether it has been achieved, whether it provides enough current income and capital appreciation, and whether it remains relevant when considering current spending policies and the current inflation rate. 5. The Endowment s asset allocation will be the primary tool used to achieve the Total Return Goal. External professional investment managers will be used to invest the Endowment s assets. 5

6 6. The Committee believes a long-term investment time horizon is appropriate and therefore the funds of the Endowment shall be structured, invested and monitored accordingly. C. Manager Investment Goals: 1. Investment performance will be reviewed by the Committee on a quarterly basis in a report prepared by the investment consultant. Managers will be reviewed as follows: 2. a) It is expected that each manager shall achieve an annualized total rate of return, net of fees and transaction costs, over a market cycle (generally 3-5 years) which meets or exceeds a broad market benchmark or index. b) It is also expected that each manager rank above median compared to their style peers over a market cycle. c) Within market cycles, the Committee recognizes that various management styles within the broad market move in and out of favor. Therefore, short-term examination of each manager s performance shall focus on style adherence, style peer comparisons, and style benchmarks. VI. Asset Allocation A. The Committee believes that the level of risk assumed in the Endowment is a function, in large part, of the Endowment s asset allocation. The proportion of assets allocated to equity investments is the most important determinant of volatility for future returns. As indicated by long-term historical data, the risk of equity ownership has been rewarded with a higher rate of return. B. In establishing the asset allocation for the Endowment, the Committee has considered conservative long-term capital market expectations for: expected return, risk, asset class correlations and level of income. C. Based on their determination of the appropriate risk posture for the funds and its longterm expectations, the Committee has established the asset-mix guidelines for the Endowment, which are contained in Attachment A. D. Until such time as the Committee changes the broad asset class targets, a routine rebalancing of the portfolio back to this target allocation shall be implemented by the Controller. A rebalancing trigger will occur whenever the aggregate equity allocations hit either their upper or lower band. At which point, the portfolio will be rebalanced across all asset classes to the target allocations to the extent possible without producing undue transaction costs. The first tool used to achieve this balance will be new cash inflows and outflows. The second mechanism will be the reallocation of funds among the Endowment s investment managers so as to bring the asset class allocations back within policy. The Committee shall be informed of all rebalancing activities requiring a reallocation of funds. VII. Permissible Investments The Committee recognizes that risk (i.e., the uncertainty of future events), volatility (i.e., the potential for variability of asset values), and the possibility of loss in purchasing power (i.e., 6

7 inflation) are represented to some degree in all types of investment vehicles. While high levels of risk are to be avoided, as evidenced by high volatility and low quality rated securities, the Committee recognizes that a prudent level of risk is necessary in order to allow the Endowment the opportunity to achieve satisfactory long-term results consistent with its objectives. All assets selected within any portfolio must have a readily attainable market value, and must be readily marketable. In order to provide the investment managers with flexibility to invest in various types of assets, the following list of assets are among those approved for investment. Equities: U.S. and Foreign Common Stocks U.S. and Foreign Preferred Stocks Stock Index Futures (for hedging purposes only) Convertible Securities, including Debentures American Depository Receipts Real Estate Investment Trusts (REITs) Domestic Fixed Income: U.S. Treasury and Agency Securities (Notes and Bonds) U.S. Corporate Notes and Bonds (Investment grade at the time of purchase) Taxable Municipal Bonds Mortgage Backed Securities Asset Backed Securities Private Real Estate: Discretionary commingled funds such as insurance company separate accounts, closedend or open-end funds, and real estate investment trusts holding either leveraged or unleveraged positions in real property and real property related assets. Private Equity: Discretionary commingled funds investing in buyouts, venture capital, mezzanine, distressed debt and other private assets. MLPs: Energy-related Master Limited Partnerships. Cash Equivalents: U.S. Treasury Bills Certificates of Deposit Commercial Paper (Rated A-1 or P-1 or higher) Repurchase Agreements Currency Investments: Foreign exchange futures, forwards and swaps (applies exclusively to the international managers, who can utilize for currency hedging purposes only) VIII. Implementation A. Policy Compliance: All external investment managers are employed at the pleasure of the Endowment. Failure to follow these guidelines, and/or the manager-specific guidelines in the Investment Instructions attached to this Policy may result in termination. During periods in which an investment manager is being funded with capital to invest within their portfolio, the manager is allowed to exceed the cash limitations described in their investment policies and guidelines, until such time as portfolio construction has been completed, but not to exceed 30 days. During periods in which a current investment manager undergoes a material change in its investment guidelines, the investment consultant and the manager will agree on a 7

8 reasonable time, not to exceed 30 days, in which the manager can be in technical violation of the policy as it transitions the portfolio to its new mandate. B. Derivative Security Policy: Investment managers should seek approval from the Committee to use an instrument if that instrument is not specifically addressed within their investment guidelines. The purpose of these restrictions is to avoid those holdings that might produce non-market-like risks to the Endowment. C. Prohibited Transactions: In addition to all other guidelines outlined in this document, the following apply: No use of leverage in the portfolio. No use of linked securities that have the principal value or interest rate tied to anything not specifically allowed as permissible investments in these guidelines. Any structured note must maintain a constant spread relationship with its underlying acceptable index. D. Proxy Voting: The Committee, as part of their duties and responsibilities, shall have the right to vote any and all proxies solicited in connection with securities held by the Endowment, but chooses to delegate to the investment managers the responsibility to vote any and all proxies. The investment manager has the responsibility to vote solely in the interest of the Endowment and to protect the value of the securities within the portfolio. Investment managers shall keep accurate records of all proxies voted and shall submit a summary report of it to staff on an annual basis. This report should be exception based, outlining those times when the investment manager did not vote with company management. The Committee reserves the right to provide additional proxy-voting direction to its managers at any time. E. Securities Lending: The Committee may elect to hire a Securities Lending Agent to lend financial securities of the Endowment. All cash collateral received from securities borrowers will be deposited upon receipt in a pre-specified short-term investment vehicle or vehicles. The Agent may lend financial securities (including but not limited to U.S. and non-u.s. securities.) This Agent shall have full discretion over the selection of borrowers through adequate analysis of publicly available information and any other material available to them. No more than 30% of the Endowment s securities on loan shall be loaned to any one borrower. All loans shall be fully collateralized with cash or government securities. Collateralization of such loans shall be at least 102% of the market value for domestic lending and 105% of the market value for international lending plus accrued income for U.S. and non-u.s. loans, respectively. Securities on loan should be marked-to-market on a daily basis to assess adequacy of collateralization. The Agent shall provide periodic performance reports to the Committee and staff. The Securities Lending program shall in no way inhibit the trading activities of the Endowment s investment managers. In the event that the Committee utilizes commingled vehicles, the commingled investment manager may engage in securities lending at their own discretion, but should notify (in advance) the Committee of their intent to utilize a securities lending program. The investment manager should inform the manager of any securities lending practices (level of collateral, types of investments acceptable as collateral) that are more aggressive than those outlined above. F. Performance Evaluation and Review: On a quarterly basis, the Controller, investment consultant and/or the Committee will review actual investment results achieved to 8

9 determine whether: 1. The investment managers performed in accordance with the policy guidelines set forth herein. 2. Asset allocation remains reasonable and each manager s security selection decision making process remains consistent with the style and methodology represented by the manager and originally hired by the Committee. 3. The investment manager performs satisfactorily when compared with: a) The objectives stated herein, as a primary consideration. b) Recognized market indices. 4. Review commissions generated, commission rates charged and firms used by the investment managers. 5. Investment performance will be compared using market indices and a statistically valid performance universe provided by the investment consultant. IX. Communications A. Investment managers and bank custodian communications with staff and the investment consultant: 1. Provide portfolio valuation and transaction listings on at least a monthly basis. 2. Review at least annually with the Committee: a) Investment performance; including levels of income and capital appreciation b) Fund policy and objectives c) Investment strategy and economic outlook d) Securities held e) Changes in form, strategy, etc. B. Committee communication with investment managers: 1. On a timely basis, the Committee will provide the investment managers with changes to the Investment Policy Statement. 2. Discuss with the investment managers: a) Any modifications and changes to the Endowment s investment objectives, goals and guidelines b) Any significant anticipated changes in the Endowment s cash flow c) Any other matters which may bear upon the Endowment s assets Statement of Investment Policy A. Missouri Botanical Garden Endowment ATTACHMENT A 9

10 X. Asset Class Target Allocation Permissible Range Equities: 65.0% 60.0% % Domestic Equity 28.5% 23.5% % Large Core 8.0% Large Growth 8.0% Large Value 8.0% Small-Mid Cap 4.5% International Equity 31.5% 26.5% % Large Cap 21.0% Small Cap 3.0% Emerging Markets 7.5% Global Equity 5.0% 0.0% % Fixed Income: 20.0% 15.0% % Core 10.0% 5.0% % Core Plus 10.0% 5.0% % Real Estate: 10.0% 5.0% % Core 5.0% 0.0% % Value Added 5.0% 0.0% % MLPs 5.0% 0.0% % Private Equity 0.0% 0.0% - 5.0% Total: 100.0% Rev