Investment Policy Statement For Montana Community Foundation MCF Investment Portfolio

Transcription

1 Statement For Montana Community Foundation MCF Investment Portfolio Revised: October 2007 Revised: March 2011 Revised: November 2015

2 Table of Contents I. Introduction...2 PURPOSE OF THIS POLICY STATEMENT... 2 INVESTMENT OBJECTIVE... 2 II. Information about the Montana Community Foundation...3 III. Responsibilities of the Fund Representatives...4 BOARD OF DIRECTORS... 4 FINANCE/INVESTMENT COMMITTEE... 4 PRESIDENT/CFO... 4 INVESTMENT CONSULTANT... 5 THE CUSTODIAN... 5 ETHICS AND CONFLICTS OF INTEREST... 5 IV. Responsibilities of the Investment Managers...5 FIDUCIARY RESPONSIBILITIES... 6 PROXY VOTING... 6 V. Risk Tolerance...6 VI. Asset Allocation Strategy...7 VII. Investment Objectives...9 VIII. Investment Strategy...9 SELECTION CRITERIA FOR INVESTMENT MANAGERS... 9 IX. Investment Guidelines...11 X. Exclusions...11 XI. Execution of Transactions...12 XII. Meetings and Communications...12 XIII. Performance Evaluation...12 XIII. Guidelines for Corrective Action...13 XIV. Alternative Investments Portfolio(s)...13 XV. Approvals...15

3 I. Introduction Purpose of this Policy Statement This outlines the investment goals and objectives for the Montana Community Foundation ( Foundation ) Pooled Investment Portfolio (the Fund ). This document is intended to provide guidelines for managing the Fund, and outlines certain specific investment policies that will govern how these goals and objectives are expected to be achieved. This statement: Describes an appropriate risk posture for the investment of the Fund; Establishes investment guidelines regarding the selection of investment managers, mutual Funds, and permissible securities, and the diversification of the Fund; Specifies the criteria for evaluating the performance of investment managers and the Fund as a whole; and Defines the responsibilities of the Board of Directors ( Board ), the Finance/Investment Committee ( Committee ), investment managers, and other parties responsible for the management of the Fund. The Board believes that the investment policies described in this statement should be dynamic. These policies should reflect the Foundation s financial status and the Board s duties and philosophy regarding the investment of these funds. These policies will be reviewed and revised periodically to ensure they adequately reflect changes related to the Foundation, the Fund and the capital markets. Investment Objective The Fund shall be invested in accordance with sound investment practices that emphasize long-term investment Fundamentals. In establishing the investment objectives of the Fund, the Finance/Investment Committee ( Committee ), takes into account the time horizon available for investment, the Foundation s financial needs and circumstances and the role these funds play in satisfying these needs and other factors that affect risk tolerance. The Committee recommended, and the Board adopted, an investment objective of growth and income for these funds. This investment objective: Is a balanced investment approach that is expected to achieve a positive rate of return over the long-term that will meet the cash flow needs of the Foundation; Is expected to earn long-term returns sufficient to maintain or grow the purchasing power of assets over the long-term, net of cash flows; Implies a long-term time horizon available for investment in order to benefit from total returns that would normally accrue to a patient investment strategy; Seeks to generate a level of current income sufficient to meet distribution needs. Recognizes that the assets of the Fund are exposed to risk and the market value of the Fund may fluctuate from year-to-year. This volatile performance is acceptable, as long as the funds are invested primarily for capital appreciation over the long-term; Page 2

4 Diversifies the Fund in order to reduce the risk of wide swings in market value from yearto-year, or of incurring large losses that may result from concentrated positions; and Is expected to achieve investment results over the long-term that compare favorably with those of other professionally managed portfolios, endowments and appropriate market indexes. It is expected that these objectives can be obtained with a well diversified portfolio structure in a manner consistent with this. This is intended to provide guidance for the Board and other parties interested in the management of the Fund. The guidance and limitations set forth in this statement are intended to provide the Board, the Committee and other parties with a clear understanding of the policies and objectives guiding the investment of the Fund s assets. It is the intent of this Policy to provide a meaningful framework for the investment of the Fund s assets and that this Policy will not be overly restrictive given changing economic, business, and capital market conditions. It is understood that there can be no guarantees about the attainment of the goals or investment objectives outlined here. II. Information about the Montana Community Foundation MONTANA COMMUNITY FOUNDATION P.O. Box 1145 Helena, MT Tel. (406) Primary Contact Chief Financial Officer Purpose and Scope of the Foundation Montana Community Foundation, Inc. was incorporated on January 29, 1988 and began operations in July The primary purpose of the Foundation is to receive and accept property to be administered permanently and exclusively for charitable purposes, primarily for the benefit of the people of Montana. This Policy governs funds contributed to the Foundation to be held as permanent endowments as defined by the Montana Uniform Prudent Investment of Institutional Funds Act. Earnings from the Fund are made available to support charitable purposes genially in the state of Montana. This Policy does not include the Foundation s working capital or other funds held for the benefit of charitable purposes and invested outside the Fund. The Foundation is organized as a public, not-for-profit corporation under Internal Revenue Code Section 501(c)(3), specifically defined in 509(a)(1). Accordingly, the Funds income and earnings are tax-exempt. Overall Objectives The investment of assets in the Fund covered by this Policy: Shall emphasize investments in marketable securities managed by professional investment managers but may also be in mutual funds or commingled funds and; Page 3

5 Shall be broadly diversified by asset class, number of issues, issue type, and other factors consistent with the investment objectives outlined in this Policy; and Shall be invested with prudent levels of risk and with the expectation that long-term total returns (yield plus capital appreciation) will increase the purchasing power of the Fund, net of all disbursements. III. Responsibilities of the Fund Representatives Board of Directors The Board bears ultimate responsibility for the Foundation and the appropriateness of its investment policy and its execution. This includes establishing clear and reasonable investment objectives, asset allocation parameters between asset classes, guidelines for the investment managers; performance goals; and tolerance for risk as documented in this Policy. In fulfilling its responsibilities, the Board is responsible for the appointment and oversight of the Finance/Investment Committee, which is delegated certain duties for the management of the Fund. Finance/Investment Committee The Committee is responsible for recommending and implementing an for the Fund. Specifically, the responsibilities of the Committee shall include: Recommending a long-term strategic investment plan for the Fund. This includes evaluating and determining the risk tolerance of the Foundation and establishing, reviewing and maintaining a long-term asset allocation policy consistent with the Funds long-term investment objectives, financial needs and circumstances; Determining an appropriate investment manager structure and the selection or termination of investment managers or mutual funds; Such other duties as may be described in this Policy or as delegated by the Board; or, as required by applicable laws and regulations; Review and deal prudently with conflicts of interest. Chief Financial Officer ( CFO ) The CFO of the Foundation is responsible for the day-to-day oversight of the Fund. The CFO shall: Act as the primary contact between the Foundation and the investment managers, investment consultant, custodian, and any other parties interested in the management of the Fund; Keep the Committee informed of any significant events that impact the Foundation and the Fund; Select or terminate investment consultants and custodians for the Fund as directed by the Committee; Monitor and evaluate the performance of the Fund as a whole and of each Investment Manager or Mutual Fund or Commingled Fund; Page 4

6 Manage and oversee the Funds cash flows and to establish appropriate cash management policies; Recommend to the Committee any changes in approved policy, guidelines and objectives as needed; and Execute such other duties as may be described in this Policy or as delegated by the Committee or the Board. Investment Consultant ( Consultant ) The Committee retains a Consultant in order to assist the Committee in the oversight of the Fund. With respect to these funds, the Consultant shall have the following responsibilities: Assist the Committee in strategic investment planning. This includes providing assistance in developing an investment policy, asset allocation strategy, and investment manager structure; Provide to the Committee quarterly performance measurement reports for each separately managed account and on each Mutual Fund as a whole and to assist the Committee in interpreting the results; Act as a liaison between investment managers and the Foundation and thereby facilitate the communication of important information about the management of the Fund; and Execute other duties as may be mutually agreed to. The Custodian The Custodian is responsible for the safekeeping of the Fund investment assets. The specific duties and responsibilities of the custodian include: Maintain separate accounts by legal registration; Value the holdings; Collect all income and dividends owed to the Fund in its custody; Settle all transactions initiated by the investment managers; and Provide monthly reports that detail transactions, cash flows, securities held and their current value, and change in value of each security and the overall portfolio since the previous report. Ethics and Conflicts of Interest All members of the Board, Committee and Foundation staff involved in the investment process are to refrain from personal business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Board members, Committee, Foundation staff, and investment agents are to disclose to the Chairperson of the Board any material interests in financial institutions that conduct business with the Foundation and they are to further disclose any large personal financial/investment positions that could be related to the performance of the Funds. IV. Responsibilities of the Investment Managers Page 5

7 It is the intention of the Committee to utilize separately managed accounts to implement the investment strategy of the Foundation, where practical. Mutual Funds, Private Equity Funds, and Limited Partnerships, may also be used from time-to-time to implement the investment strategy of the Foundation. For Mutual Funds, Private Equity Funds, and Limited Partnerships (Commingled Funds), its prospectus or trust documents will govern the investment policies of the Funds investments. Investment managers of separately managed accounts, however, shall be guided by the general principles and constraints outlined in this Policy. The following guidelines apply to the separately managed accounts: Fiduciary Responsibilities Each investment manager is expected to manage the Funds assets in a manner consistent with the investment objectives, guidelines, and constraints outlined in this Policy and in accordance with applicable laws. This includes discharging their responsibilities with respect to the Foundation consistent with "Prudent Investor" standards, and all other fiduciary responsibility provisions and regulations. Each investment manager shall at all times be registered as an investment adviser under the Investment Advisers Act of 1940 (where applicable), and shall acknowledge in writing that they are a fiduciary with respect to the assets they manage. The Fund will be managed by experienced investment management firms. Proxy Voting The investment managers are responsible and empowered to exercise all rights, including voting rights, as are acquired through the purchase of securities, where practical. Each investment manager shall vote proxies according to their established Proxy Voting Guidelines. A copy of those guidelines, and/or summary of proxy votes shall be provided to the Committee, or the CFO, upon request. The CFO is responsible for voting any proxies received from investment companies, according to the best long-term interests of the Foundation. A summary of proxy votes shall be maintained by the CFO outlining the proxies received and their disposition. V. Risk Tolerance Investment theory and historical capital market return data suggests that, over long periods of time, there is a relationship between the level of risk assumed and the level of return that can be expected in an investment program. In general, higher risk (i.e. volatility of return) is associated with higher return. Given this relationship between risk and return, a fundamental step in determining the Policy for the Fund is the determination of an appropriate risk tolerance. The Committee has examined two important factors that affect the Foundation s risk tolerance: Financial Ability to accept risk within the investment program and, Willingness to accept return volatility. Positive factors that contribute to a higher risk tolerance are: 1. The long-term time horizon available for investment, thus providing the opportunity to benefit from opportunities for growth that may accrue to a patient investment strategy; and Page 6

8 2. The Committee and the Board recognize that in order to increase the likelihood of maintaining or growing the purchasing power of assets over the long-term, the Fund s assets must be invested in more aggressive asset classes in order to earn capital growth. Offsetting these positive factors are: 1. The unwillingness of beneficiaries to accept large fluctuations in their account values. The Board and the Committee s willingness to accept short-term fluctuations in the market value of the Foundation is limited; 2. The on-going distribution requirements of the Foundation imply a need for maintaining some liquidity in the Foundation s investments; and 3. The low probability of replenishing assets in the event of any large losses that may occur from holding concentrated positions. Based on these factors, the Committee chose a moderate risk profile. This profile is for investors who are willing to take a moderate level of risk. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation. Investors using this model should be willing to assume a moderate level of volatility and risk of principal loss. A typical portfolio will primarily include a balance of fixed income and equities. VI. Asset Allocation Strategy In line with the Foundation s return objectives and risk tolerance, the mix of assets within each of the funds should generally be maintained as follows (percents are of the market value of the Fund): Asset Class Minimum Target Avg. Maximum Domestic Large/Medium Capitalization Equities 35% 45% 55% Domestic Small Capitalization Equities 2.5% 7.5% 10% International Equities 2.5% 12.5% 20% Total Equity 60% 65% 70% Investment Grade Fixed Income 20% 27.5% 40% Cash and Cash Equivalents 0% 0% 20% Alternative Investments 0% 7.5% 12.5% Deviations from this asset mix guideline may be authorized in writing by the Committee, which may determine if the aggregate deviation constitutes a material departure from the spirit of the target allocation. The maximum percentage designated for the Cash and Cash Equivalents category is intended to apply after the initial start-up of any one account in the Fund. The Committee recognizes that the initial start-up period to become fully invested could be as long as three months after the initiation of a portfolio. Rebalancing Procedures/Tactical Asset Allocation Rebalancing Page 7

9 The allocation to each asset class and to investment styles within asset classes is expected to remain stable over most market cycles. Each investment manager is expected to maintain the asset allocation of its portfolio consistent with the target asset allocation established for its portfolio. Since capital appreciation (depreciation) and trading activity in each individually managed account can result in a deviation from the overall Funds allocation, the aggregate asset allocation of the Fund will be monitored and the Committee will review the asset allocation and investment manager structure on a periodic basis, not less than annually. Should there be a deviation in an allowable range for an asset class or investment style, the CFO will meet or conference in order to decide when and how to rebalance the existing assets to within the allowable ranges with a bias towards the target allocation. Due to the dynamic nature of market value fluctuations, the CFO recognizes and accepts the fact that deviations from the asset allocation ranges can occur during interim periods between reporting periods. In addition to monitoring the asset allocation relative to the allocation ranges outlined above, the CFO shall review and rebalance the actual asset allocation periodically in order to ensure conformity with the adopted strategic allocation. To achieve the rebalancing of the Fund, the CFO shall first utilize contributions and withdrawals to the Fund or funds in the Foundation s cash account. Should additional rebalancing be required, assets may be shifted from one investment manager to another. The CFO shall coordinate all rebalancing actions with the Investment Consultant and the investment managers. Tactical Asset Allocation The CFO may take periodic tactical shifts in the asset allocation of the Fund based on its assessment of current and prospective market conditions. These tactical shifts may entail shifting assets between investment managers and/or re-directing cash flows of the Fund. These asset allocation shifts are to remain consistent with the maximum and minimum ranges outlined in the table above. Page 8

10 VII. Investment Objectives The Committee will monitor the Funds performances on a quarterly basis. The Committee will evaluate each investment manager's contribution toward meeting the investment objectives outlined below over a three- to five-year time period and a full market cycle, unless otherwise noted. Primary Benchmark: It is desired that the Fund earn returns higher than the "market," as represented by a benchmark index or mix of indexes reflective of the Funds return objectives and risk tolerance. This benchmark or "policy index" for the Fund is to be constructed as follows: 45% S&P 500 Stock Index; 12.5% MSCI EAFE Index (Net) * ; 7.5% Russell 2000 Index; 35% Merrill Lynch Domestic Master Bond Index. The Fund s returns are expected to exceed the average annual return of this policy index on a risk-adjusted basis over a three- to five-year rolling time period and a full market cycle. Secondary Performance Targets: 1. The real return goal (return after adjusting for inflation) for the Fund is 5.5%. Inflation shall be measured by the U.S. All Urban Consumers Price Index ( CPI ); 2. The Fund is expected to exceed the policy index return and the real return goal, each measured on a compound average annual return basis after the deduction of investment management fees and annualized over a three- to five-year rolling time period and a full market cycle; and 3. Performance will be compared to a peer group universe comprised of other endowments and foundations on a net of fees basis. VIII. Investment Strategy Selection Criteria for Investment Managers Investment managers retained by the Committee should be chosen using the following criteria: The investment style and discipline of the investment manager; How well the investment manager s investment style or approach complements other investment managers in the portfolio; Level of experience, financial resources, and staffing levels of the investment manager; * Net of dividend withholding taxes withheld by foreign governments. Page 9

11 How consistent an investment manager is to the style for which they were hired ; Reasonableness of expense ratios/fees; Past performance, considered relative to other investments having the same investment objective. Consideration should be given to both consistency of performance and the level of risk taken to achieve results; and Stability of the organization. Security Selection/Asset Allocation Except as noted below, each investment manager shall have the discretion to determine its portfolio's individual securities selection; The Fund s portfolio is expected to operate within an overall asset allocation strategy defining the portfolio s mix of asset classes. This strategy, described below, sets a longterm percentage target for the amount of the portfolio's market value that is to be invested in any one asset class. The allocation strategy also defines the allowable investment shifts between the asset classes, above and below the target allocations; and The Committee is responsible for monitoring the aggregate asset allocation, and may direct a re-balancing of assets to the target allocation on a periodic basis. Diversification Requirements The primary method to reduce risk for the Fund is diversification through asset allocation. By allocating assets in different asset classes, the portfolio can reduce risk by avoiding concentration as well as reduce risk through the low-correlation between different asset classes. Each investment manager has discretion with regard to security selection and allocation within its respective portfolio. Unless otherwise noted below, under normal market conditions, each investment manager is expected to be invested consistent with its investment style as described in its relevant documentation. During an initial three month period after being retained, the investment manager may hold cash and cash equivalents in larger proportions in order to invest their portfolio on an orderly basis. To minimize the risk of large losses, each investment manager shall maintain adequate diversification in their portfolio subject to the constraints outlined in this investment policy, and in their investment management agreement with the Foundation. Page 10

12 IX. Investment Guidelines Commingled Fund Investments * : The investment guidelines for any Mutual Funds, Private Equity Funds, and Limited Partnerships are detailed in the prospectus or Declaration of Trust for the individual funds. Where there are differences between this Policy and Prospectus or Declaration of Trust, the Prospectus or Declaration of Trust shall govern. Separately Managed Account Only: Each investment manager has discretion with regard to security selection and allocation within its respective portfolio. Unless otherwise noted below, under normal market conditions, each investment manager is expected to be invested consistent with its investment style as described in its relevant documentation. During an initial three month period after being retained, the investment manager may hold cash and cash equivalents in larger proportions in order to invest their portfolio on an orderly basis. X. Exclusions For Mutual Funds and Commingled Funds, the prospectus or trust documents of the Fund will govern the investment policies of the Fund s investments. The Fund s assets invested in separately managed accounts; however, shall be guided by the general principles and constraints outlined in this Policy. The Fund s assets in separately managed accounts may not be used for the following purposes: Short sales; Purchases of letter stock, private placements (including 144A securities), or direct payments; Leveraged transactions; Purchases of securities not readily marketable; Commodities transactions, unless by managers approved for that strategy; Puts, calls, straddles, or other option strategies; Purchases of real estate, oil and gas properties, or other natural resources related properties with the exception of Real Estate Investment Trusts; Lending or otherwise hypothecating securities; Investments in futures, use of margin, or investments in any derivatives not explicitly permitted in this policy statement; * Commingled funds are pooled investment vehicles where investors own shares of the Fund, but do not own the underlying investments of the Fund. Commingled funds such as mutual funds, limited partnerships or trust funds are sold to investors by prospectus or trust document only. These documents are the controlling investment guidelines of the Fund and the investment advisor(s) to the Fund have a fiduciary and legal obligation to abide by the provisions of the prospectus (or trust document), but do not have a fiduciary obligation to the Foundation. Therefore, should the Foundation invest in a pooled investment vehicle, these investment guidelines are not controlling over the Funds investment and there is the possibility that Fund investments may engage in transactions that are otherwise prohibited by this. For example, investing in other asset classes that would not otherwise be permitted for an investment manager, utilizing futures and options strategies or cash holdings at higher levels than what is permitted in this policy. Page 11

13 Investments by the investment managers in their own securities, their affiliates, or subsidiaries (excluding money market or other commingled funds as authorized by the Committee); Any other security or transaction not specifically authorized in this Policy, unless approved, in writing, by the Committee. XI. Execution of Transactions Each Investment Manager s responsibility is to seek best execution for the Fund. XII. Meetings and Communications For separately managed accounts: Any material event that affects the ownership or capital structure of the investment management firm, changes in senior investment personnel or any other material event that affects the management of this account must be reported promptly to the Committee or the Investment Consultant. This requirement does not include routine employee stock ownership awards or partnership announcements. The Investment Consultant will provide written performance reports for each separately managed account and for the composite of these assets not less than quarterly; The custodian should provide monthly statements of assets and transactions. XIII. Performance Evaluation As noted above, the Committee will monitor the performance of the investment managers and of each fund as a whole on a quarterly basis. The Committee will evaluate the Funds success in achieving the investment objectives outlined in this document over at least a three- to five-year time horizon. The Committee realizes that most investments go through cycles. Therefore, there will be periods of time during which the investment objectives are not met or when some investment managers fail to meet their expected performance targets. The Fund s and investment managers performance should be reported in terms of rate of return both gross and net of investment fees and changes in dollar value. The returns should be compared to appropriate market indexes and peers, for the most recent quarter and for annual and cumulative prior time periods. The Fund s allocation to each investment manager and Mutual Fund shall be reported on a quarterly basis. For the purposes of calculating the asset allocation of each fund as a whole, the asset allocation of each Mutual Fund shall be assumed to be fully invested in the policy index to which it is compared. Based on information provided by the Mutual Fund managers, the Committee should periodically check the actual asset allocation of the commingled funds. Risk as measured by volatility, or standard deviation of quarterly returns, shall be evaluated. An attribution analysis shall also be performed for the separately managed accounts, to evaluate how much of the Fund s investment results are due to the investment managers investment decisions, as compared to the effect of the financial markets. It is expected that this analysis will use the "style index" as the performance benchmark for evaluating both the Page 12

14 returns achieved and the level of risk taken. The investment managers performances will also be evaluated in similar fashion according to the performance standards outlined in their manager profiles and in any relevant investment management agreement. XIII. Guidelines for Corrective Action The Committee recognizes the importance of a long-term focus when evaluating the performance of investment managers. The Committee understands the potential for actual investment results over short-term periods to deviate significantly from the performance of representative market indexes. The Committee will not as a rule terminate an investment manager on the basis of short-term performance. If the investment manager is sound and is adhering to its investment style and approach, the Committee will allow a sufficient interval of time over which to evaluate performance. The Committee expects that the consultant will provide guidance to help it determine an appropriate length of time. The investment manager s performance will be viewed in light of the firm s particular investment style and approach, keeping in mind at all times the Funds diversification strategy as well as the overall quality of the relationship. The Committee, however, may require an extra level of scrutiny, or consider termination, of an investment manager based on factors such as: Material events that affects the ownership or capital structure of the investment management firm, or the management of this account; Legal or regulatory action taken against the manager; Violation of the terms of the contract or changes to agreed upon services without prior written approval of the Committee; Significant style drift from the intended investment style that the manager was engaged to implement; Lack of diversification. The investment manager may be replaced at any time as part of an overall restructuring of the portfolio or any other reason whatsoever. XIV. Alternative Investments Portfolio(s) Alternative investments seek to provide diversification and capital appreciation through innovative and flexible strategies (such as the ability to short, add leverage and hedge). Investment guidelines are the prospectus or trust document for each investment These investments carry special risks because they may include aggressive strategies, trade in volatile securities, and use of leverage in order to generate superior investment returns. Investments in illiquid securities for which there is no ready market is possible and there maybe restrictions on investors as to when funds may be withdrawn. Permitted alternative investments in the Fund may include hedge funds; managed futures funds; commodities; venture capital or private equity funds; real estate; or leveraged buy-out funds. Investments shall be limited to diversified commingled trust funds or limited partnerships offered through a third party distribution channel. The Committee has not or their designee has not authorized investment in any alternative investment offered directly by any Page 13

15 hedge fund or where the investment s in any investment vehicle where the Portfolio s liability can exceed its value. Investments will generally be made with fund-of-fund managers that are diversified by investment style and typically utilize multiple investment managers within a fund. The Committee, however, may invest in single manager funds, but these investments shall not comprise the majority of alternative investments. The Committee may approve other alternative investment strategies after careful review. These strategies will be included in this Policy by action of the Committee. Page 14

16 XV. Approvals It is understood that this is to be reviewed periodically by the Committee, which can recommend to the Board any revisions that may be warranted by changing circumstances including, but not limited to, changes in financial status, financial status,risk tolerance of the Foundation or investment managers. The Board and the Committee understand and agree that the provisions of this document are subject to any relevant investment advisory agreement and to the extent of any conflict, the terms of the investment advisory agreement controls. The Board and the Committee further understand that this Policy statement does not provide any additional rights other than those that are described in any investment advisory agreement. Chair, Board of Directors Montana Community Foundation Date Chair, Investment Committee Montana Community Foundation Date President & CEO Montana Community Foundation CFO Montana Community Foundation Date Date Page 15