TEMPLE UNIVERSITY POLICIES AND PROCEDURES MANUAL

Transcription

1 TEMPLE UNIVERSITY POLICIES AND PROCEDURES MANUAL Title: Investment Policies Policy Number: Issuing Authority: Board of Trustees Responsible Officer: Vice President, CFO& Treasurer Date Created: September 24, 2003 Date Last Amended/Reviewed: November14, 2017 Date Scheduled for Review: November 2018 Reviewing Office: Office of the Treasurer Scope of Policy & Rationale: This policy is issued by the investment committee and is for the guidance of university officials and employees, and external investment managers, in the investment and reinvestment of the University Account, Bank Cash, Operating and Auxiliary Reserve Fund, Endowment Pool and the Retirement Funds. Under the university By-Laws, the investment committee is the standing committee of the board of trustees with authority to determine policies for, and oversee the management of, the university s investment of its operating, endowment, and retirement funds. This policy is subject to (a) resolutions and policies of the board of trustees relating to investment practices (b) third-party restrictions imposed by applicable bond indentures, funding agencies and donors, and (c) compliance with applicable federal, state and local laws, rules and regulations. Nothing in this policy should be interpreted or construed to authorize violation of those restrictions. Definitions See Pages 5 7 Policy Statement This policy describes in detail the parameters to be followed when investing university funds. It specifically addresses the respective asset allocations, permitted investments and benchmarks for the University Account, Bank Cash, Operating and Auxiliary Reserve Fund, Endowment Pool and Retirement Funds. It contains direction on the frequency of portfolio rebalancing, how managers should be monitored, proxy voting and transaction execution. Roles and Responsibilities Responsibilities of the investment committee are performed with the advice and assistance of appropriate consultants, professional advisors, and staff Page of 33

2 Responsibilities include: Ensuring that current spending requirements are supported while also preserving the purchase power of the Endowment Pool; Achieving an optimum level of return within specified risk tolerances; Developing a sound and consistent investment policy including asset allocation, diversification and quality guidelines for the investment funds and pools; Selecting and maintaining qualified investment managers and consultants; Monitoring and evaluating results to ensure that policy guidelines are being adhered to and that policy objectives are being met; Taking action under appropriate circumstances to discharge an investment manager or advisor for failing to perform in terms of stated expectations. External investment managers are responsible for determining investment strategy and implementing security selection and the timing of purchases and sales within the policy guidelines set forth herein and otherwise provided by the committee. The treasurer of the university is the administrative officer responsible to the investment committee for the day-to-day management of the University Account, Bank Cash, Operating and Auxiliary Reserve Fund, Endowment Pool, and Retirement Funds. Special Situations None. Exclusions This policy excludes funds invested under the university s planned giving program. Communications and Training None. Procedures (if applicable) N/A Notes 1. Dates of official enactment and amendments: Enacted: October 2003 Amended June 14, 2007, April 1, 2009, December 8, 2009, June 17, 2010, November 18, 2010, February 17, 2011, May 10, 2011, October 11, 2011, March 12, 2012, June 21, 2012, June 20, 2013, October 8, 2013, March 27, 2014, May 13, 2014, July 17, 2014, October 14, 2014, March 11, 2015, October 13, 2015, December 8, 2015, April 21, 2016, July 12, 2016, November 15, 2016, January 17, 2017, April 20, 2017, October 10, 2017, Page of 33

3 2. History: Supersedes: Statement of Investment Policy for Temple University Retirement Plans - approved October 24, 1996 and revised September 24, 1998 (reference number is not known) University Investment Policy - approved September 14, 1989 and periodically amended. (reference number is not known) Reviewed By: Vice President, CFO& Treasurer University Counsel Third Party Investment Advisor Investment Committee of the Board of Trustees 3. Cross References/Appendix: There is no cross reference. There are three appendices included with the policy. Appendix I provides detail on the approved investment managers and their respective benchmarks. Appendix II provides detail on each investment pool and their respective custom policy index. Appendix III contains the separate investment policy statement for Good Samaritan Insurance Company Ltd Page of 33

4 TABLE OF CONTENTS I. Definitions... 5 II. Guidelines for Transactions III. Custody of Securities. 8 IV. Proxy Voting... 8 V. Conflict of Interest VI. External Investment Managers.. 8 VII. Monitoring of Objectives and Results A. Guidelines for Fixed Income Managers... 9 B. Guidelines for Equity Managers. 10 C. Pooled Vehicles.. 10 VIII. Portfolio Rebalancing.. 11 Guidelines for Specific Funds: Bank Cash 12 University Account..12 Operating and Auxiliary Reserve Fund Endowment Pool 16 Retirement Funds. 19 Other Investment Portfolios 23 Appendix I - Investment Managers and Benchmarks Appendix II Pool Benchmarks 27 Appendix III Other Investment Portfolio Investment Policies Page of 33

5 I. DEFINITIONS A. Endowment Pool Funds that are to be invested on a long-term basis. Such funds shall include funds accounted for as endowments and funds designated by the board of trustees to be treated as endowment ( quasi-endowments ). For the most part the investment horizon is unlimited in that true endowments are to be invested in perpetuity. B. Endowment Portfolio All forms of endowment funds in which the principal is available for investment in marketable securities. C. Investment Committee (the Committee ) The Committee is responsible for oversight of the investment policies and investment activities of the university. D1. Bank Cash -- Cash in University bank accounts and money funds. Bank Cash is managed by the Treasurer subject to permitted investments as established by the Investment Committee. The sources of Bank Cash can be tuition, student loan receipts, grants, Commonwealth of Pennsylvania funding, gifts, loan proceeds, auxiliary revenue, and asset sales. What defines bank cash is locus, not source or use. D2. University Account The portfolios of cash, short-term and medium-term notes and bonds invested in actively-managed bond and index funds, the assets of which are held to meet committed and planned capital spending, tuition-funded physical plant maintenance, accumulated budget surpluses due schools and programs, and reserve funds controlled by the Board. E. Operating and Auxiliary Reserve Fund A fund established in 1989 to provide level debt amortization, based on the effective bond interest rate and asset life, to the University operating budget and auxiliary operations. F. Retirement Funds Assets held for the benefit of the participants and beneficiaries in the defined benefit pension plans and the post-retirement benefits trust. G. Cash i. Dollar denominated demand deposit accounts or certificates of deposit maturing in 360 days or less with domestic or foreign financial institutions with a minimum asset size of $25 billion and a minimum rating of Aa (Moody s) or AA (Standard & Poor s). Funds invested in any one institution shall not exceed $5 million. Certificates of deposit in other financial institutions are permissible to the extent that deposits do not exceed the federally insured limit. ii. Bank or broker repurchase agreements with dealers on the Federal Reserve Primary Government Securities Dealer List or with financial institutions rated A or better by Moody s or Standard & Poor s. Repurchase agreements must be collateralized by direct US government Treasury and Agency obligations at Page of 33

6 103%, be for a period of not more than 30 days and allow for a perfected lien on the collateral. Collateral must be marked to market daily by the custodian or other third party custodian. Repurchase agreements require a signed SIFMA Master Repurchase Agreement or tri-party Repurchase Agreement signed by the counterparty. iii. Eligible bank acceptances rated at least A1 and P1 by Standard & Poor s and Moody s, maturing 180 days or less and endorsed by the bank s acceptance stamp. H. Money Market Instruments - i. Money market funds with a minimum of $500 million in assets, rated AAAm or Aaa-mf by Standard & Poor s or Moody s, respectively. Comingled funds that follow 2a-7 policies with a minimum of $500 million in assets and with underlying assets having an average credit rating in the highest credit quality ratings according to Standard & Poor s and Moody s. ii. Commercial paper rated A1 and P1 by Standard & Poor s and Moody s, maturing in 270 days or less. iii. State and Municipal obligations rated MIG-1 and SP-1 by Moody s and Standard & Poor s maturing in 270 days or less. iv. Direct obligations of the United States government with maturities or remaining maturities of one year or less. v. Obligations of agencies of the United States government with maturities or remaining maturities of one year or less. 35% maximum exposure to any single agency. vi. Obligations guaranteed by the U.S. Government with maturities or remaining maturities of one year or less. I. Equity Securities i. U.S. Equity readily marketable securities of corporations headquartered within the United States that are actively traded on the NYSE, AMEX or NASDAQ exchanges. Readily marketable securities of corporations headquartered outside of the United States that are actively traded on the NYSE, AMEX or NASDAQ exchanges (including ADRs). ii. International Equity Liquid marketable securities of corporations headquartered outside of the United States that are included in the MSCI All Country World ex.-u.s. Index. Also referred to herein as non-u.s. equities, international developed includes countries listed in the MSCI EAFE Index. International emerging includes countries listed in the MSCI Emerging Markets Index or the S&P/IFC Global Index. iii. Emerging Markets Equity Marketable securities of companies in emerging countries, those with low-to-middle per capita income. Emerging markets includes countries listed in the MSCI Emerging Markets Index or the S&P/IFC Global Index Page of 33

7 J. Alternative Investments i. Hedge Funds- Investments in funds that are allowed to take both long and short positions, use leverage and derivatives, and invest in many markets. Hedge funds may make equity, credit/fixed income, rate, and currency investments. Strategies employed may include long/short, event-driven, arbitrage, and macro. Hedge funds may also be referred to as Absolute Return investments. ii. Real Assets Investments in partnerships, funds or special purpose vehicles that invest in multiple underlying asset classes such as commodities, commodity futures, agricultural, timber, and natural resource equities. These can be U.S. or non-u.s. investments and are sometimes referred to as hard assets or diversified inflation strategies. Additionally, U.S Treasury Inflation-Protected Securities (TIPS), publicly traded real estate (REITs) and energy master limited partnerships (MLPs) may be included. Investments may be public or private investment vehicles. Vehicles may or may not incur indebtedness at the fund level. iii. Real Estate - Investments in public or private partnerships, funds and/or special purpose vehicles that make private real estate investments located within or outside the United States. Major sectors within this space include apartments, office properties, hotels, regional malls, shopping centers, self-storage, industrial properties, and health care. Investments may include equity, debt, or both and may encompass core, value-added, or opportunistic opportunities. Investments are generally made in private investment vehicles. Vehicles may or may not incur indebtedness at the fund level. iv. Private Equity Investments in private partnerships, funds and/or other special purpose vehicles that invest in a range of strategies including, venture capital, leveraged buyouts, credit-oriented opportunities, mezzanine and distressed debt, and special situations. Investments may fund new companies or the buyout of existing companies or divisions within a company. Funding for these transactions typically includes a combination of debt and equity. Investments may be domestic or international and may encompass private and public securities. These partnerships may or may not incur indebtedness at the fund level. Terms for these partnerships typically require capital lock-ups of 10 years or more, though the fund will distribute gains during the life of the partnership. K. Fixed Income Investments i. Direct obligations of the United States government ii. Obligations of agencies of the United States government. 35% maximum exposure to any single agency. iii. Obligations guaranteed by the U.S. Government iv. Investment-grade Sovereign, Supranational, Foreign Agency, and Foreign Local Government securities that are SEC-registered, issued in the U.S. in U.S. dollars by foreign governments, agencies, and corporations. Such investment is limited to a maximum of 10% of fixed income assets within respective investment funds and pools (University Account, Operating and Auxiliary Reserve Fund, Endowment, and Retirement) Page of 33

8 v. Guaranteed Investment Contracts with insurance companies rated at least A in A.M. Best s Report vi. Corporate Bonds, including convertible bonds. Minimum debt ratings are outlined within the subsections. vii. Mortgage pass-through, asset back securities and collateralized debt obligations viii. State and Municipal obligations rated A or better by Standard & Poor s or A2 by Moody s. II. GUIDELINES FOR TRANSACTIONS As a general guideline that should apply to all assets managed, transactions should be entered into on the basis of best execution, which is interpreted normally to mean best realized price. III. CUSTODY OF SECURITIES All securities must be held in custody accounts at major financial institution(s). Custodians must have a minimum rating of A by Standard & Poor s or A1 by Moody s and have provided custody services for at least 10 years. The Investment Committee selects custodians. IV. PROXY VOTING All proxies are to be voted with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in conduct of an enterprise of a like character. Proxies should be voted for issues that enhance shareholder economic value, maintain or improve shareholder rights, are not dilutive and provide reasonable accountability for management. Unless the Committee provides information on how to vote a proxy, the investment managers shall vote the proxies according to their best judgment as to how best to meet this policy. V. CONFLICT OF INTEREST Trustees who serve on the Investment Committee are charged with the responsibility for recommendations and decisions that, in their judgment, best serve the long-range interests and objectives of the university. The members of the Investment Committee are subject to the university s By-Laws and conflict of interest policy approved from time to time by the Board of Trustees. VI. EXTERNAL INVESTMENT MANAGERS Page of 33

9 The Investment Committee is responsible for the selection of external investment managers. External managers are to comply with the procedures and limitations set forth in this policy. The Investment Committee may approve exceptions which will be captured in the investment manager guidelines, offering memorandums or prospectuses. The treasurer will report to the Committee quarterly on the investment performance of each external investment manager. VII. MONITORING OF OBJECTIVES AND RESULTS All objectives and policies are in effect until modified by the Investment Committee. They will be reviewed at least annually at a meeting of the Committee for their continued appropriateness. If, at any time, an external manager or university employee believes that any guideline inhibits its investment performance, it is the manager s responsibility to clearly communicate this view to the Committee. The investments will be monitored on a frequent basis for consistency of each manager s investment philosophy, return relative to objectives, investment risk as measured by asset concentrations, exposure to extreme economic conditions, and market volatility. Investment results will be reviewed quarterly by the Investment Committee; however, results will be formally evaluated over rolling 3-to-5 year periods. The Committee will regularly review managers in order to confirm that the factors underlying performance expectations remain in place. Each investment manager will report the following information quarterly: Total return net of all commissions and fees; Additions and withdrawals from the account; Current holdings at cost and at market value; Purchases and sales for the Quarter. Managers may be required to reconcile records of holdings, transactions, and dividend/interest income with the respective custodian on a quarterly basis. Regular communication concerning investment strategy and outlook is expected. Additionally, managers are required to inform the University of any significant changes in firm ownership, organizational structure, professional personnel, account structure (e.g. number, asset size and account minimums), or fundamental investment philosophy. A. GUIDELINES FOR FIXED INCOME MANAGERS In general, fixed income portfolios shall be well diversified with respect to duration, type, industry, and issuer in order to minimize risk exposure. However, obligations issued or guaranteed by the U.S. Government may be held without limitation. Money market instruments as well as bonds may be used in the fixed income fund. Cash equivalents should be placed with issuers whose commercial Page of 33

10 paper is rated A1 or P1 by Moody s or Standard and Poor s, respectively, or bond ratings of A or better. Cash and short term instruments shall be restricted to a maximum of 10% of assets under management. Exceptions to the 10% maximum will be submitted to the Committee for approval. Fixed income instruments are to reflect, and each investment manager s performance will be measured against, the asset mix and quality of the selected benchmark as outlined in the respective subsections. Upon engaging an investment manager, the investment parameters for the manager will contain guidelines for any fixed income security that falls below the minimum acceptable credit rating, as described in the respective subsections. B. GUIDELINES FOR EQUITY MANAGERS Decisions as to individual security selection, security size and quality, number of industries or holdings, current income levels, turnover, are left to broad manager discretion, subject to the usual standards of fiduciary prudence and the provisions of this policy. The Retirement Funds and Endowment Pool are to be fully invested to the maximum extent possible. However, investment managers may, at their discretion, invest up to 10% of assets under management in cash reserves when they deem it appropriate. Exceptions to the 10% maximum will be submitted to the Committee for approval. The investment manager s performance will be measured against stock indices as described in the respective fund subsections. C. POOLED VEHICLES The diversification restrictions for individual stocks and fixed income securities shall not apply to similar investment instruments held in a commingled fund, hedge fund, limited partnership or a SEC registered mutual fund approved by the Committee. Every effort shall be made, to the extent practical, prudent and appropriate, to utilize commingled funds, collective trust funds, hedge funds, limited partnerships and/or mutual funds that have investment objectives and policies that are consistent with the policy. However, given the nature of these investments, it is recognized that there may be deviations between the policy and the objectives of the pooled vehicles. Any commingled fund(s), collective trust fund(s), hedge fund(s), limited partnership(s) and/or mutual fund(s) approved by the Committee shall first be reviewed by the Committee s independent investment consultants. In addition, the net asset value of any pooled vehicle must be periodically available to investors, be based on generally accepted accounting principles, and audited by an independent auditor Page of 33

11 If an investment management firm of a commingled fund, collective trust fund, hedge fund, limited partnership or mutual fund is under investigation or indicted for criminal or civil charges, it shall be reviewed immediately by the investment consultants, the university s treasury staff, and the Committee. The independent investment consultants will notify the Committee if such an event occurs, monitor the investment manager or pooled vehicle and communicate the status to the Committee at least quarterly. VIII. PORTFOLIO REBALANCING Rebalancing asset allocations to policy targets is essential for maintaining the risk profile adopted by the Investment Committee. Asset allocations will be monitored quarterly relative to established policy targets and ranges. Unless otherwise directed by the Investment Committee, Treasury staff is authorized to rebalance portfolios without prior Committee discussion or approval. The university will generally use each of the following three methods to rebalance the Endowment Pool to established target allocations: Method 1: Cash Flow Rebalancing Treasury staff will rebalance using cash inflows and outflows. This will involve (a) investing inflows to the Endowment Pool in asset classes with actual allocations lower than the stated targets, (b) withdrawing needed funds from asset classes with actual allocations above the stated targets, or (c) if all actual allocations are in line with the targets, withdrawing or adding funds approximately pro-rata according to the targets. Method 2: Annual Rebalancing Treasury staff will rebalance to targets annually using the third quarter-end market values. Method 3: Range Rebalancing - If actual allocations move outside of the allowable ranges, Treasury staff will determine and implement the appropriate rebalancing action. In cases where more than one asset class is above or below its long-term target, priority will generally be given according to the size of the variance (i.e., asset classes with the largest variance from target will be rebalanced first) Page of 33

12 BANK CASH Statement of Objectives The primary objective of Bank Cash is to preserve capital and maintain liquidity in order to provide adequate cash resources for the operations of the University. Authorized Investments Authorized Bank Cash investments are limited to Cash and Money Market Instruments as defined in I. G above. Liquidity Minimum The Treasurer will ensure that the University has at all times cash, or access to cash, in the amount of not less than $50 million. Access to cash means committed credit lines, letters of credit, or other bank-guaranteed funding resources which provide same-day good funds available to be deposited directly into the University s operating accounts in a timely fashion sufficient to meet Federal Reserve Bank Fedwire cutoff times as established from time to time by the Federal Reserve Bank. UNIVERSITY ACCOUNT Statement of Objectives The objectives of the University Account are to preserve capital and maintain liquidity while earning a rate of return consistent with investing in short-intermediate bonds. Asset Allocation Targets and Ranges Asset allocation should reflect the proper balance of the University Account s need for liquidity and preservation of capital with attention to the anticipated timing of requirements for University Account funds. Benchmark See Appendix I for a list of current investment managers and their respective benchmarks. See also Appendix II for benchmarks specific to the University Account as a whole. Authorized Investments For separately managed accounts, individual manager guidelines, which govern permissible securities and dictate other expectations, apply. Where investments are made in commingled or mutual funds, the permissible investments are governed by the appropriate fund prospectus. University Account funds may be invested as follows, provided such securities mature prior to the anticipated utilization of such funds: Page of 33

13 Cash as defined in Section I. Money Market Instruments as defined in Section I. Fixed Income as defined in Section I., with a maturity of five years or less, except for unauthorized investments listed below. For purposes of this Policy, the maturity date of any fixed income security subject to a mandatory put shall be the date of the put, which must be within five years of the date on which the security is, or was, acquired. A maximum of 10% of the fixed income assets may be in securities rated BBB (BBB+, BBB, BBB-) by Standard & Poor s or Baa (Baa1, Baa2, Baa3) by Moody s, provided however, that the overall quality rating of fixed income assets will be at least AA as rated by Standard and Poor s or Aa2 as rated by Moody s. Sovereign Supranational, Foreign Agency, and Foreign Local Government securities as described in Section I. is limited to a maximum of 10% of the fixed income assets. University Account funds expected to be available for investment periods greater than five years may be invested in longer term securities when authorized by the Investment Committee and the treasurer. Investments in corporate debt securities with maturities greater than ten years cannot exceed 20% of the total investment in corporate debt. The following reflects the maximum investment permitted as a percentage of the total University Account portfolio. U.S. Treasury Obligations 100% Non Mortgage-backed Federal Agency Obligations 100% Mortgage-backed Federal Agency Obligations 30% State and Municipal Obligations 10% Repurchase Agreements 50% Commercial Paper 50% Banker s Acceptances 30% Corporate Securities 50% Certificates of Deposit 30% Money Market Mutual Fund Shares 100% Bond Mutual Funds 70% Sovereign Obligations 10% Unauthorized Investments and Transactions Fixed income securities of any one issuer shall not exceed 5% of the total bond portfolio at the time of purchase (excludes U.S. Treasury or other Federal Agencies). Holdings of any individual bond issue shall not exceed 5% of the value of the total issue or total debt outstanding of the issuer (excludes U.S. Treasury or other Federal Agencies). Mortgage pass-through not issued by U.S. government agencies, Collateralized Debt Obligations, real estate asset backed securities and GICs Page of 33

14 OPERATING AND AUXILIARY RESERVE FUND Statement of Objectives The primary objectives of the Operating and Auxiliary Reserve Fund are to preserve capital and provide level debt amortization, based on the effective bond interest rate and asset life, to the University operating budget and auxiliary operations. Asset Allocation Targets and Ranges Asset allocation should reflect the proper balance of the need for liquidity, preservation of purchasing power, and risk tolerance in relation to liabilities. The funds are to be invested in cash, money market funds, and fixed income as determined by the liquidity needed for debt payments. Benchmark The fund investments will be customized to be available for debt service needs and will not be managed according to any core bond benchmark. Authorized Investments For separately managed accounts, individual manager guidelines, which govern permissible securities and dictate other expectations, apply. Where investments are made in commingled or mutual funds, the permissible investments are governed by the appropriate fund prospectus. As a statement of general policy, permissible investments include the following, provided such securities mature prior to the anticipated utilization of the funds: Cash as defined in Section I. Money Market Instruments as defined in Section I. Cash and Money Market Instruments shall be restricted to a maximum of 10% of the portfolio, except for brief periods or when building liquidity in anticipation of a debt service withdrawal. Investment Managers shall have discretion to invest up to 10% of assets under management in cash reserves when they deem it appropriate. Fixed Income as defined in Section I., except for unauthorized investments listed below, with durations that generally coincide with withdrawals for debt service. For purposes of this Policy, the maturity date of any fixed income security subject to a mandatory put shall be the date of the put, which must be within five years of the date on which the security is, or was, acquired. A maximum of 20% of the fixed income assets may be in securities rated BBB (BBB+, BBB, BBB-) by Standard & Poor s or Baa (Baa1, Baa2, Baa3) by Moody s, provided however, the overall quality rating of fixed income assets will be at least A as rated by Standard and Poor s or Page of 33

15 A2 as rated by Moody s. Sovereign Supranational, Foreign Agency, and Foreign Local Government securities as described in Section I are limited to a maximum of 10% of the fixed income assets. Cash is limited to 10% of total assets; however, higher cash balances may be kept periodically to meet pending withdrawals for debt service. Unauthorized Investments and Transactions Not more than 5% of the market value of the fixed income portfolio shall be invested in securities issued by one company at time of purchase. If fund assets fall due to debt payments, the security can continue to be held up to a maximum 10% position assuming the security maintains its credit rating. No more than 5% of any single outstanding issue shall be held at time of purchase. No more than 50% of the market value of the portfolio shall be invested in corporate bonds. Guaranteed Investment Contracts as described in Section I. Convertible bonds as described in Section I. Mortgage pass-through, asset backed securities, and collateralized debt obligations as described in Section I. State and Municipal obligations as described in Section I. Borrowing for investment purposes Page of 33

16 ENDOWMENT PORTFOLIO Statement of Objectives The financial objectives of the Endowment Portfolio are (1) to support the current and future operations of Temple University and (2) to preserve and enhance the purchasing power of the university s Endowment. To accomplish these goals, the Endowment Portfolio must generate real returns from investments equal to, and preferably greater than, its spending rate over the long term. The investment objective of the Endowment Portfolio is to attain an average annual real total return (net of investment management fees) in excess of the spending rate over the long term (rolling five-year periods). It is recognized that the real return objective may be difficult to attain in every five-year period, but should be attainable over a series of five-year periods. A 6% real, total return adequately supports the university s 4.5% spending rule and allows for Endowment growth. Spending Rule The percentage of the value of the Endowment Portfolio assets which shall be treated as income is 4.5%. The value of the assets is defined as the fair market value of the assets so held by Temple University, determined at the end of each fiscal quarter and averaged over the most recent preceding twelve quarters. If the assets have been held for less than three years, the average shall be determined over the period during which the assets have been held. Asset Allocation Targets and Ranges Endowment Portfolio funds are to be invested on a total return basis in order to maintain the purchasing power of endowment gifts and funds functioning as endowments. The basic asset class distribution will be maintained as follows: Page of 33

17 Asset Category Strategic Target (%) Tactical Range (%) Minimum Maximum EQUITY 45% 35% 55% U.S. Equity 22% 12% 32% International Equity 16% 6% 26% Emerging Markets Equity 7% 0% 17% REAL ASSETS 8% 0% 18% Real Estate 4% 0% 9% Commodities 2% 0% 8% TIPS 2% 0% 8% ALTERNATIVES 30% 15% 40% Private Equities 15% 0% 20% Hedge Funds 15% 0% 25% FIXED INCOME 17% 7% 27% U.S. Investment Grade 15% 0% 25% U.S. High Yield 2% 0% 12% Non-U.S. Fixed Income 0% 0% 10% OPPORTUNISTIC 0% 0% 5% CASH 0% 0% 20% See Section I for definitions of each Asset Category. The Investment Committee may allocate one or more of the permissible investments listed within the Authorized Investments section below. Benchmark Endowment Portfolio funds incorporate a split benchmark to reflect the asset distribution. The benchmark is weighted based on the target allocation to individual asset classes and their corresponding benchmarks. See Appendix I for a list of current investment managers and their respective benchmarks and Appendix II for the endowment pool weighted benchmark. To ensure that investment opportunities available over a specific time period are fairly evaluated, the Investment Committee will use comparative performance statistics to evaluate investment results. Each active investment manager and the Endowment Pool is expected to achieve minimum performance standards as follows: 1. Exceed an appropriate benchmark index, net of management fees 2. Where appropriate, rank in the top 40% of a style universe 3. Rank in the top 40% of an appropriate peer group of actively managed portfolios While these performance standards should be achieved over a complete market cycle, the Investment Committee will also monitor performance on a rolling three year basis Page of 33

18 Authorized Investments For separately managed accounts of the Endowment Portfolio, individual manager guidelines governing permissible securities and dictating other expectations apply. Where investments are made in commingled or mutual funds, the permissible investments are governed by the appropriate fund prospectus or offering memorandum. As a statement of general policy, however, permissible investments include the following: U.S. equity securities as defined in Section I. International equity securities as defined in Section I. Emerging markets equity securities as defined in Section I. Fixed Income Investments, as defined in Section I. A maximum of 20% of the fixed income assets may be in securities rated BBB (BBB+, BBB, BBB-) by Standard & Poor s or Baa (Baa1, Baa2, Baa3) by Moody s provided however, that the overall quality rating of fixed income assets will be at least A as rated by Standard & Poor s or A2 as rated by Moody s. Sovereign Supranational, Foreign Agency, and Foreign Local Government securities as described in Section I. is limited to a maximum of 10% of the fixed income assets. Alternative Investments as described in Section I. Cash and Money Market Instruments as defined in Section I. Investment Managers shall have discretion to invest up to 10% of assets under management in cash and equivalents when they deem it appropriate. However, the Investment Managers will be evaluated against their peers on the performance of the total funds under their direct management. Mutual funds and other commingled funds consisting of the above-named qualified investments. Futures Unauthorized Investments and Transactions Not more than 5% of the market value of either the equity or fixed income portfolio shall be invested in securities issued by one company. No more than 5% of any single outstanding issue shall be held. No more than 1% of the market value of either the equity or fixed income portfolio shall be invested in any initial offering of common stock. Exceptions to Investment Limitations The university may continue to hold any gift-in-kind when it is prudent to do so, without regard to the forgoing list of authorized investments Page of 33

19 RETIREMENT FUNDS Statement of Objectives The financial objectives of the Retirement Funds are to (1) provide a source of retirement income and other retiree benefits for its participants and beneficiaries (2) achieve and maintain full funding of the Actuarial Accrued Pension Liability and (3) reduce contributions to the Funds as a percent of payroll over time. The investment objective for the Post-Retirement Benefits plan is a long-term nominal rate of return on assets of at least 7.5% on an annualized basis. The investment objective for Defined Benefit Pension plans is a long-term nominal rate of return on assets of at least 6.5% on an annualized basis. The target rate of return for the Retirement Funds is based upon the assumption that future nominal rates of return will be close to the historical long run rates of return experienced for each asset class; however, market performance varies and a 7.5% nominal rate of return for Post-Retirement Benefits plan and a 6.5% nominal rate of return for Defined Benefit Pension plans may not be meaningful during some periods. In order to ensure that investment opportunities available over a specific time period are fairly evaluated, the Investment Committee will use comparative performance statistics to evaluate investment results. Each active investment manager and the total Retirement Funds will be expected to achieve minimum performance standards as follows: a. Exceed an appropriate benchmark index, net of management fees b. Where appropriate, rank in the top 40% of a style universe c. Rank in the top 40% of an appropriate peer group of actively managed portfolios While these performance standards should be achieved over a complete market cycle, the Investment Committee will also monitor performance on a rolling three year basis. The Retirement Funds are divided into two categories to reflect the unique liabilities and cash flow streams of each. The categories are the Defined Benefit Pension plans ( DB Plans ) and the Post-Retirement Benefits plan ( Post-Retirement Plan ). Both the DB Plans and Post-Retirement Plan shall be subject to separate periodic performance reporting and shall not be aggregated for purposes of stating returns or manager performance, except however that those individual plans that collectively represent the DB Plans may be combined for purposes of investment allocation, reporting and evaluation of manager performance. Asset Allocation Targets and Ranges Asset allocation should reflect the proper balance of the need for liquidity, preservation of purchasing power, and risk tolerance in relation to liabilities Page of 33

20 The DB Plans target asset mix, consistent with the achievement of its long term objectives is as follows: Asset Class Strategi c Target (%) Tactical Range (%) Minimum Maximum EQUITY 15% 5% 25% U.S. Equity 8% 0% 18% International Equity 4% 0% 14% Emerging Markets 3% 0% 13% ALTERNATIVES 0% 0% 10% Hedge Funds 0% 0% 10% FIXED INCOME 85% 75% 95% U.S. Investment Grade 85% 70% 95% OPPORTUNISTIC 0% 0% 5% CASH 0% 0% 20% The Post Retirement Plan target asset mix, consistent with the achievement of its longterm objectives is as follows: Strategic Target (%) Tactical Range (%) Asset Class Minimum Maximum EQUITY 40% 30% 50% U. S. Equity 20% 10% 30% International Equity 14% 4% 24% Emerging Markets Equity 6% 0% 16% REAL ASSETS 10% 0% 20% Real Estate 5% 0% 10% Commodities 2% 0% 8% TIPS 3% 0% 9% ALTERNATIVES 25% 10% 35% Private Equities 10% 0% 15% Hedge Funds 15% 0% 25% FIXED INCOME 25% 15% 35% U.S. Investment Grade 22.5% 7.5% 32.5% U.S. High Yield 2.5% 0% 14.5% Non-U.S. Fixed Income 0% 0% 10% OPPORTUNISTIC 0% 0% 5% CASH 0% 0% 20% Sub-allocations within asset class will be subject to approval by the Investment Committee. Separately Managed Retirement Pools Page of 33

21 At the Investment Committee s discretion, up to 10% of the market value of the DB Plans assets and up to 10% of the market value of the Post Retirement assets may be invested separately from the respective policy asset allocations (the Separately Managed Retirement Pools ). The Separately Managed Retirement Pools are intended to provide the University with flexibility to invest the Retirement Funds opportunistically. The performance of such funds will be measured separately from DB Plans and Post Retirement s respective weighted average benchmarks. The Separately Managed Funds performance will be measured against the weighted average of the benchmarks of the underlying managers. The market value of the DB Plans Separately Managed Pools should not exceed 15% of the market value of all DB Plans assets subject to the DB Plans target asset mix and the market value of the Post Retirement Plans Separately Managed Pools should not exceed 15% of the market value of all Post Retirement Plans assets subject to the Post Retirement Plans target asset mix, in both cases taking into account any realized or unrealized gains in such pools. Continuation of the Separately Managed Retirement Pools shall be considered by the Investment Committee at least annually, at which time the Investment Committee shall be required to vote on their continuation. Rebalancing asset allocations to strategic targets is essential for maintaining the risk profile adopted by the Investment Committee. The Retirement Funds actual asset allocation will be monitored regularly relative to established strategic targets. The Committee recognizes adjustments may be constrained by practical limits with respect to liquidity and transaction costs, but will make efforts to rebalance as appropriate. Cash flow in or out of the Retirement Funds may create an opportunity to shift the allocation. Benchmarks Retirement Funds incorporate split benchmarks to reflect the asset distributions. The DB Plans and the Post Retirement Plan benchmarks are weighted based on the target allocations to individual asset classes and their corresponding benchmarks. Performance of the DB Separately Managed Retirement Pool and the Post Retirement Separately Managed Pool shall be measured against the weighted average benchmark of the selected managers. See Appendix I for a list of current managers and their respective benchmarks and Appendix II for the DB Plans and Post Retirement Plan weighted benchmarks. Authorized Investments For separately managed accounts of the Retirement Fund, individual manager guidelines, which govern permissible securities and dictate other expectations, apply. Where investments are made in commingled or mutual funds, the permissible investments are governed by the appropriate fund prospectus Page of 33

22 As a statement of general policy, but subject to the Asset Allocations set forth above, permissible investments include the following: U.S. equity securities as defined in Section I. International equity securities as defined in section I. Emerging markets equity securities as defined in section I. Alternative Investments as defined in section I. Fixed Income Investments as defined in Section I. A maximum of 20% of the Retirement Fund s fixed income assets may be in securities rated Baa (Baa1, Baa2, Baa3) by Moody s or BBB (BBB+, BBB, BBB-) by Standard & Poor s, provided however, that the overall quality rating of fixed income assets will be at least A as rated by Standard & Poor s or A2 as rated by Moody s. Sovereign Supranational, Foreign Agency, and Foreign Local Government securities as described in Section I. is limited to a maximum of 10% of the fixed income assets. Cash and Money Market Instruments as defined in Section I. shall be restricted to a maximum of 10% each of the equity and fixed income portfolios, except for brief periods or when building liquidity in anticipation of a large withdrawal. Investment Managers shall have discretion to invest up to 10% of assets under management in cash reserves when they deem it appropriate. However, the Investment Managers will be evaluated against their peers on the performance of the total funds under their direct management. Mutual funds and other pooled asset portfolios provided they conform to the investment definitions and restrictions outlined herein and to ERISA guidelines. Financial options and futures may be employed in defensive and hedge strategies undertaken to preserve principal. Futures Unauthorized Investments and Transactions Not more than 5% of the market value of either the equity or fixed income portfolios shall be invested in securities issued by one company. No more than 5% of any single outstanding issue shall be held. No more than 1% of the market value of either the equity or fixed income portfolios shall be invested in any initial offering of common stock. Letter stock and other unregistered equity securities Short sales, options trading, or warrants Borrowing for investment purposes Page of 33

23 Other Investment Portfolios Separate investment policy statements have been created for the following portfolio(s) which are included in Appendix III: Good Samaritan Insurance Company Ltd Any governing body different, in whole or in part, from the Committee overseeing the Investment Policy will be solely responsible for ratifying any changes to their respective policies. These policies may be reviewed and revised periodically by the appropriate governing bodies, at which time an updated policy will be included in Appendix III Page of 33

24 APPENDIX I INVESTMENT MANAGERS AND BENCHMARKS Benchmarks vary by investment manager and are based on each manager s investment style. As managers are added or deleted, treasury staff, with the oversight of the Investment Committee, has discretion to revise the appendix to reflect the approved investment managers and their respective benchmark. INVESTMENT MANAGER BENCHMARK Endowment: U.S. Equities Iridian Asset Management Vanguard S&P 500 Index Fund Maverick Capital, Ltd International Equities Silchester International Investors Capital Group International Equity MFS Investment Management Kabouter Management, LLC Emerging Markets Equities Somerset Capital Mgmt Dimensional Fund Advisors Russell Midcap Index S&P 500 Index MSCI World MSCI EAFE Standard Index MSCI EAFE Standard Index MSCI EAFE Standard Index MSCI EAFE SmallCap Index MSCI Emerging Markets Index MSCI Emerging Markets Index Hedge Funds The Archstone Partnerships Evanston Capital Management B of A Merrill Lynch Treasury Bill + 5% B of A Merrill Lynch Treasury Bill + 5% Real Assets Wellington Asset Management Custom Benchmark 1 Van Eck Associates Corporation Harvest Fund Advisors, LLC S&P NA Natural Resources Alerian MLP Index Fixed Income State Street Global Advisors (Gov t/credit Index) Income Research & Management BC Gov t/credit BC U.S. Int Credit Ex Baa 1 35%MSCI ACW Energy/ 10%FTSE EPRA-NAREIT Developed/5%MSCI ACW IMI Gold & Precious Metals/5% DAX Global Agribusiness/ 25%Equal Sector Weighted S&P GSCI/ 20% BC U.S. TIPS 1-10 Yr Page of 33

25 University Account: Fixed Income J.P. Morgan Investment Advisors BlackRock, Inc. PNC Capital Advisors Vanguard Short Term Bond Index Fund DB Plans: U.S. Equities State Street Global Advisors ML Gov t/corp 1-5 yr Index ML Gov t/corp 1-5 yr Index ML Gov t/corp 1-5 yr Index BC 1-5yr Govt/Credit Float Adj Russell 3000 Index International Equities MFS Investment Management Sanderson Asset Management MSCI EAFE Standard Index MSCI EAFE Standard Index Hedge Funds The Archstone Partnerships Merrill Lynch Treasury Bill + 5% Evanston Capital Management Merrill Lynch Treasury Bill + 5% Fixed Income Income Research & Mgmt *Custom Benchmark *The investments will be monitored relative to a blended benchmark consisting of 19% Barclays Intermediate Government/Credit Index and 81% Barclays Long Government Credit Index that approximates the duration of the plan s liabilities. Post Retirement Plan: U.S. Equities Iridian Asset Management Vanguard S&P 500 Index Fund Maverick Capital, Ltd International Equities Manning and Napier Advisors LLC Harding Loevner LP First Eagle Investment Management Kabouter Management, LLC Russell Midcap Index S&P 500 Index MSCI World MSCI ACWI ex U.S. MSCI ACWI ex U.S. MSCI EAFE Index MSCI EAFE SmallCap Index Page of 33

26 Emerging Markets Equities Dimensional Fund Advisors The Vanguard Group MSCI Emerging Markets Index FTSE Emerging Mkts AllCap ChinaA Hedge Funds The Archstone Partnerships Merrill Lynch Treasury Bill + 5% Evanston Capital Management Merrill Lynch Treasury Bill + 5% Real Assets Van Eck Associates Corporation Harvest Fund Advisors, LLC Fixed Income State Street Global Advisors Post Retirement Separately Managed Pool: Miller Investment Management L.P. Welfare Benefits Trust: Fixed Income Wells Fargo Institutional Asset Advisors S&P NA Natural Resources Alerian MLP Index BC Gov t/credit Index 45% Russell 3000/ 35% BC Agg/ 20% MSCI ACWI ex U.S. (net) Merrill Lynch 1 3Year Treasury Index Operating and Auxiliary Reserve: Fixed Income Pugh Capital 60%BC Long Govt/Cr/ 40% ML 3 Yr Constant Maturity STRIPS Page of 33

27 APPENDIX II POOL BENCHMARKS Each pool s benchmark will vary as the approved asset allocation varies. Treasury staff, with the oversight of the Investment Committee, has the discretion to revise the appendix as needed. Endowment 22% Russell % MSCI World ex-u.s. (IMI) Index Net 7% MSCI Emerging Markets Index Net 15% Private Equity Index 15% HFRX Equal Weighted Strategies Index 4% NCREIF Fund Index Open End Diversified Core Equity 2% S&P GSCI Total Return Index 2% Barclays Capital 1-10 Year U.S. TIPS Index 15% Barclays Capital U.S. Aggregate Index 2% B of A Merrill Lynch High Yield Cash Pay Index University Account B of A Merrill Lynch 1-5 Yr Government/Corporate DB Plans 8% Russell % MSCI World ex-u.s. (IMI) Index Net 3% MSCI Emerging Markets Index Net 85% LDI Custom Benchmark* Post-Retirement Plan 20% Russell % MSCI World ex-u.s. (IMI) Index Net 6% MSCI Emerging Markets Index Net 10% Private Equity Index 15% HFRX Equal Weighted Strategies Index 5% NCREIF Fund Index Open End Diversified Core Equity 2% S&P GSCI Total Return Index 3% Barclays Capital 1-10 Year U.S. TIPS Index 22.5% Barclays Capital U.S. Aggregate 2.5% B of A Merrill Lynch High Yield Cash Pay Index *The investments will be customized to meet specific liability payments and will be monitored relative to a blended benchmark consisting of 67% ML Zero Coupon STRIP Index and 33% ML Corporate Index that approximates the duration of the plan s liabilities Page of 33