SAMPLE DOCUMENT Type of Document: Endowment Policies Date: 2006 Museum Name: Birmingham Museum of Art Type: Art Museum/Center/Sculpture Garden Budget Size: $5 million to $9.9 million Budget Year: 2008 Governance Type: Municipal Notes on strengths or special features: The document addresses the following topics: Responsibility & Authority Investment Philosophy & Objectives Investment Policies Rate of Return Time Horizon Risk Profile Liquidity Requirements Investment Guidelines by Asset Class Loans Review of Investment Performance Definitions Management Policies & Guidelines Spending Policy Establishment of Endowment Funds Other: Portfolio Restrictions Proxy Voting Accredited: Yes Diversification Asset Allocation Investment Management Investment Expenses USE STATEMENT & COPYRIGHT NOTICE The AAM Information Center has provided this sample document. It serves as an example of how one museum addresses a particular issue. Museums should compose original materials based on their unique circumstances. Any document produced by the recipient should not substantially use the contents of this sample as the basis. Materials in the AAM Information Center are provided "as is," without any guarantee or warranty of any kind, expressed or implied. NOTICE CONCERNING COPYRIGHT RESTRICTIONS Under certain conditions specified in the copyright law of the United States (Title 17, United States Code), libraries and archives may furnish a photocopy or other reproduction. The photocopy or reproduction may not be used for any purpose other than private study, scholarship or research. If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of fair use, that user may be liable for copyright infringement.
Birmingham of Art Investment Funds Statement of Investment Policy June, 2006 General Principles This document is intended to set forth the objectives of the investment program of the Birmingham Museum of Art and the guidelines to be followed in attempting to meet those objectives. It covers all investment funds whether currently existent or established in the future and is intended to be sufficiently specific to be meaningful, but sufficiently flexible to be practical. Through the prudent investment of its portfolio assets, the Museum expects to earn the return necessary to support its mission and overall financial objectives. Organizational Mission: 1. To administer trusts and endowments 2. To be the conduit for all philanthropic gifts and grants to and for the BMA and related entities. Statement of General Investment Objective The long-term objective of the Museum s investment portfolio is to generate a return which is sufficient to meet its current and expected future financial requirements. Statement of General Risk Tolerance The various Funds, which comprise the Museum s Investment Program, will be structured in a manner that most efficiently matches the Museum s investment risk and return characteristics with their long-term purposes and objectives. Short-term uncertainty of investment results are recognized as risks, and will be managed appropriately through specific asset allocation strategies and diversification based upon the portfolios investment time horizon.
Investment Policy - 2/1/06 Page 2 Investment Philosophy/Expectations: As a perpetually chartered organization, long-term success relies entirely on a sound decision making process. It is this thorough analysis, which gives investors the conviction to remain committed to strategies that may be out of favor with popular opinion. At every level, investment decisions should be made only after a rigorous examination of all relevant information, while remaining focused on the specific investment challenges an institution faces. David Swenson, Manager of Yale University s endowment, notes Casual commitments invite casual reversal, exposing portfolio managers (committees) to the damaging whipsaw of buying high and selling low. Only with the confidence created by a strong decision making process can investors sell speculative excess and buy despair-driven value. The long-term success of the BMA Investment Program (providing stable, substantial, sustainable flows of resources to support our mission) will be driven by compounding its value. As a result, the Museum s portfolio will be structured to protect capital during down markets, while participating during market rallies. The expectations of this approach are underperformance in rapidly rising, speculative driven markets and outperformance in markets which are negative, flat, or fundamentally driven. Return Objective The investment objective of the BMA Investment Program is to protect the purchasing power of its contributions by earning a real rate of return (after inflation) equal to spending (support for various entities), income beneficiary payments, and expenses, at a minimum. The portfolio s success will be evaluated on a total return basis. Distributions to the BMA will be expressed as a percentage of the portfolio s fund balance. Time Horizon As the Birmingham Museum of Art is a perpetually chartered organization, its time horizon is very long. However, some portions of the Museum s investments may have short-term objectives such as income beneficiaries of charitable remainder trusts and gift annuities, recipients of endowment distributions, temporarily restricted funds awaiting use in a shorter time frame, i.e. six months to three years and unrestricted funds wherein a time frame is unknown. As a result, the Museum will structure the portfolio to balance the needs of each constituent group. Risk Tolerance While short-term volatility is the most widely recognized form of risk, its importance to an organization with a perpetual time horizon is minimal. The Museum recognizes that in the 2
Investment Policy - 2/1/06 Page 3 Risk Tolerance (continued) short-term market fluctuations may result in disappointing performance. However, short term volatility creates opportunities for long-term investors as noted by Ben Graham s statement In the short-run the market is a voting machine, in the long-run the market is a weighing machine. Permanent loss of capital is the largest risk to the Museum s return objective of protecting the value of its invested assets. In order to minimize this risk, the Museum s approach toward investing will focus on diversification and valuation. Liquidity Liquidity is important, but not at the expense of failing to protect the value of the Museum s assets. Most institutional and individual investors have a strong preference and sometimes mandated requirement for investments that can readily be converted to cash. This environment can create opportunities for investors that are willing to accept some level of illiquidity in their portfolio. However, given the unpredictable nature of liquidity requirements, the Museum must keep a majority of its assets in vehicles that offer readily available liquidity. Diversification To be truly diversified, the portfolio must be diversified by economic return drivers (interest rates, inflation, liquidity, public/private, growth rates, valuation levels). In order to accomplish this, the Museum will invest in a broad range of asset classes that derive returns in ways fundamentally dissimilar from one another. Eligible Investments Because of the cyclical nature of investment markets, opportunities present themselves in all strategies. Howard Marks argues No investment is so bad that it s bad at any price. In order to maintain broad flexibility, the Museum will not outright eliminate any investment from consideration. However, to qualify for inclusion in the portfolio, all investments must possess the following characteristics: Asset Class Requirements: 1. Understandable performance and risk drivers (Predictable Performance in varying market environments). 2. Provide Diversification by Economic Return Drivers. 3. No or Low Leverage. 3
Page 4 Investment Manager Requirements: 1. Understandable Investment Process/Strategy. 2. Primary Objective Protect Capital. 3. A Minimum of 5 years of verifiable or audited performance results. These performance results should include all accounts of similar style managed by the firm, equally weighted, regardless of size. 4. The record submitted must have been produced by the investment professionals following the same discipline as represented to the Museum, for at least three years. 5. Neither the investment fund management firm being considered nor the individual manager recommended to the Museum may have had any significant litigation that has relevance to their honesty, integrity or abilities. 6. Stability of both personnel and accounts. 7. Substantial resources to ensure future viability, sufficiently staffed back offices, and quality of personnel in research, management and communications. 8. In addition to the requirements listed above, alternative investment managers must: A. Be willing to disclose (at least quarterly) strategy exposures, leverage, portfolio assets/asset growth, and a review/outlook; B. Provide the Museum s custodian with, at a minimum, quarterly valuations (excludes private equity); C. Provide audited annual financial statements or third party valuation reports; D. Minimize Unrelated Business Taxable Income (UBTI); E. Employ a policy to avoid conflicts of interest within their business; and F. Invest personally in the same products as the Birmingham Museum of Art. Performance Measurement / Monitoring The Birmingham Museum of Art understands the real opportunity to achieve superior long-term results is not driven by short-term outperformance of a benchmark, but rather adhering to appropriate investment policies over the long-term. Total Portfolio An investment program is made up of a diversified pool of investments/managers. As grants and expenses are funded out of the total portfolio, the ultimate measure of success of our investment program will focus on the total portfolio s results, measuring on a rolling five-year basis, the market value of the portfolio versus the inflation adjusted value of contributions to ensure the portfolio s purchasing power is preserved. 4
Page 5 Investment Managers Performance expectations will be determined for investment managers prior to initial funding. Short-Term - The Finance Committee will receive quarterly performance reports from its Consultant, but individual manager performance over quarterly periods will be addressed at Finance Committee Meetings on an exception basis (when performance, whether good or bad, can t be explained by the market environment). Long-Term Over rolling five year periods, an Investment Manager s performance should meet/exceed all performance expectations established prior to funding and outperform relevant benchmarks and peers. Notwithstanding these expectations, investment performance shall not be the sole determinant of whether or not an investment fund manager is terminated, but rather termination shall be based upon a full review of an investment fund manager s continued compliance with the Investment Policy and its continued suitability to manage a portion of the Museum s investment portfolio. Manager Watch List Birmingham Museum of Art will maintain a manager watch list. Managers may be placed on this list at any time and for any reason, but the primary reasons include: 1. Managers are not performing to expectations (short term underperformance versus benchmarks and peers does not necessarily mean the manager will be added to the watch list ); 2. Management teams experience employee turnover at any level; 3. Organizations are undergoing change (ownership, merger, vehicle, ) The Museum s Financial Officer will report to the Finance Committee on all managers on the watch list quarterly or as often as necessary. Portfolio Restrictions 1. No individual equity security shall represent more than 7% of the portfolio s total equity exposure. 2. For cash/fixed income portfolios, no single corporate issuer shall represent more than 5% of such portfolio s value at the time of purchase, nor shall any single corporate position exceed 7% of such portfolio s value. 3. The Museum will allow its investment managers to use all of the tools which are available, including derivative securities, to help them achieve the Museum s return 5
Page 6 Portfolio Restrictions (continued) objectives. However, in order to control the Museum s exposure to the risks associated with derivative securities, investment managers must demonstrate to the Investment Committee s satisfaction that: A. The manager understands the derivative securities that it is purchasing; B. These securities are being used in an overall portfolio strategy; and C. The manager has demonstrated an ability to successfully use these securities in similar portfolios in the past 4. In no event may the investment managers create leverage within the Museum s portfolio. This includes the use of securities which have been purchased but not yet paid for or delivered, as well as the purchase of securities which would create an obligation or investment exposure greater than the portfolio value. Proxy Voting The Museum will allow each individual manager to vote all proxies, but will retain the right to vote proxies at their discretion. If the Museum desires to take such proxy action, then they must notify the appropriate manager within a reasonable time period. ---------------------------------------------------------------------------------------------------- Management Review Procedures Responsible Parties Duties of the BMA Board of Trustees The Board ensures that its fiduciary responsibility for the invested assets, are fulfilled through appropriate investment structure, internal and external managements, and portfolio performance consistent with the Policies. The Board is not involved in day-to-day investment decisions. The Board delegates primary responsibility for overseeing the investments of the Museum to the Finance Committee. Through the Finance Committee, the Board shall: Establish and periodically review and approve changes to the Investment Policy Statement; and Periodically review the Museum Portfolio s asset allocation plan against capital market assumptions regarding return, risk and correlations for major asset classes to ensure that the current asset mix will achieve the Museum s long-term goals. These functions shall be carried out with the assistance of an Investment Consultant, and shall take into account the advice of the Finance Committee and the Chief Financial Officer. 6
Page 7 Duties of the BMA Finance Committee The Finance Committee is appointed by the Board and is responsible for the development, implementation and maintenance of these Policies. Specifically, the Finance Committee will: Develop the Policies and recommend their approval by the Board; Implement and maintain the Policies; Report to the Board concerning the Museum s investments, including current holdings, asset allocation and performance; Select, engage, or terminate the Investment Managers and Investment Consultants as needed; Delegate to Investment Managers full discretionary investment authority with the provisions of the Policies and the individual manager contracts; Monitor the performance of Investment Managers with the assistance of the Chief Financial Officer and the Investment Consultant; Monitor portfolios to determine compliance with policies and to determine whether or not Investment Managers are managing to their stated styles. (The source of information for these reviews shall come for the Chief Financial Officer, the Investment Consultants, the custodian, the trustee, and each Investment Manager); Review the Museum s asset allocation no less than quarterly and revise it as necessary; and; Recommend Spending Policies where appropriate. Duties of the BMA Financial Officer (CFO) The BMA Financial Officer shall be responsible for the day-to-day administration of the Museum s Investment Portfolio and for implementing the Finance Committee s decisions. The CFO shall also be the primary liaison between Investment Managers, the Consultant and the Finance Committee. The CFO will adhere to the following procedures in the management of invested assets: Support the Finance Committee in the development and approval of the Policies, implementation and monitoring of the Policies, provision of cash flow requirements to assist in appropriate asset allocation decisions, and report on investment activity and matters of significance; Conduct performance reviews, asset allocations, investment manager reviews and selections, as well as provide topical research as requested by Finance Committee. Monitor the asset allocation for compliance with the Policies; Rebalance the portfolio on a regular basis as determined by the Finance Committee; Ensure that the Investment Managers adhere to the terms of their contracts and that performance monitoring systems are sufficient to provide the Finance Committee with timely, accurate, and useful information; 7
Page 8 Duties of the BMA Financial Officer (CFO) (continued) Review the portfolios on an ongoing basis; Supervise and direct the work of the Investment Consultant (if one is used); and Handle all of the other day-to-day financial operations of the Museum. Duties of the Investment Managers For the individually managed accounts, the Investment Managers shall: Provide the CFO with a written agreement to invest in accordance with the Policies; Provide the CFO with proof of liability and fiduciary insurance coverage on an annual basis; Provide the CFO each year with the updated ADV Part II filed with the SEC; Vote the proxies in accordance with these Policies and report on such twice a year; Adhere to the investment management style as represented to the Investment Committee at time of retention; Execute all investment transactions with brokers and dealers qualified to execute institutional orders on an ongoing basis at the best net cost and, where appropriate, direct the brokerage as requested. Provide monthly reports in a satisfactory form; Reconcile every month accounting, transaction and asset summary data with custodian or trustee valuations and communicate and resolve any significant discrepancies; and Maintain frequent and open communications with the CFO and Investment Consultants on all significant matters pertaining to the Policies including, but not limited to, the following; o The Investment Manager s investment outlook, investment strategy and portfolio structure; o Significant changes in ownership, organizational structure, financial condition or senior staff; o Changes in the portfolio manager or other staff members assigned to manage the allocation; o Other issues which the Investment Manager deems to be of significant interest or material importance; and o Be available to meet with the Investment Committee annually 8
Page 9 Duties of the Investment Consultant (if used) The principle role of the Investment Consultant is to provide independent advice to the CFO and the Finance Committee. The Investment Consultant shall be responsible for the following; Making recommendations to the CFO and the Finance Committee regarding investment policy and strategic asset allocation including the addition or substitution of new asset classes; Assisting the Finance Committee in the selection of qualified Investment Managers, and assisting in the oversight of existing Investment Managers, including performance evaluation and monitoring changes in staffing, ownership and the investment process; Preparing a quarterly report on the Investment Managers performance, and on the performance of each portfolio in total including a review of guideline compliance and adherence to investment style and discipline; Working directly with the CFO and other staff on any investment-related topic; Providing topical research and education on investment subjects that are relevant to the Museum; and Meeting with the Finance Committee on a semi-annual basis and the CFO on a quarterly basis. 9