University policy regarding university investments
(A) Policy statement. The purpose of this policy is to establish the investment objectives for the university operating cash accounts. This policy defines the authority and responsibilities of the chief financial officer of the university for the management of investment operations and the standards to be used to monitor investment performance.
(1) This statement of investment policy is set forth in order that:
(a) There is a clear understanding on the part of the board of trustees, the finance and administration committee, chief financial officer, and any investment managers retained by them concerning the investment policy and objectives for the funds under management;
(b) Investment managers are given the guidelines and limitations expressed by the board of trustees, the finance and administration committee, and the chief financial officer for the management of these funds;
(c) Current and future Board of Trustees and Finance and Administration Committee members, have a basis for understanding the investment process and evaluating performance.
(B) Eligibility and scope. The board of trustees has the general authority to implement this policy. The chief financial officer is responsible for the management of the investment operations, as delegated by the board of trustees. In this capacity, the chief financial officer may delegate to the appropriate staff the authority to execute investment operations and may appoint a committee composed of university administration to assist in the execution of these responsibilities. The chief financial officer will report to the finance and administration committee of the board of trustees, at least quarterly on the status of the investment pools.
(1) Responsibilities of the chief financial officer under this policy are as follows:
(a) Advising the finance and administration committee and the board of trustees on its investments made pursuant to section 3345.05(C) of the Ohio Revised Code;
(b) Reviewing and recommending any changes to the investment policy of the University;
(c) Approving the selection of an investment advisor or consultant in compliance with section 3345.05(D)(1) of the Ohio Revised Code;
(d) Authorizing asset subclasses within the asset classes described in this policy which constitute permissible areas for investment of the university assets in compliance with section 3345.05(C)(1) of the Ohio Revised Code;
(e) Recommending return and risk objectives and asset allocation targets for the university assets that are invested;
(f) Approving the selection of investment managers authorized to manage university assets;
(g) Assessing the performance of the university’s investment managers and making retention decisions regarding the managers and consultants based on performance benchmarks formally established through the university’s investment policy; and
(h) Approving guidelines for the investment instruments held by the university by its investment managers.
(C) Additional Roles and Responsibilities.
(1) Finance and Administration Committee.
(a) The chief financial officer will report to the finance and administration committee of the board of trustees, at least quarterly, on the status of the investment pools of the university.
(b) The finance and administration committee authorizes the control and execution of the investment policy to the chief financial officer.
(2) Fiduciary duties of the board of trustees, finance and administration committee, and the chief financial officer.
(a) The board, committee and chief financial officer are responsible for directing and monitoring the investment management of university assets.
(3) Professional investment managers.
(a) The chief financial officer may delegate responsibilities to professional investment managers to achieve university investments objectives as established by the chief financial officer, the committee, and/or the board of trustees.
(b) Professional investment managers must be licensed either by the division of securities or registered with the Securities and Exchange Commission, and must be in compliance with the standards established in section 3345.05(D)(1) of the Ohio Revised Code.
(4) Investment consultant.
(a) The chief financial officer may appoint an investment consultant to act as a non-discretionary advisor to the chief financial officer and the finance and administration committee for matters concerning university investments. The responsibilities of the investment consultant include:
(i) Assisting in the development and periodic review of investment policy;
(ii) Recommending appropriate asset and style allocations, and the number and types of investment managers necessary to carry out the recommendation;
(iii) Conducting investment manager searches necessary during the normal management of the portfolio and/or when requested by the chief financial officer, ensuring the search is conducted in accordance with university standards established by the chief financial officer, assisting in securing the services of the investment manager, monitoring the performance of the investment manager, recommending the termination and/or change of an investment manager;
(v) Establishing benchmarks for the overall university portfolio and for the portfolio assigned to each investment manager;
(vii) Communicating matters of policy, investment manager research, and investment manager performance to the chief financial officer;
(viii) Reviewing the operating fund investment history, historical capital markets performance and the contents of this policy with all members newly appointed to the finance and administration committee, board of trustees or to the chief financial officer.
(1) The Kent state university investment pool is divided into long-term and short-term portfolios.
(a) Short-term. The short-term investment pool represents funds needed for expenditures in one year or less. The primary objective of the investments is to provide for the preservation of capital with a secondary emphasis on maximizing income.
(b) Long-term. The long-term investment pool represents a “permanent core” fund not needed for working capital in any given single year. The primary objective of the investments is long-term growth of principal and income, the purpose which is to enhance the university’s ability to provide for programs and initiatives.
(2) Investment considerations.
(a) The short-term investment pool as established is for the purpose of covering the investment of university funds that are required for daily liquidity and expenditures of one year or less.
(b) Investments not expected as necessary to fund the routine operations of the university may be invested in the long-term investment pool.
(c) At a minimum, an average of twenty-five (25) percent of the operating assets over the previous fiscal year must be invested in publicly-traded fixed-income securities, which includes:
(i) Those securities issued by the United States federal government or its agencies;
(ii) The treasurer of the states;
(iii) Pooled investment program;
(iv) Obligations of the state of Ohio or any of its political subdivisions;
(v) Certificates of deposits of any national bank located in the state of Ohio;
(vi) Repurchase agreements with any eligible Ohio financial institution that is a member of the Federal Reserve system or Federal Home Loan Bank;
(vii) Money market funds; or
(viii) Bankers acceptances maturing in two hundred seventy (270) days or less.
(d) Monies from various University funds may be pooled to maximize return or reduce expenses.
(3) Spending policy.
(a) In order to provide current and future financial support for unrestricted educational and general fund priorities, a spending policy is used to determine the allocation of the annual investment income to the operating budget, an initiatives fund, and the stabilization fund. The distribution of each of the components receiving an allocation of the total investment earnings is to be calculated as follows:
(i) A spending rate is calculated by using seventy-five (75) percent of the moving average of rates of return from the long-term pool for the previous five years. All earnings from the short-term pool are available to be spent in the year they are earned.
(ii) The operating budget allocation is a fixed-dollar amount that is determined annually during the University budget process. It is funded first from the income from the short-term investment pool with the remaining amount to be allocated from the long-term investment pool.
(iii) The initiatives fund allocation is calculated by subtracting the budget allocation from the total income available to be spent. The initiatives fund is available for unrestricted educational and general fund priorities as determined by the president of the university.
(iv) The stabilization fund allocation or deduction is determined by subtracting the amount of income available to be spent from the actual investment income as of June 30, each fiscal year. That stabilization fund is the accumulation of market appreciation for the long-term investment fund that is used to protect against the possibility of future market declines in the long-term investment pool.
(4) Investment objectives.
(a) The investment objectives and the asset allocation listed below require a disciplined, consistent management philosophy that accommodates the reasonable and probable market events. The philosophy should be inconsistent with historical results in the capital markets.
(b) Since the duration, direction and intensity of inflation cycles vary, it is recognized that the return experience by the operating fund over any one cycle may vary from the objective, but it is deemed reasonable to expect:
(i) Four percent real rate of return over a complete cycle; and
(ii) Seven percent normal rate of return (assuming a 3-percent inflation rate).
(c) The chief financial officer is responsible to ensure that the following assets allocations are adhered to by the total operating fund over a full market cycle:
(5) Long-term pool asset allocation guidelines (at market value):
(a) In general, the asset allocation should average, over a full market cycle approximately 65% equities (or equivalents) and 35% fixed income and cash (or equivalents). For purposes of this document a full market cycle is defined as no less than three years or more than seven years. However, within a market cycle, the allocation will not exceed the following parameters:
Fixed Income, Cash and Equivalents
Equity and Equivalents
As a Percentage of Equity and Equivalents
(b) The target equity portfolio shall average 80% domestic equities and 20% international equities. The actual allocation may fluctuate depending on the posture of the university at any point in time, but the percentage of domestic and international equities will not exceed the stated range. Given the stated targets, the Policy Index is 50% Russell 3000, 12% MSCI EAFE, 33% Lehman Brothers Aggregate and 5% T-bills. The 5% Policy Index allocation to T-bills is attributable to the residual cash from the equity and fixed income targets proportional to the portfolio at 3% and 2%, respectively.
(c) As a whole, Alternative Investment (as equivalents for the Asset Classes above) cannot exceed 30% of the total portfolio. Within the Alternative Investment limitation, non-marketable investments may not exceed more than 10% of the total portfolio.
(d) The operating fund’s available assets should be invested primarily in equity, debt, and cash equivalent securities, including alternative investments as described herein. The university may revisit these options and consider other reasonable investment vehicles currently in use in the market.
(i) Equity securities.
(a) Diversification. No more than five (5) percent, at cost, or ten (10) percent, at market, may be invested in any one company with no more than twenty (20) percent exposure to any one industry. For the purpose of this policy, the Standard and Poor definition of industry classification will be used for clarity if necessary.
(b) Foreign securities are a permissible investment;
(c) Preferred stock and convertibles are permitted, but may not exceed twenty (20) percent of the portfolio;
(d) Mutual funds are permissible investments. Reasonable efforts must be taken by the chief financial officer to ensure that such investments, both alone and in conjunction with the entire portfolio, stay with this policy.
(ii) Fixed income securities.
(a) At a minimum, seventy-five (75) percent of all fixed income investments must be rated investment grade or better by either Moody’s or Standard and Poor’s as to domestic securities, and AA rated by those agencies or their foreign counterparts as to foreign securities;
(b) At a maximum, twenty-five (25) percent of all fixed income investments can be rated below investment grade with the caveat that it must be clearly stated in the investment strategy description by a particular manager that below investment grade securities are part of the portfolio;
(c) Diversification. No more than ten (10) percent, at cost, to any one company, or twenty-five (25) percent exposure, at cost, to any one industry. U.S. Treasury securities are exempt from this restriction;
(d) Neither foreign securities nor convertibles may exceed ten (10) percent of the overall fixed income portfolio;
(e) Mutual funds are permissible investments. Reasonable efforts will be made to ensure that such investments, both alone and in conjunction with the entire portfolio, stay within the guidelines of this statement.
(iii) Alternative investments. The University may consider investments in hedge fund strategies within the context of the overall investment plan. The objective is to diversify the portfolio, complement traditional equity and fixed income investments, and improve the overall consistency of performance of the portfolio.
(a) Funds of hedge funds. The investment committee established by the chief financial officer may elect to invest in funds of hedge funds. The funds of hedge funds structure helps to provide an additional layer of diversification relative to relying on single-manager or single-strategy hedge fund approach.
(b) Single-Manager hedge funds. The chief financial officer may elect to invest with single-manager hedge funds, but must only be used in limited instances where there are useful strategies that cannot be realized in a core diversified fund.
(c) Transparency and liquidity. The university understands that hedge funds and funds of hedge funds investments are less transparent than traditional investments, but accepts reasonable levels of transparency in order to monitor the investments appropriately.
(i) The university understands that liquidity in such investments may also be limited. Liquidity constraints, including lock-up provisions and redemption or withdrawal fees, should be taken into consideration when making allocations to the managers responsible for the investments in these funds.
(d) Allowable hedge fund strategies and alternative strategies. Funds of hedge funds and funds of alternative investment strategies are expected to provide diversification by investing in approaches that do not correlate directly with traditional equity and/or fixed-income investments.
(i) Such strategies may include, but are not limited to: statistical arbitrage, equity market neutral, convertible arbitrage, distressed securities, merger arbitrage, fixed income arbitrage, equity long/short, global macro, short selling, managed futures, structured products, micro finance and portable alpha.
(ii) Up to 10% of the investment allocation may be made to non-marketable alternative strategies that may include, but are not limited to; private real estate, private equity and hard assets.
(e) Allowable hedge fund investments. The strategies referenced in section (D)(
45)(d)(iii)(d)(i) above may include investments in the following: common and preferred stocks, options, warrants, convertible securities, foreign securities, foreign currencies, commodities, commodity futures, financial futures, derivatives, mortgage-backed and mortgage-related securities, real estate, bonds (both investment-grade and non investment-grade, including high-yield debt, distressed or other securities) and other assets. Strategies may also utilize short-selling and leverage.
(iv) Cash and short-term investments. The requirements for cash and short-term investments are as follows:
(a) Maintain adequate cash liquidity to pay ongoing expenses.
(b) Commercial paper purchased shall be from Fortune 100 quality companies and rates A-1, P-1, by Standard and Poor’s.
(c) Certificates of deposits purchased shall be from institutions only protected by FDIC in amount not exceeding $100,000 per CD.
(5) Proxy voting.
(a) The board of trustees may appoint to each investment manager the duty and responsibility to vote proxies when it furthers the objective of maximizing the values of the securities held in the portfolio. As proxy, the investment manager must maintain proper records and documentation regarding decisions made on each proxy vote.
(b) Other proxies, if not under the purview of an investment manager, will be the direct responsibilities of the Trustees.
(a) The investment managers and the chief financial officer must receive confirmation of transactions on a monthly basis as available from the brokers;
(b) The chief financial officer must receive from the custodian a monthly statement of all accounts;
(c) The investment consultant must provide a quarterly evaluation report to the chief financial officer, and to the board of trustees, containing a cumulative summarization of the performance of the university investments over one, three, five and/or ten years where applicable;
(d) At a minimum, the investment consultant must meet semi-annually and as requested, with the chief financial officer to review the investment policy, risk levels, investment outlook, and other planning matters.
(i) The investment consultant must be available to review these same matters with the board of trustees and/or the finance and administration committee upon request.
Effective: June 22, 2007
Prior Effective Dates: 10/12/1993, 10/31/2002, 2/24/2003, 9/20/2005, 6/1/2007