Investment Policy Statement
A. Organization and Purpose
The University of Rochester’s Board of Trustees has delegated the authority for investment decisions to its Investment Committee (Committee). The University of Rochester’s Office of Institutional Resources (Office), under the supervision of the Committee, provides investment management services to the University of Rochester (University) and related organizations or foundations (Foundations). Assets are held in custodial accounts or in limited partnerships within the University’s Long-Term Investment Pool (Pool) consisting of the University’s endowment and other funds intended to be invested over long time periods. Other pools of capital such as operating funds or split-interest gifts may also be managed by the Committee and the Office, either separately or in other investment pools. In addition to guiding the University’s investment process, the policies contained herein comply with NYPMIFA as adopted by New York in 2010.
B. Standard of Care
The Committee and the Office manage the Pool in accordance with an Investment Policy Statement. In recommending investment actions to the Committee, the Office exercises ordinary diligence and prudence and may engage, with Committee approval, a consultant to assist it in performing its duties.
C. Objectives and Approach
The primary objective in managing the Pool is to maximize long-term real investment returns commensurate with the risk tolerance of the University. To achieve this objective, the Committee and the Office manage the Pool in an attempt to achieve returns which over multi-year periods, but not necessarily over shorter time periods, exceed the returns on a passively investable benchmark. Recognizing that the University seeks outstanding students, faculty, and staff and wishes to provide them with appropriate resources, the Committee and the Office will also evaluate the Pool in relation to similar private universities (Peer Group). In approaching asset allocation and portfolio construction, the Committee does not believe in market timing, or high concentration in any particular asset class; instead, the Committee recognizes that certain actions, such as adjusting asset allocation, acting to preserve capital or altering leverage or liquidity in times of unusual market or economic conditions, can improve performance and/or reduce risk. To implement these objectives, the Committee seeks managers who are flexible in their investment approach in addition to those focused on benchmark indices.
D. Policy Portfolio and Spending
The Committee and the Office will establish, annually, a long-term investment return target and asset allocation ranges (Policy Portfolio), recognizing that available returns are a function of the opportunity set, not a function of spending needs. The Committee and the Office calculate and communicate the Pool’s risk and return estimates to the University and Foundations to assist them in setting spending rates and to help in long term planning. The Policy Portfolio will be used by the University in establishing financial models for budgetary planning. The Policy Portfolio will be established after analysis and modeling by the Office of factors which influence investment returns and risks of various asset classes, including possible impacts of inflation or deflation. In establishing the Policy Portfolio the extremes of investing for preservation of principal and current income on one hand, and maximum return without regard for risk on the other, are to be avoided.
II. Responsibilities and Practices
A. Committee Responsibilities
Committee responsibilities include:
- Establishing an Investment Policy Statement to guide investment practices over a period of five years or more.
- Establishing an annual Policy Portfolio to guide asset allocation.
- Approving the hiring and termination of investment firms.
- Monitoring Office actions to ensure compliance with policies.
- Monitoring the returns and characteristics of the Pool relative to the Policy Portfolio and Peer Group.
The Committee may establish an Executive Committee to assist in establishing a meeting quorum. The Executive Committee consists of the Committee Chairman, past Committee Chairmen, current Board Chairman, University President and those Voting Trustee Investment Committee members managing an investment firm or large pool of invested capital.
The Committee may delegate to the Office, in accordance with the Investment Policy Statement and Policy Portfolio, responsibility for:
- Managing day-to-day investment operations.
- Terminating firms (subject to approval of the Chairman of the Investment Committee).
- Selling securities; however, purchasing securities must be approved by the Committee.
B. Office Responsibilities
The Office manages Pool assets, within the responsibilities set forth below by the Committee, and assists the Committee in developing the Investment Policy Statement and the Policy Portfolio. The Office’s investment management responsibilities include:
- Asset allocation and tactical decisions
Based upon the University’s risk tolerance together with capital market risk and return estimates, the Committee and the Office will annually establish asset allocation targets and ranges in order to achieve the objectives stated in the Investment Policy Statement. The Office, with Committee approval, may adjust the portfolio within the established ranges for rebalancing or in gradual response to unusual conditions (such as reducing equity exposure after a prolonged period of excess returns) but will not engage in short-term speculation on the direction of markets.
- Manager Selection and Monitoring
The Office continuously monitors and evaluates investment strategies and investment firms with a goal of identifying superior investment opportunities. Prior to hiring investment firms the Office investigates, analyzes and documents the investment process, organization, and staff of such firms. This effort continues after firms are hired. Investment firms are expected to implement strategies, within guidelines that are provided to them, that are likely to achieve or exceed targeted returns. Certain firms may be given discretion on asset allocation to better enable them to achieve or exceed a targeted return.
- Manager Diversification
For investments whose returns are produced solely through exposure to publicly-traded markets, such as mutual funds, exchange-traded funds and similar securities, allocations are limited only by the ranges expressed by the Policy Portfolio. For external active managers where underlying securities are not held in custody by the University, no more than 5% of the Pool can be allocated to a single such manager. For external active managers of long-term illiquid partnerships, such as private equity and real asset funds, the 5% limitation applies to the market value of any existing investments plus undrawn commitments with the firm, adjusted for expected distributions.
The Office provides quarterly reports to the Committee and Foundations describing the Pool’s asset allocation relative to the Policy Portfolio, risk, liquidity and returns. Reporting also includes performance of investment firms and underlying asset classes relative to benchmarks. The Office provides summary reports to the University that explains the Pool’s investment performance relative to the Policy Portfolio and significant actions by the Office and the Committee over the prior quarter. The Office also provides a comprehensive and highly confidential annual report to the Committee, Foundations and the University on all of its activities, on the investment firms managing the Pool, and with comparisons of the Pool to the Peer Group.
- Tactical Investments
The Investment Office is granted flexibility to purchase tactical investments (“TI”) on a limited basis between Committee meetings. This enables the Investment Office to better manage asset allocation by investing with managers or vehicles not found on the existing “roster”. Definitions of TI, and the approval process, are described below.
TI characteristics; expectations and sizing of allocations
- TIs are smaller and shorter term than strategic investments and are characterized by adroitness.
- TIs may include assets that decline in price by 20% to 25% (or more) and which are viewed by both the Investment Office and Cambridge Associates as priced below intrinsic value. They may also include investment ideas that originate from investment firms that are not currently managing LTIP investments and/or “amplification” of investments purchased by existing managers of the LTIP. [Note: the “credit tilt” in fixed income, implemented in early 2009, is an example of a TI]
- TIs may be liquid or “semi-liquid”. Semi-liquid TIs are defined as those expected to return the majority of capital within five years and with little or no capital commitments (e.g. 10%) beyond the initial investment (such as LP interests purchased on the secondary market). Liquid TI’s may include, for example, ETFs, index funds, mutual funds, and/or individual securities.
- An investment firm may be employed to manage TIs or TIs may be purchased directly by the Investment Office. Any investment requiring an ISDA may not be purchased. Short positions held through an ETF or similar vehicle are permitted.
- Return expectations from TIs at the time of purchase must be greater than the long-term annual return assumption for the LTIP (currently 8%), with the TI return expected to be generated within a three to five year period.
- Not more than 5% of the LTIP, in total, either at the time of an investment or at market value, can be allocated to the TI program.
Role of the Committee and the approval process; purchases and sales
- The Chairman of the Investment Committee will receive a draft of TI recommendations in advance of notification to the Committee. Committee members will receive the recommendation, electronically, after approval by the Chairman. Committee members are invited to comment, but a vote for approval will not be sought. Strong objection by one or more voting Committee members will result in postponement of the investment until the next regularly scheduled Committee meeting, at which time the recommendation may, at the discretion of the Chairman, be discussed and voted upon. Alternatively, the Investment Office may, with the Chairman’s approval, convene a meeting of the executive committee to discuss the recommendation.
- The Investment Office may increase, provided exposure remains below 10% of the LTIP, or decrease/exit TI positions after the initial investment. The Committee Chairman may instruct the Investment Office to sell or alter the size of TIs at any time after an initial investment. The Investment Committee will receive notification at the time a TI is sold.
Role of the consultant
- TIs will be discussed with the University’s investment consultant (currently Cambridge Associates) prior to the recommendation to the Chairman and the Committee. The consultant may also suggest potential TIs to the Investment Office.
Source of funds
- Funding for TIs may be from any asset category, including cash, which offers a lower expected return and/or an increased risk profile when compared to the proposed TI.
- For asset allocation purposes TIs will not appear in a separate category. TIs will be reflected in the category best matching their investable universe (i.e. public equity, fixed, hedge, private equity, etc.). TI performance will be measured on the same basis as all other investments of the LTIP. The Committee will receive a report each quarter entitled “TI Performance and Allocation” when or if funds are allocated to TIs.
|Long Term Investment Pool|
|Policy Portfolio Asset Allocation Recommendation for 2015 (in %)|
|Total, Publicly-traded long equities||
35 - 37
3 - 6
|Cash (not held by managers)||
(2) - 4
|Total, Traditional Investments||
36 - 47
23 - 26
16 - 21
14 - 17
|Total, Alternative Investments||
53 - 64
*Tactical allocations of up to 10% on total Long Term Investment Pool value may appear in these categories.
Approved by the Investment Committee on 9/23/2014