Steward Associate VP for Business Services
Previous Version College Endowment Investment and Spending (archived January 2013)
Full Text of the Policy
Purpose/Rationale: to ensure responsible management of endowed funds and quasi-endowed funds to maximize financial return based upon the appropriate level of risk and consistent with the College’s socially responsible investing values.
Applies to: any endowment gifted by a donor for which Washington State provides a matching contribution. This policy also applies to quasi-endowments, except where otherwise stipulated.
A. Roles and Responsibilities
1. The Board of Trustees delegates to the president or his or her designee responsibility for establishing an investment policy and appointing an Investment Committee.
2. The president delegates authority for investment of college funds to the Investment Committee (the Committee) comprising the Vice President for Finance and Administration, the Vice President for College Advancement, the Executive Director of Operational Planning and Budget, the Director of Business Services, and the Accounting Manager.
- The Committee will be chaired by the Vice President for Finance and Administration.
- This is the same Investment Committee as that established by the College Investment Policy.
3. The Committee will:
- Review policy to define investment objectives, allowable investments, asset allocation, and spending allocation methodology;
- Evaluate investments based on the college’s commitment to socially responsible investing;
- Monitor investment performance;
- Recommending the hiring and termination of Investment Managers;
- At least quarterly, review the portfolio investments and their performance, and overall adherence to the investment policy, including social responsibility.
- Performance will be compared to the appropriate benchmark for each asset class.
- Produce an annual report of the state of the college investments including social responsibility.
4. The Vice President for Finance and Administration will report to the president at least annually on the status of investments, and on any recommendations for changes to the investment policy.
B. Ethics, Conflicts of Interest, and Standard of Care in Exercising Fiduciary Responsibilities
1. The President, Committee members, and applicable staff will perform their duties in a manner consistent with the standard of a “prudent person,” as derived from RCW 43.250.040:
“In investing and reinvesting moneys and in acquiring, retaining, managing, and disposing of investments, there shall be exercised the judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of the funds considering the probable income as well as the probable safety of the capital.”
2. The President, Committee members, and authorized investment officers will adhere to standards of conduct as stipulated by the following:
- Public Records Act, RCW 42.56;
- Ethics in Public Service Act, RCW 42.52; and
- Section 292-110-010 of the Washington Administrative Code.
C. Internal Controls
The Vice President for Finance and Administration will maintain internal controls to protect against the loss of public funds arising from negligence, theft, or misuse. These controls will include, but not be limited to:
- The use of third party custody and safekeeping;
- The execution of all securities transactions on a delivery versus payment basis;
- The separation of transaction authority from record keeping;
- The use of objective criteria in selecting financial institutions and dealers authorized to provide investment services to the state;
- The use of objective criteria in awarding investment purchases and sales to authorized financial institutions and dealers.
- Total Return: The return on an investment, including income from dividends and interest, as well as capital appreciation or depreciation over a given time period, usually one year.
- Earnings: Income from dividends and interest in investments.
- Principal: State contributions plus private matching contributions, and any permanent transfer of funds by the Committee from unexpended earnings accounts.
- The overall objective of the college’s investment policy is to construct investments that are optimal, efficient, and socially responsible.
- The college’s endowment investment objective is to provide reasonable assurance that the future growth of each endowment fund is sufficient to offset normal inflation plus reasonable spending, thereby preserving the constant dollar value and purchasing power of the fund.
- The college strives to achieve intergenerational equity through enhancing the real (inflation adjusted) purchasing power of the endowments while providing a relatively predictable, stable and constant stream of earnings for current use.
- The investment program has a long-term horizon and allocates assets accordingly. The assets will be managed on a total return basis, recognizing both yield (from dividends and interest) and market value change.
- The average total return is expected to equal or exceed the average of appropriate capital market indices over rolling five year periods.
The Committee will pool college endowment funds and quasi-endowment funds for the purposes of investing, except where otherwise stipulated by a donor. The pooled fund will be known as the Endowment Investment Pool.
- The Committee will ensure separate accounting for individual funds and their related earnings within the college’s financial system.
G. Socially Responsible Investing
1. Per RCW 24.250.040 and 24.55.015, the Committee’s investment decisions must be guided foremost by its fiduciary responsibility.
2. Consistent with college values, the Committee will select investment options that meet the college’s criteria for socially responsible investment.
3. The college shall develop its own criteria for socially responsible investing. Because of the difficulties of closely monitoring college’s funds and the limitations of using mutual funds, criteria shall consist of guiding principles, not a detailed list of companies.
4. Since the definition of socially responsible investing changes rapidly, the college’s set of socially responsible criteria shall be reviewed and updated every three years by an expanded committee with membership including at least two faculty and two students in addition to membership of the standing committee. In the process of reviewing and updating the statement, public input will be considered from all campus constituents.
H. Investment Managers/Advisors
1. The college, through the Investment Committee, will select and retain Investment Managers/Advisors.
2. Investment Managers/Advisors will:
- Provide investment services and monthly reports of portfolio balances, activity, and performance to college management;
- Comply with the guidelines contained within this policy,
- Meet with the Committee on an as-needed basis.
- Maintain frequent and open communication with college management and staff on all significant matters pertaining to the endowment investments, including, but not limited to the following:
* Major changes in the Investment Manager’s investment outlook, investment strategy, process, or portfolio structure;
* Significant changes in ownership in the Investment Management Company, its organizational structure, financial condition, or senior personnel;
* All pertinent issues which the Investment Manager deems to be of significant or material importance.
The relationship between risk and expected return is a fundamental investment concept. The college recognizes that risk cannot be eliminated, and chooses a variety of strategies to manage the risk. These include, but are not limited to:
- The selection of individual asset classes;
- The overall portfolio asset allocation;
- Industry and organization diversification; and
- International diversification.
J. Portfolio Composition and Asset Allocation
The target asset allocation reflects the long-term risk and return objective of the portfolio. Within each asset class, the range between the minimum and maximum weight allows for tactical shifts among asset classes in response to the changing dynamics in the market.
Strategic Asset Allocation
Fixed Income Securities
Cash & Cash Equivalents
The purpose of equity investments, both domestic and international, is to provide capital appreciation, growth of income, and current income, with the recognition that this asset class carries with it the assumption of greater market volatility and increased risk of loss. This component includes domestic and international common stocks, American Depository Receipts (ADRs), preferred stocks, and convertible stocks traded on the world’s stock exchanges or over-the-counter markets.
Public equity securities shall generally be restricted to high quality, readily marketable securities of corporations that are traded on the major stock exchanges, including NASDAQ. Decisions as to individual security selection, number of industries and holdings, current income levels and turnover are left to broad Investment Manager discretion, subject to the standards of fiduciary prudence.
Fixed Income Securities:
The purpose of fixed income investments, both domestic and international, is to provide diversification and a predictable, dependable source of current income. The Committee expects that fixed income investments will not be totally dedicated to the long-term bond market, but will be flexibly allocated among maturities of different lengths according to interest rate prospects.
Fixed income instruments should reduce the overall volatility of the Fund’s assets and provide a hedge against deflation. This component includes both the domestic fixed income market and the markets of the world’s other developed economies. It includes but is not limited to:
- U.S. Treasury and government agency bonds;
- Foreign government and supranational debt;
- Public and private corporate debt;
- Mortgages and asset-backed securities;
- Non-investment grade debt.
Fixed income also includes money market instruments, including, but not limited to:
- Commercial paper;
- Certificates of deposit;
- Time deposits;
- Bankers’ acceptances;
- Repurchase agreements;
- U.S. Treasury and agency obligations.
Investments in fixed income securities should be managed actively to pursue opportunities presented by changes in interest rates, credit ratings, and maturity premiums.
Cash and Cash Equivalents:
The Investment Manager may invest in the highest quality commercial paper, repurchase agreements, Treasury Bills, certificates of deposit, Washington State’s Local Government Investment Pool, and money market funds to provide income, liquidity for expense payments, and preservation of the Fund’s principal value.
- Un-invested cash reserves shall be kept to a minimum.
For mutual and other commingled funds, the prospectus or Declaration of Trust documents of the fund(s) will govern the investment policies of the fund investments.
While the Committee understands that such funds have their own stated guidelines which cannot be changed for individual investors, in principle and spirit those guidelines should be similar in nature to the guidelines stated above.
To the extent that a fund allows any or all of the above stated restrictions, the Committee must be aware of their possible use and be confident that the Investment Manager and any sub-advisors thoroughly understands the risks being taken, have demonstrated expertise in their usage of such securities, and have guidelines in place for the use and monitoring of those securities.
1. Every August or as directed by the Committee, investment managers will rebalance the portfolio to control portfolio risk and maintain the policy asset allocation within the targeted ranges.
2. Tactical rebalancing, which represents portfolio positioning to opportunistically capture short term market anomalies, is also permissible as long as the trades do not violate the stated ranges for each asset class and do not cause undue expense to the portfolio.
L. Spending Allocation
1. Subject to the intent of the donor expressed in the gift instrument and governing state law, the college may allocate for spending so much of an endowment fund as it deems prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.
- State law stipulates that the college may not invade the principal.
2. As soon as possible after the end of every fiscal year, the Committee will determine the amount to be allocated for distribution for the following academic year. Upon such determination, funds sufficient to cover those distributions will be set aside in such a manner as to assure availability of funds and not be subject to investment losses.
- Distributions will not exceed 5% of the previous five year rolling average of the fiscal year end value of each endowment.
- The value of each endowment includes both the corpus and the associated unexpended earnings account.
3. The Committee may determine that reduced or no disbursements will be made if earnings are low or negative.
4. The Committee may make a permanent transfer from the unexpended earnings account to the corpus account for each endowment to compensate for inflation.
M. Management and Administrative Fees
1. Management and administrative fees will be deducted from the fund as they are incurred.
2. The Committee will review the fees each year.
N. Annual Policy Review
1. The Committee will review this policy every August and recommend changes to asset allocation and spending methodology as deemed appropriate.
- RCW 24.55: Prudent Management of Institutional Funds Act
- RCW 28B.10.528: Delegation of powers and duties by governing boards
- RCW 28B.76.550-630
- RCW 39.58: Public funds — deposits and investments
- RCW 39.59: Public funds — authorized investments
- RCW 42.56: Public Records Act
- RCW 42.52: Ethics in Public Service Act
- RCW 43.84.080: Investment of current state funds
- RCW 43.250.040: Authority of official to place funds in the public funds investment account
- WAC §292-110-010: Use of state resources
See Also : College Endowment Investment Policy