Elements of a Sound Investment Policy
Responsible stewardship of your school’s investment funds resides in a clearly articulated and regularly monitored investment policy. This responsibility is the same whether you have a modest endowment or one that would rival that of a major college or university. The investment policy consists of two distinct aspects—an endowment policy and a treasury policy. The endowment policy concerns long-term investment strategies and policies. The treasury policy articulates the investment parameters for funds that you invest for only short periods of time to cover operating and capital needs. The short-term investment or treasury policy should focus on providing sufficient liquidity and safety for operating cash while maximizing yield.
Responsibility for overseeing the investment policy should be assigned to a Board committee—either a separate committee or a subcommittee of your Finance Committee. Each year, this committee should review your policy. The entire Board should be asked annually to affirm the school’s investment policy. Your Board minutes should reflect that such a review took place.
The Investment Committee (or subcommittee) should be sure that the answers to the following questions are clearly stated in your current policy.
- What role do investments play in advancing the mission of the school?
- What is the scope of the responsibilities of the Investment Committee? Will this committee oversee just the endowment fund—or all investments of the school (i.e., what is its charge)?
- What are the members’ lengths of term? How are they appointed? How will the administration of the school be represented on the committee?
- How often will the committee meet?
- What investment vehicles will be used—and what vehicles will not be used? (For example, you may allow investment in repurchase agreements, collateralized by the U.S. government or GNMA securities, but prohibit any investment via commodities trading.)
- How will you structure your investment portfolio? (Many schools specify a percentage in equities, a percentage in fixed-income investments, and a percentage of cash or cash equivalents. Situations unique to a school may call for other options as well. The typical structure is 60%–70% in equities, 25%–30% in fixed-income securities, and the balance in cash or cash equivalents.)
- Will you restrict holdings in certain types of investments? (Your school’s mission may dictate that your portfolio restrict holdings in certain investments. For example, will your school’s portfolio hold investment in companies that sell alcoholic beverages?)
- Will you engage the services of an outside fund manager or managers—or will the Investment Committee manage the investments? (It is typical for schools to engage an outside fund manager—and for larger schools to have several fund managers.)
- Have you established return-on-investment objectives? Such objectives will enable you to consistently measure the performance of your fund manager(s)—whether (1) your Investment Committee also serves as the investment manager, or (2) you have diversified investments with one outside manager, or multiple outside fund managers, or some other combination. (For example, will you measure the performance [annualized return] of your fixed-income portfolio against the return of the appropriate Lipper Index? You may wish to measure the return on the equity portion of your investments against the S&P 500—or another index that you feel is a good benchmark. The important step is to select benchmarks and then stay with them.) It is common to require your manager to include a comparison of your benchmark’s performance with the portfolio performance in his/her regular report.
- If you use a fund manager, will you have restrictions on the amount or percentage of proprietary funds (those funds that are owned by the manager’s company) that the manager may purchase for your portfolio?
While Investment Committees tend to concentrate their efforts on behalf of the endowment fund, no less attention should be paid to the investment of your operating funds. Schools typically manage these funds through a bank, a money market fund, or an organization. Your short-term investment policy or treasury policy should set forth any special considerations for the investment of short-term funds. It should clearly specify who has the authority to transfer funds to and from the investment vehicles as well as how these transfers will be monitored.
The benefits of a written investment policy are clear. A policy:
- provides a framework for prudent stewardship;
- minimizes knee-jerk responses to “market conditions” and focuses on the long-term well-being of the school;
- provides not only a framework for orienting new Trustees into this important aspect of trusteeship, but conveys that you are serious about investment matters. Thus, your investment policy is a key piece in recruiting and orienting new Trustees;1 and
- moves oversight of investment funds from the “temporary” realm into a more professional atmosphere, which characterizes the best Boards—consistently thinking and acting strategically on behalf of their schools.
A final, but no less important, point is that your written investment policy assures your donors that you will take excellent care of their gifts to your institution. (Note: A copy of your investment policy—as well as a copy of your school’s gift acceptance policy—can be a key sales tool for major or planned gifts to your school.)
Do you have a timetable for a consistent review of the above points to ensure that your school is fulfilling its fiduciary responsibility? Prudent stewardship dictates that the entire Board knows what your school’s policies are, and that you, as Board Chair, have a means by which to evaluate the Board’s stewardship for your school.