This document establishes the investment policies, objectives, and operating practices for the Non-Endowed Assets (the “Fund”) of the University of Connecticut Foundation, Inc. The Fund has an investment objective of providing investment returns above those available from treasury bills and short-maturity bonds. In addition, a key objective of the Fund is to support the Foundation’s annual operating revenue by providing critical income for the organization’s budget.
Non-Endowed Assets primarily include:
- Private donations which are donor designated as fully-‘spendable;
- Spending allocations generated from the endowment; and
- Foundation reserves
As noted in the Statement of Work between the University and Foundation, the Foundation will retain all investment earnings on non-endowed assets. Income from investing non-endowed assets is expected to provide a vital portion of the Foundation’s annual operating revenues. These assets are callable at any time to support University scholarships, faculty, programs, and Foundation operations.
The investment of the Fund has the dual purpose of income generation to help sustain the Foundation’s budget, as well as, the appreciation of the assets invested in the Fund, accomplished via a prudent, diversified asset allocation that keeps capital preservation in mind at all times. The guidelines of the Fund have been structured in a manner to allow the Investment Managers to strive to meet the income requirements of the Foundation. The Foundation’s definition of earnings is an income concept with a calculation as follows:
The Non-Endowed Assets portfolio monthly income is calculated by the University of Connecticut Foundation using GAAP accounting methodologies. Monthly earned income is defined as the sum of interest received and accrued from securities held or sold less the amortization of premium or accretion of discount for bonds not purchased at par, plus dividends received and accrued, plus or minus realized gains or losses from amortized cost on securities sold, using straight-line methodology. Income is reconciled versus US Bank custody statements on a monthly basis.
This policy has been presented to and approved by the Board of Directors of The University of Connecticut Foundation, Inc. The Investment Committee has arrived at this Investment Policy through careful study of the returns and risks associated with various investment strategies in relation to the current and projected needs of the University and Foundation. This policy has been chosen as the most appropriate strategy for achieving the financial objectives of the Fund, which are described in the Objectives section of this document.
The Investment Committee has adopted an intermediate-term investment horizon such that the chances for, and duration of, investment losses are carefully weighed against the long-term potential for appreciation of investments until expenditures are made. This policy and the managers implementing this policy will be reviewed at least annually to determine if any changes are required.
Duties and Responsibilities
The Investment Committee is responsible for managing the investment process in a prudent manner with regard to capital preservation while providing a steady flow of interest income to the Foundation. The Investment Committee has authority to retain and/or replace investment managers and to control the asset allocation as long as it remains within approved limits.
The Investment Committee shall recommend for Board approval the investment policy for the Fund. This includes, but is not limited to, selection of acceptable asset classes, allowable ranges of holdings by asset class and individual investment managers as a percent of assets, the definition of acceptable securities within each asset class, and investment performance expectations.
The Investment Committee will communicate the policy and performance expectations to the Investment Managers. The Investment Committee will also review investment performance regularly to assure that the policy is being followed and that suitable progress is being made toward achieving the objectives. The Investment Committee will present its findings and recommendations to the full Board if action is needed.
The Investment Managers shall be responsible for determining investment strategy and implementing security selection and the timing of purchases and sales within the policy guidelines set forth in this statement, and as otherwise provided by the Investment Committee.
In the event that there is a material concern with a holding in the Non-Endowed Portfolio the Investment Committee Chair, after consultation with at least one other Investment Committee member and Chair of the Finance Committee, is authorized to take action to control losses by partially or fully liquidating such holdings up to, but not exceeding, 10% of the cost basis of the value of the Non-Endowed Portfolio at the time of the liquidation. This 10% limit will be reset after each Investment Committee meeting, during which any such actions taken during the previous period must be communicated to the Investment Committee.
Investment Fund Structure:
The Non-Endowed Assets may be invested in two separate portfolios, the Fixed Income Portfolio and the Strategic Investments Portfolio, as defined in the following two sections:
Fixed Income Portfolio
The majority of assets are to be invested in short-to-intermediate duration fixed income securities.
A minimum of 2% Cash Equivalents must be held in the portfolio at all times, with a maximum of 20% in Cash Equivalents allowed.
Objectives and Guidelines
The fixed income assets in the portfolio shall be managed with the objective of generating a net-of-fee return in excess of the Benchmark.
The Benchmark for the total portfolio shall be a blend of:
- 80%ICE BofA 1-3 Year Government Credit Index (B1A0)
- 20%ICE BofA BB-B US Cash Pay High Yield Constrained Index (JUC4).
The portfolio is expected to be managed in a prudent manner with regard to capital preservation while pursuing returns in excess of the benchmark, meeting liquidity needs and providing a steady flow of interest income to assist in meeting the budgetary needs of the Foundation.
Fixed Income Guidelines and Constraints
- Credit quality:
- Minimum Average Portfolio Quality: BBB (S&P), Baa2 (Moody’s), BBB (Fitch) or BBB (Kroll)
- Minimum credit quality at time of purchase: B (S&P), B2 (Moody’s), B (Fitch) or B (Kroll)
- At no time should the total of all securities in the portfolio which were rated only by Kroll exceed more than 2% of the portfolio
- In the absence of a security rating, the issuer’s rating will apply
- In case of split ratings, the highest rating shall apply.
- The portfolio should follow the limits set forth below:
|US Government Securities||5.0%||100.0%|
|Below Investment-Grade Securities||0.0||50.0|
- Duration / Maturity:
The portfolio shall maintain a duration of no longer than 3.25 years.
- Permitted Securities:
- Fixed-income instruments of U.S. and non-U.S. issuers, such as:
- Obligations of Governments or their agencies, including (a) developed and (b) developing and emerging market countries;
- Securities guaranteed by such Governments or their agencies;
- Obligations of Supranational entities;
- Corporate securities, including covered bonds and convertible securities;
- Mortgage-backed securities;
- Asset-backed securities;
- Real Estate Investment Trust (REIT) debt obligations;
- Preferred stock, including Bank Trust Preferred stock, up to a maximum of 15% of the portfolio;
- Bank loans;
- Money-market instruments, including repos, certificates of deposits and commercial paper;
- Obligations of state/province and local jurisdictions of U.S. and other countries;
- Commingled funds advised by the manager that invest in securities that are substantially consistent with these guidelines;
- Financial derivative instruments, such as forwards (including currency forwards), futures, options, and swaps, to be utilized for hedging, yield curve management, and efficient market exposure; and
- Rule 144(a) securities or Reg S securities, as appropriate, and 4(2) commercial paper.
- Investments shall not be made in securities of the client entity, its subsidiaries, or its affiliates.
- Any other fixed income securities whose risk characteristics are consistent with benchmark securities.
- Diversification guideline at time of purchase:
Except for US government or agency securities, no more than 3% of the portfolio’s market value will be invested in securities of any single issuer.
The portfolio shall maintain sufficient liquidity such that it could be fully liquidated at reasonable transaction costs within 5 days under most market environments.
Strategic Investments Portfolio
The Investment Committee is authorized to approve a limited number of Strategic Investments to be funded from Non-Endowed assets. These investments are expected to be diverse in nature and highly idiosyncratic in their risk and return drivers.
While traditional risk metrics are not likely to be applicable to most Strategic Investments the Investment Committee will consider all such Investments on a risk adjusted return basis and review all potential risks that can reasonably be expected to affect the outcome of the project. Additionally, Strategic Investments will be made with consideration to their overall impact on the UConn Foundation’s budget while being mindful of the Foundation’s need to preserve capital. Budget impact considerations may include costs such as operational burden, reporting costs, and deal structuring costs.
The Investment Committee will only approve Strategic Investments that are believed to exhibit a risk-return profile that exceeds that of the Fixed Income portfolio.
Strategic Investments pursued by the Investment Committee will be completed with consideration of the following factors:
- (1) General economic conditions; (2) the possible effect of inflation or deflation; (3) the expected tax consequences of investment decisions, strategies and distributions; (4) the role that each investment or course of action plays within the overall portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property and real property; (5) the expected total return from income and the appreciation of capital; (6) needs for liquidity, for regularity of income and for preservation or appreciation of capital; (7) the size of the portfolio;
- Investment and management decision respecting individual assets shall be evaluated not in isolation, but in the context of the portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the funds.
The Investment Committee will commit no more than 20% of the Non-Endowed Portfolio’s total value to Strategic Investments as of the date of the investment(s).
Strategic Investments may include any investments that the Investment Committee has deemed suitable for the Long-Term Investment Portfolio.
This Policy is effective from October 16, 2020 and replaces and supersedes any preceding policy concerning this subject matter. This Policy is subject to review on its first anniversary and once every five years thereafter.
Approval of any investments for inclusion in the Strategic Investment Portfolio will require a 2/3rds majority of all present voting members. All other rules of order as defined in the UConn Foundation Bylaws will apply.
Category: Finance and Administration
Applies to: All staff
Approved by: Board of Directors (Committee: Investment)
Effective Date: October 16, 2020
Contact: Senior Vice President of Finance and Administration and CFO
Official Website: www.foundation.uconn.edu/policies
Revision History: March 6, 2020; February 23, 2018; March 12, 2015; March 9, 2012; June 10, 2005