Investment Policy Statement for Operating Cash

Date Approved:12-1-2011
Last Revision:9-20-2019
Last Reviewed:9-20-2019
Approved By:Board of Trustees
Oversight Unit:FINANCE & ADMIN, VICE PRES
Purpose

I.    Introduction

Northern Michigan University is an educational institution that challenges its students and employees to think independently and critically, develop lifelong learning habits, acquire career skills, embrace diversity and become productive citizens in the regional and global community.

The University’s Operating Cash assets are intended to provide maximum financial resources for the

University, balancing risk and return, and in recognition of the fiduciary responsibilities of the Board of Control.  While the University will be sensitive to social and political concerns, it will not invest the funds in order to foster a particular social or political action.

II.    Purpose

The purpose of this Investment Policy Statement is to establish a clear understanding of the philosophy and the investment objectives for Northern Michigan University (hereinafter, "University) Short-Term, Intermediate-Term and Long-Term portfolios. It is meant to assist the Finance Committee and its Agents in effectively supervising and monitoring the investments of the University.

The Board of Trustees has delegated the management of the University’s investment portfolio to the Finance Committee (“Committee”).  This policy applies to all assets included in the University’s Operating Cash investment portfolio.

Policy

III. Roles & Responsibilities

A. Board of Trustees

The Board of Trustees is responsible for the University’s Operating Cash investment portfolio.  To implement these responsibilities, the Board sets and approves the investment policy statement and delegates responsibility to the Finance Committee for implementation and ongoing monitoring.

B. Finance Committee

The Committee is responsible for implementing the Investment Policy.  This responsibility includes approving investment strategy, hiring and firing investment managers, monitoring performance of the investment portfolio on a regular basis (not less than annually), maintaining sufficient knowledge about the portfolio and its managers so as to be reasonably assured of their compliance with the Investment Policy Statement.  The Committee will submit Performance Reports to the Board periodically, but no less than annually.

C. University Management

The Vice President of Finance has responsibility for administration of the Fund’s investment portfolio and will consult with the Committee and/or the Board on all matters relating to the

investment of the portfolio.  The Vice President of Finance will serve as the primary contact for the Fund’s investment consultant and custodian. 

D. Investment Consultant

Northern Michigan may choose to hire an investment consultant.  Investment advice concerning the management of investment assets will be offered by the investment consultant, and will be consistent with the investment objectives, policies, guidelines and constraints as established in this statement.  Specific responsibilities of the investment consultant would include items such as assisting in the development and periodic review of the investment policy and the asset allocation strategy, conducting investment manager searches when determined appropriate by the investment consultant and monitoring the performance of the investment manager(s) to provide University Management and/or the Committee with the ability to determine the progress toward the investment objectives.  With respect to the investment manager review/monitoring process, the investment consultant will notify University Management as soon as practical, and include in their regular report, if an investment manager is removed from its qualified list of recommended managers.

E. Investment Custodian

Northern Michigan may hire a custodian for the University’s investments to establish and maintain direct account relationships with each investment manager and perform standard custodial functions including security safekeeping, collection of income, settlement of trades, collection of proceeds for maturing securities, distribution of income and daily investment of cash.  The custodian will provide monthly account statements and other reports as requested by staff and the investment consultant.

F. Investment Managers

Northern Michigan will delegate the selection, purchase and sale of individual securities to qualified industry experts.  Each individual investment manager will exercise discretion over assets in accordance with specified investment guidelines.

Investment managers that utilize a separate account to manage University assets will adhere to specific investment manager guidelines established with the assistance of the investment consultant. 

Investment managers that utilize a mutual fund, commingled trust fund or limited partnership structure will have discretion to manage the assets in accordance with policies and guidelines outlined in the respective mutual fund’s prospectus, commingled fund’s offering memorandum or limited partnership’s private placement memorandum.

The investment managers shall communicate frequently and openly with the Northern Michigan and/or Investment Consultant on all matters of significance regarding changes in management organization/structure.

     

IV. Investment Objectives

The following investment pools and objectives have been established for the University Operating Cash assets:

  1. Short-Term Investment Pool:  Assets intended to cover the investment of University funds that are required for daily liquidity and expenditures of one year or less.  The primary objective of this pool is to provide for preservation of capital with a secondary emphasis of maximizing investment income without undue exposure to risk. Funds needed for expenditures in less than one year will be considered short-term.
  2. Intermediate-Term Investment Pool: Assets intended to cover funds that are earmarked for use in the next one to three years.  The primary objective of this pool is to preserve capital and maximize income without undue exposure to risk.
  3. Long-Term Pool: Assets not needed within three years will be considered long-term.  The primary objective of this pool is to provide for long-term growth of principal and income without undue exposure to risk.

 

V.  Investment Policies

A. Diversification

To achieve the University’s Operating Cash investment objective, the pools, in aggregate, will be allocated among a number of assets to ensure proper diversification.  Investment diversification is important to limit risks that include return volatility and magnitude of potential losses.  Equity investments will be diversified by market capitalization, style, industry and geographic region.  Fixed income investments will be diversified by market sector, maturity, credit quality and issuer. 

B. Risk

Risk management of the investment program is focused on understanding both the investment and operational risks to which the University is exposed.  The objective is to minimize operational risks and require appropriate compensation for investment risks, which the University is willing to accept.

C. Rebalancing

Northern Michigan intends to maintain the asset class allocations within the target ranges outlined below.  Allocations will be reviewed quarterly and will generally be rebalanced if any asset class is outside its range.

D. Asset Allocation

Based upon the underlying needs and circumstances for each pool of capital, Northern Michigan has determined the following asset allocation targets: 

Short-Term Pool

 

 

Asset Class

Target

Range

Gov’t Money Market Fixed Income

100%

N/A

Total Capital Preservation  

100%

N/A

Total Portfolio

100%

 

 

 

Intermediate-Term Pool

 

 

Asset Class

Target

Range

Short-Term Fixed Income

40%

30%-50%

Intermediate-Term Fixed Income

60%

50%-70%

Total Capital Preservation

100%

N/A

Total Portfolio

100%

 

 

 

Long-Term Pool

 

 

 

Asset Class

 

Target

Range

U.S. Large Cap Equity

 

3%

0%-8%

 Global Equity                                                                    12%                         5%-17%

Total Capital Appreciation  

 

15%

5%-25%

Intermediate-Term Fixed Income

 

85%

75%-95%

Total Capital Preservation  

 

85%

75%-95%

Total Portfolio

 

100%

 

Northern Michigan will determine the appropriate size for each pool based on the University’s operating environment, recommendations from University Management and input from the Investment Consultant.  

  1. Capital Appreciation Assets are meant to help grow the real value of the portfolio over time.
  2. Diversifying Assets are intended to provide a risk and return profile between capital appreciation and capital preservation assets.
  3. Capital Preservation Assets are meant to lower the return volatility of the portfolio, provide diversification and stability, especially during periods of weak equity markets.

 

IV.   Implementation & Evaluation

Long term objectives have been established against which the performance of the investment policy is to be measured.  Because the capital markets fluctuate, the viability of the asset allocation is to be judged over a period of a full market cycle.

A. Investment pool performance will be measured against:

  1. A primary market benchmark, which is a policy benchmark consisting of passive indices reflecting the University’s strategic target asset allocation percentages for each pool of capital. (A description of the indices used for the policy benchmark can be found in Appendix A.)

B. Investment Manager Performance

It is the intent to hire investment managers specializing in market segments to achieve the target asset allocation.  Each manager is closely reviewed to ensure the investment process remains consistent and the organization remains stable.  Any deviations of such qualitative factors will be brought to Northern Michigan’s attention by the investment consultant for further review. The University seeks to attain investment results over a full market cycle.  Northern Michigan understands that an investment manager’s total return during any single measurement period may deviate from the long-term return objective.

The individual manager’s investment performance will be measured against:

  1. The manager’s specific passive index identified in the investment manager guidelines (see Appendix A for detailed information).
  2. A peer group universe of similar investment styles.

It is expected within each asset class that actively managed investment strategies should match or exceed the passive index (net of fees) and should be above median against the appropriate peer group universe over a full market cycle. Passively managed strategies should closely track the performance of their relevant benchmarks.

 

Appendix A

ASSET ALLOCATION GUIDELINES

Investment management of the assets shall be in accordance with the following asset allocation guidelines.

Short-Term Pool

     

Asset Class

Policy Benchmark

Target     

Allowable Ranges

Capital Preservation Assets

     

Gov't Money Market

ML 91 Day T-Bill Index

100%

N/A

Total Capital Preservation

 

100%

 

 

Intermediate-Term Pool

     

Asset Class

Policy Benchmark

Target     

Allowable Ranges

Capital Preservation Assets

     

Short Term Fixed Income

Bloomberg Barclays Credit 1-5 Yr Index

40%

30%-50%

Intermediate Fixed Income

Bloomberg Barclays U.S. Credit Index

60%

50%-70%

Total Capital Preservation

 

100%

 

 

Long-Term Pool

     

Asset Class

Policy Benchmark

Target     

Allowable Ranges

Capital Appreciation Assets

     

U.S. Equity

S&P 500 Index

3%

0%-8%

Large Cap Global Equity

MSCI ACWI Index

9%

4%-14%

Small Cap Global Equity

MSCI ACWI Small Index

3%

0%-8%

Total Capital Appreciation

 

15%

5%-25%

Capital Preservation Assets

     

Intermediate Fixed Income

Bloomberg Barclays U.S. Aggregate Index

85%

75%-95%

Total Capital Preservation

 

85%

75%-95%

 

Appendix B

INVESTMENT MANAGER EVALUATION CRITERIA

The following criteria are used to evaluate investment managers.  Northern Michigan may choose to override these criteria upon agreement.

1. The performance and portfolio data submitted by investment managers should be audited by a third party to ensure compliance with the Global Investment Performance Standards (GIPS) published by the CFA Institute or subjected to other appropriate standards. In reviewing such data, the Investment Consultant may rely upon the veracity of such data.This is intended to reduce risk of a poor selection based upon incorrect or misleading data.  

2. The performance records submitted must be of sufficient duration to include a variety of economic and market environments.In general, a five-year performance history is deemed to be the minimum acceptable history.  

3. Actively managed investment managers must demonstrate a sufficient record of performance superiority after fees over the average manager in their investment style.  

4. Actively managed investment managers must demonstrate a sufficient record of performance superiority after fees over managers with similar risk characteristics (i.e. appropriate passive indexes, style universes, etc.).  

5. Passive manager candidates must exhibit a sufficient record of approximating the appropriate market benchmark with limited tracking error. 

6. Investment managers must exhibit a consistent investment style and risk profile as defined by the aggregate financial characteristics of the portfolio over a number of measurement periods. 

7. Investment managers must demonstrate organizational stability and provide evidence indicating that the people, resources and other factors responsible for past superior investment results are still in place.Such evidence increases the probability that past success will be repeated in the future. 

8. Minority owned investment managers shall be considered in each manager selection process.They will be upheld to the same standards as all other investment managers.

9. Investment managers must be completely independent from the investment consultant.The investment manager and the investment consultant seek to avoid all potential conflicts of interest. There should be no shared economic interests between the two parties.