The Catholic University of America

Finance:                                                                                                                                     Finance Investment Policy

Approved by:
Executive Committee of Board of Trustees
History:
Issued
-- March 14, 2002
 
Revised
-- March 24, 2015
Related Policies:
Additional References:
 
Responsible Official:
Treasury Services Director tel. 202-319-6445
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Policy
The Investment Policy governs the investment management of the Pooled Investments of the University. 
Scope
This policy applies to all university investments. 
Procedures and Regulations
This Statement of Investment Policy and Objectives governs the investment management of the Pooled Investments of The Catholic University of America, hereafter ("the University" or "the Endowment"). This Statement shall remain in effect until modified as conditions warrant by the Board of Trustees.  The responsibility for ensuring the implementation of the policy and guidelines set forth in this Statement is delegated to the Finance Committee of the Board of Trustees. The policy and objectives provided below apply to the overall pooled endowment fund; specific guidelines for individual accounts managed by investment advisors may be attached as appendices. 
A.     FINANCIAL AND INVESTMENT OBJECTIVES 
1.   The primary financial objective of the Endowment is to provide funds for the current and future support of the operations of the University, and for its programs and affiliates.  Implicit in this objective is the financial goal of preserving and enhancing the Endowment Fund's inflation-adjusted purchasing power, while providing a relatively predictable, stable and constant stream of income for current use consistent with the first objective.  
2.   The long-term investment objective of the Endowment is to attain an average annual real total return[1]  (net of investment management fees) of at least 5.0% as measured over rolling five-year periods. It is recognized that the real return objective may be difficult to attain in every five-year period, but should be attainable over a series of five-year periods.  This objective should be achievable within risk levels defined by the Trustees. 
B.    ENDOWMENT SPENDING POLICY 
1.  The University will utilize total return (income plus capital appreciation) on its assets in the determination of the rate of spending out of the Endowment fund.  The policy adopted by the Board of Trustees is to provide for an annual 4.5% distribution based on an average of twelve fiscal quarters of the beginning unit market value and paid quarterly.  
2.   In order to preserve the Endowment's purchasing power, long-term average spending should be kept no greater than the expected long-term real total return of the fund.  As a general matter, the Trustees should review spending policy at least annually.  
C.    INVESTMENT MANAGEMENT STRUCTURE  
1.   The Finance Committee will choose and monitor the investment managers for the Endowment. The Committee will report regularly to the Board of Trustees concerning the state of the Endowment and the performance of its managers.  The Endowment will be managed by external investment advisory firms.  Each investment manager has complete discretion to manage the assets in each particular portfolio to achieve its investment objectives within the guidelines set forth in this policy statement and separate manager guidelines adopted by the Committee. 
D.    PORTFOLIO COMPOSITION AND ASSET ALLOCATION  
1.   To achieve its investment objective, the Endowment shall be divided into four major asset classes:  Equities, Fixed Income, Real Assets and Marketable Alternatives.  It should be noted that the division of the Endowment by asset class need not necessarily be related to the division of assets among outside investment advisors.  The purpose of dividing the Endowment in this manner is to ensure that the overall asset allocation between these four asset classes remains under the regular scrutiny of the Finance Committee and is not allowed to become the residual of separate manager decisions.  Over the long run, the allocation between the asset classes will be the single most important determinant of the Endowment's investment performance. 
2.   The Endowment will be diversified both by asset class (e.g., equities, bonds, cash equivalents, alternative assets) and within asset classes (e.g., within equities by economic sector, industry, quality, and size).  Moreover, if the investment is executed via active management, each manager(s) may have distinct and different investment philosophies.  The purpose of such diversification is to provide reasonable assurance that no single security, class of securities, or specific investment style will have a disproportionate impact on the Endowment's aggregate results. 
3.   The purpose of the Equity asset class is to provide a total return that will provide the potential for growth of principal and protect the purchasing power of the Endowment.  The University recognizes that the pursuit of these long-term objectives entails the assumption of greater variability of the total portfolio's investment returns (risk) in comparison to more conservative asset allocations, which have lower levels of expected risk and return. 
4.   The purpose of the Fixed Income Fund (bonds and cash equivalents) is to contribute to overall return, to reduce the overall volatility of the Endowment's returns, to provide a hedge against the effects of a prolonged economic contraction, and to provide cash flow to support the University's operations.  
5.   The purpose of the Real Asset class is to provide potential for growth of principal and protect the purchasing power of the portfolio by providing a hedge against inflation. 
6.   Marketable Alternatives should provide diversification to the portfolio as these assets are generally less correlated to traditional securities.  Over the longer term, these assets should provide potential for growth while protecting the portfolio in negative market environments. 
7.   The University's policy portfolio incorporates the Endowment's long-term asset allocation policy. As such, it reflects the fund's objectives for investment risk and return.  The target allocations, ranges, and benchmarks for the University's policy portfolio are as follows: 
Asset Class                             Minimum       Target       Maximum      Benchmark
 
Total Equity                                35%             50%             70%          MSCI ACWI
 
Total Fixed Income                      8%              12%             40%          Barclays Aggregate
 
Real Assets                                 5%              18%             35%          CPI + 4%
 
Marketable Alternatives               5%              20%             30%          HFRI FOF Index
 
Cash                                            0%               0%              10%          3 month TBill
  
8.  The investment performance of the fund will be measured against a custom benchmark constructed to reflect (where possible) passive investment alternatives to the asset classes contained in the policy portfolio.  The Total Fund is thus expected to outperform the performance of a blended benchmark comprised of the returns of the benchmarks defined at the asset class level in the weightings indicated in the above table. 
9.   The purpose of rebalancing is to ensure that asset allocation complies with the targeted policy ranges thereby managing portfolio risk and performance.   The Endowment will be rebalanced as necessary, making use of spending payments to the extent possible and considering the transaction costs involved in the rebalancing.  Tactical rebalancing, which represents portfolio positioning to opportunistically capture short term market anomalies, is permissible as long as the trades do not violate the stated ranges for each asset class and do not cause undue expense or risk to the portfolio.  Rebalancing the portfolio to the policy allocations should generally be conducted on at least an annual basis, or as dictated by market movements. 
E.     OBJECTIVES AND GUIDELINES FOR THE ASSET CLASSES 
Equity Securities:  This asset class 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 readily marketable securities of corporations that are traded on established stock exchanges, including NASDAQ and similar networks.  Equity holdings must generally represent companies meeting a minimum market capitalization requirement of $50 million with reasonable market liquidity.    Decisions as to individual security selection, number of industries and holdings, current income levels and turnover are left to broad manager discretion, subject to the standards of fiduciary prudence.  However, no single major industry shall represent more than 20% of the Endowment’s total market value, and no single security shall represent more than 5% of the Endowment’s total market.   
The Domestic and International Equity Investment Manager(s) is prohibited from borrowing money or pledging assets, or trading uncovered options, commodities or currencies without advance approval. The Manager(s) is also restricted from investing in private placements and restricted stock unless otherwise permitted by the Finance Committee.  It is expected that no assets will be invested in securities whose issuers are or are reasonably expected to become insolvent, or who otherwise have filed a petition under any state or federal bankruptcy or similar statute. 

Private Capital Partnerships - Investments may also include domestic and international venture capital and private equity investments, held in the form of professionally managed pooled limited partnership investments.  Such investments must be made through funds offered by professional investment managers.   
Distressed Debt - Investments may also include domestic and international distressed debt investments (both liquid trading opportunities as well as illiquid control strategies), typically held in the form of professionally managed pooled limited partnership investments.  Within the above guidelines and restrictions, the Manager(s) has complete discretion over the timing and selection of the securities. 
Fixed Income Securities:  It is expected 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.  This component includes both the domestic fixed income market and the markets of the world’s other 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, and 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, and U.S. Treasury and agency obligations.   
Investments in fixed income securities may be managed actively to pursue opportunities presented by changes in interest rates, credit ratings, and maturity premiums.  These investments will be subject to the following limitations:     
     Investments of a single issuer, with the exception of the U.S. Government and its agencies (including GNMA, FNMA and FHLMC), may not exceed 5% of the total market value of the Endowment. 
Cash and Equivalents: The Investment Manager may invest in the highest quality commercial paper, repurchase agreements, Treasury Bills, certificates of deposit, and money market funds to provide income, liquidity for expense payments, and preservation of the Fund’s principal value. Commercial paper assets must be rated at least A1 or P-1 (by Moody’s or S&P).  No more than 5% of the Endowment’s total market value may be invested in the obligations of a single issuer, with the exception of the U.S. Government and its agencies.   
Uninvested cash reserves shall be kept to a minimum; short term, cash equivalent securities are usually not considered an appropriate long term investment vehicle.  However, such vehicles are appropriate as depository for income distributions from longer term investments, or as needed for temporary placement of funds directed for future investment to the longer term capital markets.  Also, such investments are the standard for contributions to the current fund or for current operating cash. 
Within the above guidelines and restrictions, the Manager(s) has complete discretion over the timing and selection of fixed income and cash equivalent securities. 
Real Assets:
Treasury Inflation Protected Securities (TIPs) - Investments may also include U.S. Treasury inflation-indexed securities and non-U.S. dollar denominated inflation-indexed securities.  Inflation-indexed securities are fixed income securities that are structured to provide protection against inflation.  The value of an inflation-indexed bond’s principal or the interest paid on the bond is adjusted to track changes in an inflation-linked index.
Commodities - Investments may also include a broad range of commodity oriented strategies.  These strategies will include but may not be limited to futures, options on futures and forward contracts on exchange traded agricultural goods, metals, minerals, energy products and foreign currencies.  The use of swap transactions will be permitted to access this market strategy.  Investments may be held in the form of professionally managed pooled funds, segregated and limited liability or corporate investments. 
Natural Resources - Investments may include oil, gas, and timber investments, and may be held in the form of professionally managed pooled limited partnership investments.  Such investments will be made through funds offered by professional investment managers.   Investments may also be in the form of liquid natural resource securities. 
Real Estate - Investments may also include equity real estate, held in the form of professionally managed, income producing and value add commercial and residential property. Such investments must be made through funds offered by professional investment managers. 
Marketable Alternatives - Investments may also include equity-oriented directional or relative value hedge funds (i.e. Long/Short, Macro, Event Driven, Credit, Convertible Arbitrage, and Fixed Income strategies) which can be both domestic and international market oriented.  These components may be viewed as equity-like or fixed income-like strategies as defined by their structures and exposures. 
Derivatives and Derivative Securities - Certain of the Endowment’s managers may be permitted under the terms of their specific investment guidelines to use derivative instruments.  Derivatives are contracts or securities whose market value is related to the value of another security, index, or financial instrument.  Investments in derivatives include (but are not limited to) futures, forwards, options, options on futures, warrants, and interest-only and principal-only strips.   No derivative positions can be established that create portfolio characteristics outside of portfolio guidelines. Examples of appropriate applications of derivative strategies include hedging market, interest rate, or currency risk, maintaining exposure to a desired asset class while making asset allocation changes, gaining exposure to an asset class when it is more cost-effective than the cash markets, and adjusting duration within a fixed income portfolio.  Derivatives positions should be fully collateralized. Investment managers must ascertain and carefully monitor the creditworthiness of any third parties involved in derivative transactions.  
F.    RESTRICTIONS ON SPECIFIC INVESTMENTS 
1.  The Board of Trustees of the University requires that all investment advisors adhere to the University's strict prohibition of investments in companies substantially engaged in the manufacturing, distribution, or provision of products or services on the basis that such activities are inconsistent with the teachings of the Catholic Church.
Prohibited investment areas:
a)   Contraceptives
b)   Abortion
c)    Research involving human embryos or fetal tissue obtained by direct abortion
d)  Military weaponry inconsistent with Catholic teachings on War (e.g., biological and chemical weapons, arms designed or regarded as first-strike nuclear weapons, indiscriminate weapons of mass destruction, etc.) 
G.   GUIDELINES FOR TRANSACTIONS 
1.  The Treasurer of the University is responsible for initiating purchase and withdrawal transactions with the investment managers.  In doing so, the Treasurer will work in conjunction with the Chair of the Finance Committee and follow all guidelines established by the Committee.   
2.   As a general rule that applies to all assets managed, transactions should be entered into on the basis of best execution, which is interpreted to mean best-realized price.  Notwithstanding the above, the Trustees may direct their investment managers to utilize soft dollar brokerage commissions to pay for service-based fees incurred by the University in the management of the Endowment. 
H.   MONITORING OF OBJECTIVES AND RESULTS 
1.  Both the Endowment and the individually managed portfolios will be monitored for consistency in each manager's investment philosophy, return relative to objectives, investment risk as measured by asset concentrations, exposure to extreme economic conditions, and market volatility. Portfolios will be reviewed by the Committee on a quarterly basis, but investment results will be evaluated over rolling three- to five-year periods.   
2.  The Committee may request that the investment manager(s) be present at periodic meetings to present their portfolios and results to the Committee.  In either case, the Committee will regularly review managers to confirm that the factors underlying performance expectations remain in place. 
3.   On a quarterly basis each investment manager will report the following information:  total return net of all commissions and fees, and returns for the equity and fixed income portions of the account, purchases and sales for the quarter, portfolio holdings at cost and market value, and an analysis of the portfolio by sector. 
4.   Regular communication concerning investment strategy and outlook is expected.  Additionally, managers are required to inform the University of any significant change in firm ownership, organizational structure, professional personnel, account structure (e.g., number, asset size and account minimums), or fundamental investment philosophy. 
5.   All objectives and policies are in effect until modified by the Finance Committee and approved by the Trustees.  They will be reviewed at least annually for their continued appropriateness.  If at any time a member of the Board, Finance Committee, University Staff or investment manager believes that an established policy or guideline inhibits the Endowment's investment performance, it is that individual's responsibility to clearly communicate this view to the Treasurer of the University and the Chair of the Finance Committee. 
Contacts
Vice President for Finance and Treasurer          tel. 202-319-5606
Director of Treasury Services                             tel. 202 319-6445
 
Related Policy
           


[1] Real total return is the sum of capital appreciation (or loss) and current income (dividends and interest) adjusted for inflation as measured by the CPI (U) index.