M1Step1-Completing an Investment Policy Statement_Discussion Board_IPS

Investment Policy Statement

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Introduction

Background and Purpose

The JSE College Endowment Fund (the “Endowment”) was established to fund academic and ed-
ucational activities and facilities of JSE College (‘JSE”). This investment policy statement (IPS)
was created by the Investment Committee (“IC”) of the Board of Trustees (“the Board”) for the
guidance of the IC, the Investment Office, the Endowment’s investment managers, and other fidu-
ciaries in the course of investing the assets of the Endowment.

This IPS establishes policies and procedures for the administration and investment of the Endow-
ment’s assets. This IPS formally defines the objectives and guidelines of the Endowment’s invest-
ment program.

Responsibilities and Meetings

Investment Committee (IC) and Board of Trustees (Board):

The Board is responsible for the overall stewardship of the Endowment. The Board has delegated
to the Committee the fiduciary responsibility to oversee the Endowment’s investment activities
and to recommend appropriate actions to the Board. The IC has the responsibility to ensure that
the Endowment is managed in a manner that is consistent with the IPS. The IC shall meet a
minimum of four times per year and report to the Board. The IC has the authority and
responsibility to:
a. Review and update the IPS with regard to the Endowment Investment Objectives,
Spending Policy and Investment Risk Management Framework.
b. Appoint an independent Investment Consultant.
c. Appoint and terminate engagement with external investment managers. Determine
and approve the terms and conditions of the service arrangements including the com-
pensation/fee structures with external asset managers.
d. Execute or rescind on behalf of the JSE College Endowment, proxies to vote stock
and other securities owned by the JSE College Endowment. Administrative action in
the area may also be delegated to qualified proxy voting advisors.
e. Provide quarterly reports to the Board of Trustees regarding the investment perfor-
mance, goals, strategies, and objectives.
Investment Consultant

The Investment Consultant is responsible for designing and implementing the JSE College En-
dowment investment program, including strategy, asset allocation, investment manager selec-
tion, and risk management. They are also responsible for approving, implementing, and modify-
ing individual investment decisions in accordance with the IPS. They must report to the Com-
mittee, on a regularly scheduled basis, on portfolio activities including changes to the asset allo-
cation, the hiring and termination of investment managers, and the increase or decrease in allo-
cations to existing investment managers.

External Investment Managers

The IC have determined that assets will be managed by external managers. The IC, Investment
Consultant, and members of the Board will interview and evaluate and determine the engage-
ment and termination of investment managers.

The Board seeks external managers who meet the investment objectives of the Endowment
assessed against the following factors:
a. Investment Philosophy: manage assets on a passive basis.
b. Investment Process: employ a robust, transparent investment process supporting the
investment philosophy.

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c. Investment Professionals: diverse and qualified team capable of executing the invest-
ment philosophy and process effectively and efficiently.
d. Investment Performance: demonstrate investment performance in terms of return, risk
and liquidity meeting the investment objectives of the Endowment.
e. Investment Fees: investment management fees are expected to be in line with peers
and market best practices.
f. Investment managers are expected to have the following corporate entity characteris-
tics:
1. Strong reputation in the marketplace with a high-quality, institutional client base.
2. Aligned interests (e.g. significant amount of principal/employee dollars invested in
the funds).
3. Controlled growth and a manageable level of assets under management.
4. Competitive long-term performance among peers.

Assumptions

The JSE College relies on the JSE Endowment to meet a maximum of 10% of total college ex-
penditure (operating and normal capital expenditure on a rolling 5-year basis).

The average disbursement over the last five years is USD 5 million, with approximately USD 4
million for operating expense and USD 1 million for capital expenditures.

Average donations to the Endowment over the last five years are USD 2 million and this is expected
to rise in line with CPI inflation.

The fund currently has assets under management of USD 100 million.

Operational expenses for JSE College Endowment Fund are reflected in the operating expense.

Based on these assumptions JSE Endowment is considered well-funded compared to the dis-
bursement requirements for JSE College.

Spending Policy

The Endowment’s long-term spending rate is expected to be 5% of Endowment assets, reflecting

long-term capital market assumptions.

Mission and Investment Objectives

Investment Objectives

The Endowment provides financial support for the operations of JSE. Investment and spending
policies are designed to balance the current goals of JSE with its future needs, in order to achieve
parity in supporting current and future generations of JSE students. The primary investment ob-
jective is to preserve the purchasing power of assets over time, factoring in inflation, while gener-
ating returns sufficient to sustain spending levels to support the academic and educational activi-
ties of JSE.

Return Objectives

The primary investment objective of the Endowment is to earn an average annual real total return
(net of portfolio management fees) of at least 5% per year over the long term (rolling 5-year peri-
ods), within prudent levels of risk. Attainment of this objective will be sufficient to maintain, in real
terms, the purchasing power of the Endowment’s assets and support the defined spending policy.

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A secondary investment objective is to outperform, over the long term, a blended custom bench-
mark based on the asset allocation policy outlined in this IPS.

Risk Tolerance and Investment Constraints

Relative Risk Levels

The IC recognizes that a reasonable level of investment risk must be accepted to provide an op-
portunity to achieve the long-term Endowment Investment Objectives. The IC and its Investment
Consultant must identify and monitor risks to the portfolio, managing those identified as being
material. The Endowment is well-funded, has a perpetual investment horizon and moderate
spending and liquidity requirements. The opinion of the IC as advised by the Investment Consult-
ant is that the Endowment can adopt a moderate to high-risk investment profile.

Absolute Risk Levels

Risk tolerance is expressed as the volatility of total returns. Absolute risk levels will be measured
using the standard deviation of portfolio returns and target levels of to be maintained within the
range of 10% to 15% annualized.

During adverse market conditions, the decline in the net asset value of the Endowment should
not exceed 25% over a 12-month period.

Liquidity

The Endowment should retain sufficient liquidity to meet its spending rule and operational needs,
as well as to fund commitments to investment managers. The IC will receive regular liquidity reports
on daily, monthly, quarterly and annual basis.

A minimum of 50% of the Endowment’s assets should be liquid within one year, and a minimum
of 80% of the Endowment’s assets should be liquid within three years.

Regulations and Legal Framework

The Fund will be managed on a total return basis, consistent with the applicable standard of
conduct set forth in the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

The IC oversees the Endowment investments in accordance with the act and shall manage and
invest the endowed funds in good faith and with prudence.

Investment Constraints

The following categories of investments are not permitted for investment without the IC’s prior
written approval or as specifically authorized in the implementation of alternative strategies: (i)
private placements or restricted securities, (ii) commodities (iii) uncovered options; (iv) short
sales or margin transactions; (v) use of derivatives other than for efficient portfolio management
and (vi) securities of the investment manager or its respective parent, subsidiaries or affiliates.

Investment managers will attempt to obtain the “best available price and most favored execution”
with respect to all portfolio transactions. Considering the fund’s aversion to Alternatives outside
of real estate, no allocation to private equity and private debt should be made.

Equity

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The maximum position in any single security should be consistent with the portfolio’s benchmark
index and in any single case be less than 10% of the relevant asset class.

Fixed Income

Securities of any one issuer, with the exception of the US Government, its agencies, or other
sovereign government issuers must be less than 10% of the relevant asset class.

Investments rated below investment grade (BBB− by Fitch Ratings, or other recognized rating
services), are limited to less than 10% of the relevant asset class.

The modified duration of the fixed income portfolio may not differ by more than three years from
the modified duration of the relevant benchmark index.

Asset Allocation and Rebalancing Policy

Asset Allocation Policy

The IC recognizes that the Strategic Asset Allocation policy is paramount in meeting the spend-
ing policy, return and risk objectives of the Endowment. To achieve this, the Endowment will
allocate across a range of diversifying asset classes including equity, fixed income and real
estate. Other asset classes may be added to the Endowment to enhance returns, reduce vola-
tility through diversification, and/or offer a broader investment opportunity set.

Strategic Asset Allocation Policy, Policy Range and Benchmarks

To achieve asset class diversification the Endowment has adopted the following policy ranges
for each asset class within the overall portfolio. The Strategic Asset Allocation (SAA) framework
is based on an optimization model using capital market assumptions provided by the investment
consultants (SW Investment Consultants) reviewed annually by the IC. Given the long-term na-
ture of the Endowment changes to the SAA framework are expected to be infrequent:

Asset Classes, Allocation Limits and Benchmarks

Asset Classes Policy Target Allocation Limits % of

% of Total AUMs Total AUMs
Cash 0 0–10
North American Large Cap Equities 35 30–40
Developed Market ex US Equities 10 5–15

Emerging Markets Equities 15 10–20

US Treasuries Fixed Income 20 15–25

US IG Corporate Bonds Fixed Income 10 5–15

Real Estate Alternatives 10 5–15

The choice of asset classes and allocation limits reflects the following assumptions:
a. Equity risk premium: Equities are expected to provide a long-term return premium re-
flecting the risk of this asset class. Accordingly, the SAA will be heavily weighted to eq-
uity.

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b. Alternative assets: The IC recognizes that alternative investments including real estate,
private equity and debt offer diversification opportunities to traditional assets including
public equity and fixed income. The JSE Endowment will limit allocations within alterna-
tive assets to real estate as part of the SAA reflecting the relatively small scale of the
fund.
c. Benefits from global opportunities: The Endowment will consider global investment op-
portunities in its search for diversifying risk/return investments.
d. Diversification: The IC recognizes the diversification benefits within and between asset
classes by region, sector, and economic source of return to lower volatility and raise
compound returns over the long term.

Asset Allocation Ranges: Tactical Allocation Management

The IPS establishes the policy ranges around the SAA for the asset classes approved by the IC.
The role of the policy ranges is to allow for short-term fluctuations resulting from market volatility,
provide flexibility in managing investments, and limits for tactical investing to take advantage of
timing opportunities based on the advice of the Investment Consultant. The IC will rely on the
Investment Consultant to determine allocations within the stated ranges and to manage actual
asset class allocations within the policy ranges to manage risk. The IC will review actual asset
allocations relative to the framework at each quarterly meeting. The Investment Consultant will
rebalance the Endowment promptly if the asset class deviates from the approved allocation
range, unless instructed otherwise. The Investment Consultant may suggest adjusting the allo-
cation range to avoid immediate rebalancing. Approval from the Committee is needed for ad-
justments.

Currency Risk Management

The base currency denomination for the Endowment portfolio will be the US dollar. Where pos-
sible, all investments will be US dollar-denominated or in a US dollar-hedged share class, except
where exposure to non-US dollar currencies is an explicit part of the investment rationale. In
such cases hedging will be considered where the benefits of hedging outweigh the costs of
hedging.

Use of Leverage and Derivatives

Portfolio-level leverage will not be a permissible element of the Endowment’s investment strat-
egy. Underlying investment managers may use derivative exposures for the purposes of risk
management and efficient portfolio management.

Use of Index Tracking ETFs and Active Investment Funds

While the IC recognizes that active management can provide positive risk adjusted post costs
returns, the portfolio will be invested in passive investment funds where possible for all asset
classes within the SAA framework.

Portfolio Performance Reporting

Reporting Structure

The IC must provide adequate quarterly reporting to the Board including the following:
a. Performance measurement and attribution for the quarter and trailing 1, 3 and 5-year pe-
riods for the portfolio both in absolute terms and relative to the established benchmarks.
b. Asset allocation of the total portfolio.
c. Market value of the total portfolio.
d. Liquidity of the total portfolio.

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Performance Reports

Portfolio performance reports will reference the following:

a. Absolute Return and Risk Outcomes: measure performance against the Endowment’s
absolute return and risk targets as determined in this IPS and compare performance to
the Endowment’s spending policy.
b. Asset class performance: measure the performance of each fund against the relevant
asset class benchmark performance.
c. Policy Asset Allocation: measure performance against the benchmark for each asset
class, weighted by the Endowment’s policy asset class weighting.
d. Actual Asset Allocation: measure performance against a portfolio consisting of the
benchmark for each asset class, weighted by the Endowment’s actual asset allocation.
Comparison of b. and c. to be used to assess the impact of tactical asset allocation deci-
sions.
e. Risk adjusted measures: measure the Sharpe and Sortino ratios of the Endowment ac-
tual asset allocation and performance.

Performance Evaluation Benchmarks

Benchmarks for each asset class are stated below:

Asset Classes Benchmark Index

North American Large Cap Equities AP North American Equity Index

Developed Market ex US Equities AP Developed Markets Ex US Index

Emerging Markets Equities AP Emerging Markets index

US Treasuries Fixed Income BH 7−10 Year US Treasury Index

US IG Corporate Bonds Fixed In- BH USD IG Corporate Bond Index

come
Real Estate Alternatives DL Real Estate Index

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