Investment Policy of the Organization Centerfor the Arts

Endowment Fund

PURPOSE OF THE INVESTMENT POLICY

This Investment Policy was adopted by the Board of Directors of the ______(the "Board") to direct the prudent investment of its portfolio (the “Portfolio”) in a manner consistent with the intention to use income and assets from the fund for the maintenance, repair, and improvements to the ______(“Organization”) facilities. The Board has delegated financial oversight of the Portfolio to the Investment Committee. Duties and responsibilities of the Investment Committee are defined in the Organization’s bylaws.

This Investment Policy shall be used by the Investment Committee in executing its duty to manage, monitor, and reportupon the investment portfolio and the performance of any of the Portfolio's custodians, investment managers, or investment advisors.

It is expected that this document will be reviewed annually by the Investment Committee. Any revisions will be disclosed to the Finance Committee and recommended to the Board for approval.

This document will be provided to all investment managers.

Additionally: 1) all transactions shall be for the benefit of the Organization and 2) the Board will have ultimate responsibility for the investment and management of endowment funds.

In the event of the Organization’s dissolution, the funds will be dispensed at the direction of the Board and in accordance with donor wishes whenever possible.

DUTIES AND EXPECTATIONS OF PARTIES

A)Expectations of the Board and Investment Committee

The Board with advice and input from theInvestment Committee is charged with responsibility for managing investments for the endowment fund for Organization. The duties of the Board will include:

  • Ensuring appropriate policies governing the management of the Portfolio are in place and effectively implemented
  • Approving the Investment Policy
  • Delegating authority to the Investment Committee for implementation of the policy and monitoring performance and compliance
  • In instances when the use of investment tools not expressly permitted under this policy are considered, they must be reviewed and approved by the Board

The duties of the Investment Committee will include:

  • Communicating the Organization’s financial needs for facility maintenance, upkeep, or improvements to the investment managers on a timely basis
  • Determining the Organization’s risk tolerance and investment horizon as well as the communication of these to the investment managers
  • Establishing investment allocations consistent with the desired risk tolerance and investment horizon
  • Annually reviewing investment allocations and verify the existence and marketability of the underlying assets or satisfy themselves that such a review has been performed independently
  • Annually reviewing the performance of the investment managers against appropriate benchmarks
  • Replacing investment managers that fail to comply with the investment guidelines or for any reason deemed appropriate by the board
  • Ensuring no conflicts of interest arise between the board members, committee members, or the Organization leadership and the investment managers

B)Investment Manager(s) Responsibilities

  • The investment manager(s) will comply with the investment guidelines provided within this document.
  • Each investment manager will comply with all legal and ethical standards for the profession.
  • Each investment manager will have full discretion in making investments decisions for investments placed under his/her care while operating within the constraints and consistent with the philosophy outlined in this document.
  • Investment managers will have the ability to buy, sell or hold individual securities and to alter the investment allocation or mix consistent within the guidelines provided by this document.
  • Investment managers will provide investment reports on a timely basis, including monthly and quarterly investment performance results compared against relevant benchmarks.
  • Investment managers will communicate material changes in the economic outlook or other factors that may affect the investment strategy and implementation of the strategy.
  • In the event of a 25% decline in the market value of the portfolio, the custodian will inform the Investment Committee promptly so that the Investment Committee may review, revise, or enact measures to preserve capital, including but not limited to suspending capital withdrawals.
  • Inform the Investment Committee about significant changes to the investment philosophy, personnel managing the portfolio, or related factors.
  • Administering the Organization’s funds at reasonable cost while striving to reduce fees, including (though no limited to) management fees, custodial fees, consulting fees, transaction fees and similar costs.

INVESTMENT OBJECTIVES

Consistent with the intent of the endowment fund, the overall objective for the stewardship of these funds is the preservation of principal and –subject to minimizing risk and expenses – growth of capital sufficient to provide annual income commensurate with the expected expenditures for the upkeep of theOrganization’s facilities. In quantitative terms, the objective is to earn a total return of 5% annually. Total return includes income from dividends and interest, as well as appreciation or depreciation in the price of the security, over a three-year period. The investment policy reflects practices that provide stable, maximum income and cash flow to meet facility upkeep obligations overseen by Organization while allowing the conservation of principle. Capital appreciation of the investments may be used to meet these income and cash flow needs.

A)Approach

Because the Portfolio is expected to endure into perpetuity, and because inflation is a key component in its Performance Objective, the long-term risk of not investing in growth securities outweighs the short-term volatility risk. As a result, the majority of assets will be invested in equity or equity-like securities. Fixed income securities will be used to lower the short-term volatility of the portfolio and to provide income stability, especially during periods of weak or negative equity markets. Cash is not a strategic asset of the portfolio, but is a residual to the investment process and used to meet short-term liquidity needs. Other asset classes are included to provide diversification (e.g. international equities) and incremental return (e.g. small cap equities).

B)Asset Allocation

The general policy shall be to diversify investments within both equity and fixed income securities so as to provide a balance that enhances total return while avoiding undue risk owing to a concentration of investments in a single asset class r investment category.

As a long-term policy guideline, equity and fixed income investments will each constitute 40 – 60% of the total assets as outlined below:

Asset class / Target / Acceptable Range
Domestic equity – large cap / 35% / 30 – 40%
Domestic equity – mid cap / 5% / 0 – 10%
Domestic equity – small cap / 5% / 0 – 10%
International equities / 15% / 0 – 20%
Subtotal / 60%
Fixed income* / 40% / 35 – 45%
Cash or equivalents ** / 0% / 0 – 5%
Total / 100%

* May include REITs for income purposes

** Cash is not considered a strategic asset within the Portfolio but rather a residual of the investment process used to meet short-term liquidity needs.

Rebalancing should be conducted annually and more frequently if necessary to remain within acceptable target ranges. This activity will be reviewed by the Investment Committee annually.

C)Spending Policy

Distributions from the fund shall be based upon a total return approach that reflects both income and capital appreciation. The targeted allowable spending amount shall be up to 5% of the Portfolio’s average quarterly market value for the past 5 years. No distributions may be made during the first 3 years of the fund’s existence. The fund’s market value will be used for calculating the allowable spending limit after year 3 and before year 5.

These funds may be considered by the Board and Finance Committee when budgeting, though the Director of the Organization may recommend to not budget these funds. In that case, funds will be maintained in the endowment.

In the event the Portfolio loses market value, the Investment Committee must determine a prudent level of spending from the endowment or advice suspension of withdrawals in order to preserve capital. The Board must approve suspensions of spending from the Portfolio.

IMPLEMENTATION

A)Time Horizon

The Investment Committeeseeks to attain investment results over multiple years. It does not expect that all investment objectives will be attained in each year and recognizes that over various time periods investment managers may produce significant over or under performance relative to the broad markets. For this reason, long-term investment returns will be measured over a 3-year moving period. The Investment Committee reserves the right to evaluate and recommend necessary changes regarding investment managers over a shorter-term using the criteria establish under "Manager Performance Objectives" below.

B)Manager Performance Objectives

All investment returns shall be measured net of fees. Each investment manager will be reviewed on an ongoing basis and evaluated upon the following criteria:

  • Ability to meet or exceed the median performance of a peer group of managers with similar styles of investing
  • Ability to produce a total return of 5% of both income and capital appreciation
  • Equity results, net of fees, meet or exceed the following benchmarks measured over a 3 year period:

Large Cap / S&P 500

Mid Cap / Russell Midcap Index

Small Cap / Russell 2000 Index

International / MSCI EAFE Index

  • Fixed income results to exceed those of the Barcley’s Capital Intermediate Government/Credit Bond Index (A Rated or Better) measured over a 3 year market cycle
  • Adherence to the guidelines and objectives of this Investment Policy
  • Avoidance of regulatory actions against the firm, its principals or employees

Performance shall be evaluated based upon adherence to the stated philosophy and style of management at the time the investment manager was retained; continuity of personnel and practices at the firm; and, ability to match or outperform its respective target index.

GUIDELINES AND PROHIBITIONS

The Portfolio's Custodian, Investment Managers, and/or Investment Advisors are expected to comply with the following guidelines.

A)Equity investments

Equity investments may consist of common stocks, mutual funds, and/or exchange-traded funds and will be diversified in terms of industry, capital size, nation of origin, and styles (e.g. growth or value). Equity investments will include:

  • No more than 20% of equity investments in companies not domiciled within the United States.
  • No more than 5% of the equity assets invested in any one stock issue.
  • Adequate diversification among economic sectors, maintained by investing no more than 40% of the portfolio in any one economic sector.
  • No non-marketable securities;
  • With the exception of international managers, no non-dollar denominated securities; and
  • In the case of international managers, appropriate diversification with respect to currency and country exposure.

B)Fixed Income Securities

Fixed Income Investments may consist of:

  • Securities of the U.S. Government or agencies.
  • Taxable fixed income securities with an overall weighted average credit rating of “Aa” or better by Moody’s or “AA” or better by Standard & Poor’s
  • Commercial paper and variable rate demand notes of domestic corporations rated A-1 or P-1 at time for purchase, or if unrated, restricted to those issuers whose long-term debt is rated A or higher by one of the major rating agencies.
  • Bankers’ acceptances and certificates of deposit of major domestic banks and domestic subsidiaries of foreign banks meeting the quality criteria above.
  • Repurchase agreements 100% collateralized with respect to market value plus accrued interest in direct U.S. Government securities.
  • Money market funds adhering to the quality guidelines described above.
  • Shares of open-end investment companies (mutual funds) and exchange-traded funds which meet the above stated guidelines and are consistent with the overall objective. Additional constraints on fixed income investments include the following:
  • Duration within +/-20% of the effective duration of the benchmark index under normal conditions;
  • With respect to the corporate sector of the portfolio, no more than 25% of the portfolio in any one economic sector;
  • No position of any one issuer shall exceed 8% of the manager’s total portfolio as measured at market value except for securities issued by the U. S. government or its agencies

C)Cash and equivalents

  • Maintain a maximum weighted average maturity of less than one year.
  • Invest no more than 5% of the manager’s portfolio in the commercial paper of any one issuer. All commercial paper must have a minimum rating of A1/P1 by Standard & Poors’ and Moody’s, respectively
  • Invest no more than FDIC covered limit ($250,000 until that limit expires and returns to $100,000) in bank accounts or certificates of deposit of any single issuer, unless the investments are fully collateralized by U.S. Treasury or agency securities. Any Certificates of Deposit purchased must have with the highest credit quality rating from a nationally recognized rating.
  • Assure that no position of any one issuer shall exceed 8% of the manager’s total portfolio as measured at market value except for securities issued by the U. S. government or its agencies

D)Alternative Investment Vehicles

  • Hedge Funds have limited liquidity and generally exhibit high variance in their returns. They may not be used.
  • Derivative securities may not be used outside of mutual funds. Lower-class or order collateralized mortgage obligations, floating rate securities, and similar instruments may not be used.
  • Lending securities within the Organization’s Portfolio to other parties for any purpose is strictly prohibited.

Page 1 of 7