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Business Procedures Manual

9.2 Investments

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9.2.1 Investment Policy

Each institution must develop a written investment policy that must be filed with the Vice Chancellor for Fiscal Affairs and Treasurer. The policy must be reviewed and updated at least once every two (2) years. Each institution shall submit an annual report on its investment performance to the Vice Chancellor for Fiscal Affairs and Treasurer, which asserts that investments have been made in accordance with the institution’s written investment policy.

Note: For the schedule of reporting of investment policy changes and annual investment performance, see Section 20.0, Required Reports.

  1. The investment policy should specify overall investment objectives. There may be several different investment objectives, depending on the type of funds to be invested and period of investment to be considered. These may include objectives that attempt to preserve the purchasing power of income and principal, maximize current income, or maximize capital values. Each investment objective should clearly state the time horizon for achieving investment objectives.

  2. The investment policy should also identify the general type of investments permitted under each investment objective. Investment must be consistent with donor intent, Regents policy and applicable federal and state laws.

  3. The investment policy should include asset allocation guidelines, which outline the asset classes and subclasses that will constitute permissible areas for investment of funds. The guidelines should indicate the maximum and normal distribution of funds among the different asset classes or subclasses and the rationale for selecting these criteria. Asset allocation guidelines should also be tied to the investment objective and consider the potential risks associated with different asset allocations. The investment policy should outline the factors to be considered when an institution proposes a change in asset allocation such as during times of significant rate shift affecting the investment portfolio and instability in inflationary trends.

  4. Diversification is fundamental to the management of risk, and is, therefore, a pervasive consideration in prudent investment management. The investment policy should include a diversification plan that considers the asset classes and investment products to be utilized in an attempt to achieve desired return with an acceptable level of risk.

  5. The investment policy should include spending rules and relate these to investment objectives. Variables to be considered include the percentage of return allocated to prevent principal erosion by inflation versus the percentage to be expended currently.

  6. The investment policy should provide for appropriate collateralization of invested funds that, by law, require the pledge of collateral.

  7. Management’s plan for authorization of investment activity, periodic reporting of investment activity, and monitoring of investment results should be outlined in detail in the investment policy.

  8. Criteria to be used in the selection of investment managers and the evaluation of their performance should be described in the investment policy, if the institution chooses to use outside investment managers. These criteria should address the investment manager’s:

    • Professional background and experience;
    • Investment philosophy relative to the institution’s stated investment objectives;
    • Organizational structure and overall product line;
    • Control with respect to ensuring that individual managers adhere to policy objectives and guidelines;
    • Total size of managed assets;
    • Record of performance measured against appropriate benchmarks;
    • Ability to communicate results effectively and in timely fashion;
    • Written contract, executed once an investment manager is selected, that specifies, at a minimum, the requirements listed in section 7.5.2, Investments, in the Board of Regents Policy Manual. In addition, state funds invested must be separately identifiable.

9.2.2 Pooled Investment Funds

Units of the University System of Georgia and their affiliated organizations may participate in the Pooled Investment fund program. The characteristics and investment objectives of the four types of pooled funds are detailed below.

Short Term Fund

The Short Term investment fund provides a current return and stability of principal while affording a means of overnight liquidity for projected cash needs. The investment maturities in this fund will range between daily and two (2) years.

INVESTMENT OBJECTIVES

  1. The primary investment objective shall be preservation of principal.

  2. The secondary investment objective shall be to provide a competitive return on the short term funds of the University Systems of Georgia participants, while providing for periodic cash needs.

  3. The overall character of the portfolio shall be of U.S. treasury and agency quality, and holdings shall be well diversified as to issuer and maturity.

  4. It is anticipated that liquidity needs generally will be met through maturities, portfolio structure, and interest income.

GENERAL INVESTMENT GUIDELINES

  1. The investments shall be in conformity with donor intent, Regents policy and applicable federal and state laws.

  2. The investment manager is authorized to make investment changes as deemed necessary and in accordance with the objectives and guidelines set forth in this document on a discretionary basis.

  3. The investment manager will meet as necessary, but at least once a year, with the Board of Regents to review investment strategies and investment objectives.

  4. Investments shall be limited to fixed income securities.

  5. The investment manager shall prepare investment performance results on a quarterly basis. Results will be compared against the Money Net All Taxable Index and the Georgia Fund (LGIP Pool).

SPECIFIC INVESTMENT GUIDELINES

  1. The average maturity (average life) of the portfolio shall not exceed two (2) years.

  2. The maturity (average life) of any individual holding shall not exceed three (3) years.

  3. Adequate liquidity will be maintained to meet the forecasted working capital requirements of the fund participants.

  4. For purposes of determining maturities, the next Reset Date will be used for floating rate securities, the Put Date for putable securities, the Call Date for securities trading on a yield-to-call basis, and the average life on securities with periodic principal payments prior to maturity such as mortgage backed securities and asset backed securities.

Legal Fund

The Legal fund provides an opportunity for greater income and modest principal growth to the extent possible with the securities allowed under Georgia Code sections 50-17-59 and 50-17-63. The average maturity of in this fund will typically range between five (5) and ten (10) years, with a maximum maturity of thirty (30) years for any individual investment.

INVESTMENT OBJECTIVES

  1. The overall character of the portfolio should be one of treasury and agency quality, possessing virtually no degree of financial risk.

  2. The investment objective shall be to preserve principal and generate competitive fixed income returns.

  3. The portfolio will be measured against the Lehman U.S. Government Index.

GENERAL INVESTMENT GUIDELINES

  1. The investments shall be in conformity with donor intent, Regents policy and applicable federal and state laws.

  2. The investment manager will give frequent and active attention to the fund to develop and implement strategy.

  3. The investment manager is authorized to make investment changes as deemed necessary and in accordance with the objectives and guidelines set forth in this document on a discretionary basis.

  4. The investment manager will meet as necessary, but at least once a year, with the Board of Regents to review investment strategies and investment objectives.

SPECIFIC INVESTMENT GUIDELINES

The portfolio shall have the following characteristics:

  1. The maximum maturity of an individual investment will be thirty (30) years.

  2. Maturities should generally be of intermediate to longer term length, but may emphasize shorter or longer maturities, depending on yield differentials.

  3. The average maturity of the portfolio shall not exceed ten (10) years.

Balanced Income Fund

The Balanced Income fund is designed to be a vehicle to invest funds that are not subject to state regulations concerning investing in equities. This fund is comprised of fixed income, equity, and cash equivalent instruments.

INVESTMENT OBJECTIVES

  1. The overall character of the portfolio should be one of above-average quality, possessing, at most, an average degree of investment risk.

  2. The investment objective shall be to seek a reasonable and meaningful total rate of return with emphasis on current income.

  3. For comparative purposes, the stock portion of the portfolio will be reviewed over a full market cycle relative to the results achieved by the Standard & Poor’s 500 Index and the Lipper Large Cap. Core Average.

  4. The bond portion of the portfolio will be measured against the Lehman Aggregate Index.

GENERAL INVESTMENT GUIDELINES

  1. The investment manager will give frequent and active attention to the fund to develop and implement strategy.

  2. The investment manager is authorized to make investment changes as deemed necessary and in accordance with the objectives and guidelines set forth in this document on a discretionary basis.

  3. The investment manager will meet as necessary, but at least once a year, with the Board of Regents to review investment strategies and investment objectives.

SPECIFIC INVESTMENT GUIDELINES

  1. The equity allocation range shall be between 30%-40%, with a target of 35% of the total portfolio, and shall have the following characteristics:

    • High overall quality.
    • Reasonable diversification.
    • Companies with a history of consistent or growing earnings and/or dividends.
    • Prospects of future earnings and/or dividend increases.
    • Strong or improving financial position.

    Note: Foreign common stocks that fulfill the above criteria are eligible investments, as long as they are listed or have American depositary receipts (ADRs).

  2. The fixed income (bond) portion of the portfolio shall be between 60%-70%, with a target of 65% of the total portfolio, and shall have the following characteristics:

    • All issues must be investment grade at the time of purchase.
    • Well diversified as to issuer and maturity.
    • Maturities should generally be of intermediate to longer term length, but may emphasize shorter or longer maturities, depending on yield differentials.
    • The maximum maturity of any individual issue shall not exceed thirty (30) years at the time of purchase.
    • The average maturity of the portfolio shall not exceed ten (10) years.
  3. Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund:

    • Reserves and excess income should be invested at all times in practical amounts.
    • Reserves can be invested in high quality institutional money market mutual funds or other high quality short term instruments.

Total Return Fund

The Total Return fund is another pool designed to be a vehicle to invest funds that are not subject to state regulations concerning investing in equities. This pool offers the greatest percentage of overall equity exposure, with well over half of the funds typically invested in equities.

INVESTMENT OBJECTIVES

  1. The overall character of the portfolio should be one of above-average quality, possessing, at most, a moderate degree of investment risk.

  2. The investment objective shall be to seek a reasonable and meaningful total rate of return with an emphasis on capital appreciation.

  3. For comparative purposes, the stock portion of the portfolio will be reviewed over a full market cycle relative to the results achieved by the Standard & Poor’s 500 Index and the Lipper Large Cap. Core Average.

  4. The bond portion of the portfolio will be measured against the Lehman Aggregate Index.

GENERAL INVESTMENT GUIDELINES

  1. The investment manager will give frequent and active attention to the fund to develop and implement strategy.

  2. The investment manager is authorized to make investment changes as deemed necessary and in accordance with the objectives and guidelines set forth in this document on a discretionary basis.

  3. The investment manager will meet as necessary, but at least once a year, with the Board of Regents to review investment strategies and investment objectives.

SPECIFIC INVESTMENT GUIDELINES

  1. The equity allocation range shall be between 60%-70%, with a target of 65% of the total portfolio, and shall have the following characteristics:

    • High overall quality
    • Reasonable diversification
    • Companies with a history of consistent or growing earnings and/or dividends
    • Prospects of future earnings and/or dividend increases
    • Strong or improving financial position

    Note: Foreign common stocks that fulfill the above criteria are eligible investments, as long as they are listed or have ADRs.

  2. The fixed income (bond) portion of the portfolio shall be between 30%-40%, with a target of 35% of the total portfolio, and shall have the following characteristics:

    • All issues must be investment grade at the time of purchase.
    • Well diversified as to issuer and maturity
    • Maturities should generally be of intermediate to longer term length, but may emphasize shorter or longer maturities, depending on yield differentials.
    • The maximum maturity of any individual issue shall not exceed thirty (30) years at the time of purchase.
    • The average maturity of the portfolio shall not exceed ten (10) years.
  3. Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund.

    • Reserves and excess income should be invested at all times in practical amounts.
    • Reserves can be invested in high quality institutional money market mutual funds or other high quality short term instruments.

Diversified Fund

The Diversified fund is designed to gain further diversification and increase exposure to assets that have lower correlation to equity and bond markets by utilizing alternative asset classes. In addition, this fund is constructed to build an optimal portfolio where return is increased and risk is reduced.

INVESTMENT OBJECTIVES

  1. The overall character of the portfolio should be one of above-average quality, possessing, at most, a moderate degree of investment risk.

  2. The investment objective shall be to seek a reasonable and meaningful total rate of return with emphasis on capital appreciation.

  3. For comparative purposes, the stock portion of the portfolio will be reviewed over a full market cycle relative to the results achieved by the Standard & Poor’s 500 Index.

  4. The bond portion of the portfolio will be measured against the Lehman Aggregate Index.

GENERAL INVESTMENT GUIDELINES

  1. The investment manager will give frequent and active attention to the fund to develop and implement strategy.

  2. The investment manager is authorized to make investment changes as deemed necessary and in accordance with the objectives and guidelines set forth in this document on a discretionary basis.

  3. The investment manager will meet as necessary, but at least once a year, with the Board of Regents to review investment strategies and investment objectives.

SPECIFIC INVESTMENT GUIDELINES

  1. The equity allocation range shall be between 50%-75%, and shall have the following characteristics:

    • Broad diversification among large, mid, and small cap stocks, including value and growth equity styles.
    • Growth equity style stocks should be from companies with:
      • High overall quality.
      • A history of consistent or growing earnings and/or dividends.
      • Prospects of future earnings and/or dividend increases.
      • Strong or improving financial position.

    Note: Foreign common stocks that fulfill the above criteria are eligible investments, as long as they are listed or have ADRs.

  2. The fixed income (bond) portion of the portfolio shall be between 20%-40%, and shall have the following characteristics:

    • Allowable issues include investment grade, high yield, and non dollar denominated debt.
    • Well diversified as to issuer and maturity.
    • Maturities should generally be of intermediate to longer term length, but may emphasize shorter or longer maturities, depending on yield differentials.
    • The maximum maturity of any individual issue shall not exceed thirty (30) years at the time of purchase.
    • The average maturity of the portfolio shall not exceed ten (10) years.
  3. Hedge Funds. The investment approach to this asset class is to use a multi-strategy, multi-manager fund of hedge funds. The Board of Regents believes that a fund of funds strategy will provide the best access to a highly diversified pool of hedge fund strategies and managers. The Board seeks absolute returns by investing in a fund of funds manager. The specific portfolio characteristics should approximate:

    • 4-6% volatility.
    • Beta to the Standard & Poor’s 500 Index < 0.25.
    • 8% worst expected decline from peak to trough.
    • Consistent monthly returns.
    • Expected return of 5% above LIBOR net of fees over a rolling three (3) year time period.
  4. Real Estate. The Board of Regents’ approach for investing in this asset class is to use real estate investment trusts (REITs). REITs are more liquid than owning commercial real estate, and diversification can be achieved by purchasing a mutual fund. The objectives for investing in real estate are:

    • Diversification, having lower correlation with major asset classes such as stocks and bonds.
    • Return characteristics of steady income, high single-digit returns with lower volatility within a total portfolio context.
  5. Venture Capital/Private Equity/Post Venture Capital. This asset class is the riskiest and most volatile permitted investment opportunity. This asset should be considered as an additional diversification investment strategy due to the low correlation with stocks and bonds.

  6. Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund.

    • Reserves and excess income should be invested at all times in practical amounts.
    • Reserves can be invested in high quality institutional money market mutual funds or other high quality short term instruments.

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