Investment Policy Statement

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PREAMBLE

The Investment Policy of the Austin Community Foundation is implemented under the supervision of the Board of Governors of the Foundation, which has ultimate responsibility for the approval and maintenance of the policy. The Board exercises responsibility through its Investment Committee, which, within the broad guidelines of this approved Investment Policy, will have broad discretion with regard to stewardship of the Foundation’s invested funds.

The Chair of the Board of Governors appoints the Chair of the Foundation’s Investment Committee.  Other members of the committee shall be appointed according to the process outlined in the Foundation’s By-Laws.  The Chair of the Investment Committee shall participate in the identification and invitation of committee members. The Investment Committee will be composed of a minimum of three and a maximum of nine members. The Committee shall include current members of the Board of Governors, persons external to the Board, and other “expert” members as shall be deemed appropriate and necessary. In no case shall the Committee include members who are currently active managers of the invested funds of the Foundation. The President of the Foundation shall serve as a member of the Committee and shall designate other employed officers to serve and support the Committee and its ongoing work.

 

The Investment Committee shall meet at least quarterly, and more frequently as it deems necessary. The Committee shall report to the Foundation’s Board of Governors at least quarterly, and shall annually provide a full calendar year report to the Board.

 

The executive staff of the Foundation shall have broad responsibility to manage and coordinate the implementation of the Investment Policy, under the direction of the Investment Committee, and shall be the official representative of the Foundation in day to day administration of the policy and in relationship to investment managers and related parties.  Staff also has the responsibility of working with individual donors to the Foundation as funds are established. Foundation executive staff is empowered to enter into such relationships as may benefit the philanthropic and charitable intent of the Foundation, with due respect to the Investment Policy and the Foundation’s strategic goals and objectives.  In identification, selection and engagement of investment managers, the Foundation and Investment Committee are committed to engage those in which ownership, leadership and management reflect the diversity of the community the Foundation serves.

In all of their collective work on behalf of the Foundation’s assets, Board, Investment Committee and Staff members shall be guided by a commitment to adhere to all legal, ethical and operational standards required and expected of charitable fiduciaries. In particular these individuals shall be committed to meeting the expectations of honesty, loyalty, integrity and transparency as they serve the Foundation, its donors and its beneficiaries.

PURPOSE

The Investment Policy Statement (“IPS”) presents the investment process for The Austin Community Foundation’s investment portfolio, including investment objectives, asset allocation, investment restrictions, and review procedures, collectively the Investment Policy Statement (“IPS”).

The IPS governs the investment process through the following:

  • Stating the Foundation’s objectives and guidelines for the investment of endowed, quasi-endowed and non-endowed assets.
  • Setting forth an investment structure that includes various asset classes, investment management styles, asset allocations and acceptable ranges consistent with the Foundation’s long-term objectives.
  • Managing the overall level of risk and liquidity in accordance with the objectives.
  • Establishing criteria to monitor evaluate and compare the performance relative to appropriate benchmarks.
  • Defining suitable investments.
  • Complying with best fiduciary practices including all applicable laws, rules and regulations.

The investment process set forth in the IPS enables the Foundation to consistently utilize meaningful diversification to achieve return objectives during a variety of economic and market conditions. 

This IPS is not a contract nor does it imply a guarantee of future investment results.  It is a dynamic tool that is subject to revision based on changes in the Foundation’s investment objectives.

STATEMENT OF OBJECTIVES: Endowed and Quasi-Endowed Funds

For endowed and quasi-endowed funds, the primary objective is to preserve the portfolio’s purchasing power through asset growth at least equal to the spending policy, plus the rate of inflation.  In order to insure a predictable level of funds, a total return spending policy has been adopted.  This policy provides for 5% spending of the rolling 20 quarter market value for endowment funds, not to exceed accumulated earnings in accordance with applicable laws, regulations and fund agreements. 

Time Horizon

The Foundation is a permanent institution with long term investment objectives.  Based upon significant evidence that long-term investors do not benefit from short-term asset class forecasting or market timing, the Foundation has adopted a strategic allocation with a long-term horizon. 

Risk Tolerance

The Foundation has recognized and acknowledged that risk must be assumed in order to achieve the long-term investment objectives.  Because there is an established relationship between the level of risk assumed and the level of return that can be expected, the Foundation uses two primary factors to determine risk tolerance:

  • Financial ability to accept permanent risk of loss within the investment program.
  • Willingness to accept return volatility.

Taking these two factors into account, the Foundation rates the risk tolerance as Moderate.  

Performance Expectations

The design of the investment portfolio is based upon a “Total Return” approach, including both current income (interest and dividends) and capital appreciation.  Achievement of the investment objective will be monitored as frequently as quarterly but evaluated over a full market cycle, which is customarily more than 5 years. 

 

Asset Allocation

The expected return and risk of a portfolio are primarily determined by the asset class mix.  The Foundation has reviewed the long-term risk and return characteristics of various asset classes and developed the Strategic Asset Allocation (“SAA”), contained in Exhibit A. 

The Foundation has adopted strategic targets for each asset class within minimum and maximum percentages.  Specific categories and percentages for each asset class are described in Exhibit A.

This IPS governs assets of commingled endowed, non-endowed, and quasi-endowed funds.  The investment strategies and restrictions for these funds were established via each fund’s establishing documents, and are accommodated in establishing these guidelines.    

A detailed description of each class of asset, including selection criteria and restrictions, are found in Exhibit B.

The SAA will serve as a guideline of asset classes and range of investments for fund holders with differing risk profiles and investment horizons.  It is anticipated that the Foundation, with the advice of fund holders will develop the appropriate asset allocation strategy for funds.  To aid in this process the Foundation has developed the Illustrative Balanced Strategies contained in Exhibit C.  These platforms allow for selection among a range of strategies from capital preservation (0% equity/100% fixed income and cash) to aggressive growth (100% equity/0% fixed income and cash).    

Rebalancing of Strategic Allocation

The discipline of regular portfolio rebalancing has been demonstrated to improve portfolio performance.  Portfolios will be rebalanced within a reasonable percentage of strategic targets no less often than annually.

IMPLEMENTATION GUIDELINES

The management of this portfolio is rooted in the principle that markets are reasonably “efficient” and that returns are determined principally by asset allocation decisions.  The Foundation’s investment process will identify sources of excess return, take advantage of sophisticated trading strategies, and keep trading costs and fees to a minimum.   The Foundation will seek superior managers that have exhibited the ability to achieve these results.  Managers will be monitored through both quantitative and qualitative measures, including Modern Portfolio Theory and returns-based attribution analysis.

The asset allocation will be implemented through any combination of individual securities, separately managed accounts (SMA), institutional mutual funds, limited partnerships or passive strategies designed to mirror an index return such as Exchange Traded Funds (ETFs).

Alternative Investments

The Foundation may invest in a broad range of alternative strategies.  The intent will be to provide broad diversification across manager styles and strategies while providing low correlations to traditional long-only fixed income and equities.  The strategies may include real estate, energy and natural resources, private equity, commodities, including managed futures, hedging strategies using options and other derivatives, absolute return, and opportunistic equity. 

The evaluation process for alternative strategies and managers will include both quantitative and qualitative due diligence and research.  In most cases, these investments will be implemented via limited partnerships.  Therefore, restrictions are established by the offering documents for each partnership. 

STATEMENT OF OBJECTIVES: Non-Endowed Funds

The Foundation holds and manages temporary and non-endowed funds for charitable purposes.  For non-endowed funds, the primary objective is to preserve capital and have liquidity on a short term basis.  These funds will be invested in short term instruments with a maturity date not to exceed one year. 

SELECTION OF MONEY MANAGERS FOR ALL FUNDS

The Foundation will select managers that meet the following minimum criteria:

  • Must be a bank, insurance company, investment management company, or investment adviser as defined by the Registered Investment Advisers Act of 1940.
  • Must provide monthly statements and historical quarterly performance using the Performance Presentation Standards as defined by the CFA Institute (formerly the Association for Investment Management and Research – AIMR).  The performance is based on a composite of all fully discretionary accounts of similar investment style, and reported both gross and net of fees
  • Must provide performance evaluation reports prepared by an objective third party that illustrate the risk/return profile of the manager relative to other managers of like investment style.
  • Must provide detailed information on the history of the firm, key personnel, key clients, fee schedule, and support personnel. 
  • Must clearly articulate the investment strategy that will be followed and document that the strategy has been adhered to over time.
  • Must have no outstanding legal judgments or past judgments.

It is recognized that alternative investment managers may not comply with all of the criteria stated above, but shall be governed by the terms of their offering document. 

CONTROL PROCEDURES FOR ALL FUNDS

Duties and Responsibilities of the Managers

The duties and responsibilities of each manager retained by the Foundation include the following:

  • Managing the Foundation’s assets under its care, custody and/or control in accordance with the IPS objectives and guidelines set forth herein, and also expressed in separate written agreements when deviation is deemed prudent and desirable by the Foundation.
  • Exercising investment discretion within the IPS objectives and guidelines set forth herein.
  • Informing the Foundation in writing regarding all significant and/or material matters and changes pertaining to the investment of the Foundation’s assets on a timely basis.

 Performance Objectives

The appropriateness of the IPS for achieving the stated objectives will be reviewed at least annually.  In addition, the Foundation will monitor the performance on a quarterly basis as described below.

It is not expected that the IPS will change frequently.  In particular, short-term changes in the financial markets should not require adjustments to the IPS.

Monitoring Managers

Quarterly performance will be evaluated to measure progress toward the attainment of long-term expected return and adherence to investment style.  It is understood that there are likely to be short-term periods during which performance deviates from market indices. 

At least annually, the Foundation will review:

  • Each manager’s adherence to the IPS guidelines and portfolio construction.
  • Material changes in the manager’s organization, investment philosophy and/or personnel.
  • Comparisons of the manager’s results to appropriate benchmarks.
  • Portfolio based performance attribution.
  • Portfolio based style analysis.
  • Portfolio based fundamental review.

 

Managers may be replaced for failure to adhere to the responsibilities outlined in the IPS, inconsistent execution of the investment mandate, or substantive personnel changes.  Managers may be terminated for any reason or no reason.

AFFIRMATION

A moderate level of risk is intended to be sustained over our investment horizon, unless there is a significant change in financial circumstances or other goals and objectives.  The Foundation will review the Investment Policy Statement at least annually and determine any necessary adjustments to fully and accurately express its investment goals and objectives.

Exhibit A

Asset Class Targets

 

Strategic Asset Allocation

 

Investment Portfolio

 

 

Lower Limit

 

 

Strategic Allocation

 

 

       Upper Limit

Equities

25%

45%

75%

Fixed Income and Cash

15%

20%

25%

Hedged Strategies

0%

15%

20%

Real Assets

6%

20%

20%

Exhibit B 

Asset Class Descriptions

 

Cash/Cash Equivalents

Money market mutual funds selected must adhere to the following guidelines:

  • Cash equivalent reserves shall consist of cash instruments having a quality rating of A-1, P-1 or higher.  Commercial paper, treasury securities with maturity of less than 90 days, certificates of deposit with maturity of less than 90 days, and repurchase agreements are also acceptable investment vehicles for the money market mutual funds.
  • Any idle cash not invested by the investment managers shall be invested in an interest bearing cash account.

Cash balances may also be invested in federally insured bank deposit accounts or similar instruments.

Fixed Income

The fixed income strategy will employ a variable maturity approach that relies less on interest rate forecasting, but shifts the maturity structure in response to changes in the yield curve.  Managers and mutual funds selected to manage the Foundation’s assets must adhere to the following guidelines:

  • The international fixed income component will be hedged to avoid fluctuations in currency exchange rates.
  • Fixed income investments will generally have short to intermediate durations to minimize interest rate volatility, with average durations of no more than approximately seven years.

Equities (domestic and international)

Managers and mutual funds selected to manage the Foundation’s assets must adhere to the following guidelines:

  • Equity holdings in any one company should not exceed more than 10% of the market value of the foundation’s equity portfolio.
  • Allocations for all equities will generally avoid excessive industry or sector concentration.
  • The managers shall emphasize quality in security selection and diversify to avoid risk of loss.
  • The managers shall have the discretion to invest a portion of the assets in cash reserves when they deem appropriate.  However, the managers will be evaluated against their peers on the performance of the total funds under their direct management.
  • Allocations to any specific country shall not be excessive relative to a broadly diversified international equity manager peer group.  It is expected that the non-US equity portfolio will have no more than 40% in any one country.
  • Foreign exchange contracts may be utilized provided that use of such contracts is limited to hedging currency exposure within the manager’s portfolio.  There shall be no direct foreign currency speculation or any related investment activity.

The following types of securities and transactions are not authorized without receiving specific Foundation approval:

  • Letter stock and other unregistered securities.
  • Investments for the purpose of exercising control management.

  

Exhibit C

Illustrative Balanced Strategies

Composition

Capital Preservation

Income

Income & Growth

Growth & Income

Growth

Aggressive Growth

Equity Component

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Fixed Income Component

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

U.S. Stocks

0.0%

14.0%

28.0%

42.0%

56.0%

70.0%

Large Cap Growth

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

Large Cap Value

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

Small Cap Growth

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Small Cap Value

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Real Estate

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

International Stocks

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

Large Cap Core

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Small Cap Value

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Emerging Markets Large Value

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Emerging Markets Small Core

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Fixed Income

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

Short-term Domestic

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

Short-term Global

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

Intermediate-term Domestic

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

Intermediate-term Global

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

 

ADDENDUM

 

Austin Community Foundation Investment Policy Statement

Treatment of Excess Business Holdings

 

Under the Pension Protection Act of 2006 (PPA), the private foundation excess business holdings rules now apply to donor advised funds as if they were private foundations1. That is, the holdings of a donor advised fund in a business enterprise, together with the holdings of persons who are disqualified persons with respect to that fund, may not exceed any of the following:

• Twenty percent2 of the voting stock3 of an incorporated business

• Twenty percent of the profits interest of a partnership or joint venture or the beneficial interest of a trust or similar entity.

Ownership of unincorporated businesses that are not substantially related to the fund’s purposes is also prohibited.

Donor advised funds receiving gifts of interests in a business enterprise after the date of the PPA’s enactment (August 17, 2006) will have five years to divest holdings that are above the permitted amount, with the possibility of an additional five years if approved by the Secretary of the Treasury.  Funds that currently hold such assets will have a much longer period to divest under the same complicated transition relief given to private foundations in 19694.

What is a business enterprise?

A “business enterprise” is the active conduct of a trade or business, including any activity which is regularly carried on for the production of income from the sale of goods or the performance of services. Specifically excluded from the definition are:

  • Holdings that take the form of bonds or other debt instruments unless they are a disguised form of equity
  • Income from dividends, interest, royalties and from the sale of capital assets
  • Income from leases unless the income would be taxed as unrelated business income
  • “Functionally-related” businesses and program-related investments
  • Businesses that derive at least 95 percent of their income from passive sources (dividends, interest, rent, royalties, capital gains). This will have the effect of excluding gifts of interests in most family limited partnerships, and other types of holding company arrangements.

What is a disqualified person?

Donors and persons appointed or designated by donors are disqualified persons if they have—or reasonably expect to have—advisory privileges with respect to the donor-advised fund by virtue of their status as donors. Members of donors’ and advisors’ families are also disqualified, but the section does not define “family” and does not cross-reference either section 4958 or 4946 for the definition. Finally, the term includes 35-percent-controlled entities as defined in section 4958(f)(3).

 

ACF Policy with regard to assets categorized under the PPA as “excess business holdings”

ACF will identify and monitor any new gift to a donor advised fund of any interest qualifying as an “excess business holding” under the PPA.  ACF will exercise its best effort to dispose of the contributed interest at the best possible price within five years of the date of the gift, as required under the PPA.  In any event, ACF will dispose of any excess business holding prior to the five year time limit, except in the event that the  Treasury Department grants an additional five year holding period.  ACF will notify potential donors of such interests of this requirement prior to the contribution of such interest.

1 The language is clear that it is only the donor advised fund—not the sponsoring charity—that is to be treated as a private foundation. Accordingly, it appears that this section does not apply to assets held by the sponsoring charity’s investment pools, or assets held by funds that are not donor advised.

2 Thirty-five percent if it can be shown that persons who are not disqualified persons have effective control of the business.  

3 Additionally, the donor advised fund will be barred from holding non-voting stock of an incorporated business unless the disqualified persons collectively own less than 20 percent of the voting stock.   Under the de minimis rule, the donor-advised fund could continue to hold an interest that did not exceed two percent of the voting stock and two percent of the value.  Additional rules apply to cover situations such as mergers, redemptions, and acquisitions. 

4 Excess holdings acquired by purchase must be disposed of immediately. If purchases by disqualified persons cause the donor advised fund to have excess holdings, the donor advised fund will have 90 days to dispose of the excess.