MUSC Foundation Investment Policy Statement 2018
- I. Executive summary
- II. Introduction
- III. Delegation of responsibilities
- IV. Risk tolerance
- V. Asset allocation guidelines
- VI. Investment objectives
- VII. Prudence, ethics & conflicts of interest
- VIII. Policies and procedures
- IX. Expendable funds objectives and guidelines
- X. Evaluation and review process
- Appendix A: Strategic benchmark
- Appendix B: Asset class definition/guidelines
I. Executive summary
Long-term preservation of corpus, after inflation and spending
4.0% + 1% Foundation Fees based on the three-year average of ending market value of the Total Fund
Perpetual horizon permits tolerance of market cycle volatility and the ability to sustain associated losses
Strategic Asset Allocation and Benchmark
|Asset Class||Policy Benchmark||Target|
|US Equities||Russell 3000||18.0%|
|Non-US Developed Equities||MSCIEAFE||
|Non-US Emerging Equities||MSCI Emerging Markets||6.5%|
|Select Strategies||MSCIAC World||10.0%|
|US Core Fixed Income||Barclays Capital Aggregate Bond||8.0%|
|High Yield/Distressed||Merrill Lynch High Yield BB-B||3.0%|
|Hedge Funds||HFRI Fund of Funds||10.0%|
|Real Assets||NCREIF/Bloomberg Commodity||7.5%|
|Private Equity||Cambridge all Private Equity||20.0%|
|Cash/Cash Equivalents||US T-bills||1.0%|
Board of Directors
Investment Committee by delegation from the Board of Directors
This statement is issued by the Board of Directors of the Medical University of South Carolina Foundation (“Foundation”). Foundation assets will be managed according to the investment standards as established in the South Carolina Uniform Prudent Management of Institutional Funds Act (SCUPMIFA), S.C. Code Ann.34-6-10 et.seq.
The goal of this investment policy statement is to support, at the discretion of the Board of Directors of the Foundation (“Board”), programs and activities that are of significant value to the Medical University of South Carolina (“University”) and the Medical University Hospital Authority (“Hospital”). The role of the Foundation is to provide financial resources to help underwrite and support current and future operating cash flow requirements of the University. The investment philosophy of the Foundation combines the goal of total return and preservation of capital with prudent risk tolerance in order to achieve investment results consistent with the financial goals and objectives of the University and the Hospital.
In the administration of the powers to make and retain investments and to delegate investment management of Foundation funds, the Board of Directors of the Foundation and the Investment Committee of the Board shall exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision. In so doing they shall consider the long and short-term needs of the Foundation in carrying out its purposes, its present and anticipated financial requirements, and expected total return on its investments.
Consistent with the expectation that the University, the Hospital, and the Foundation will exist in perpetuity, grants to be made in the future are as important as grants made today. In order to best serve the University and the Hospital now and in the future, the goal of the Foundation’s investment and spending practices is to maintain and increase the level of annual grants. It is the Foundation’s objective to optimize the total return of funds invested consistent with prudent risk-taking, recognizing that the Foundation will live in perpetuity.
The Investment Committee (“Committee”) has oversight of the Endowment Funds and the Expendable Funds. The Endowment Funds are permanent funds established for the benefit, in perpetuity, of designated beneficiaries and purposes. The Expendable Funds are funds established for the benefit of specific programs or activities. These funds may not be considered to be permanent since the amount and timing of distributions is within the discretion of the donor-designated recipient, subject to oversight by the Board of Directors. Additional details on the policy pertaining to Expendable Funds are in Section IX.
This Statement of Investment Policy and Objectives is intended to serve as an operating document to guide the investment activities of the Foundation and:
- Define responsibilities among the various groups accountable for guiding the investment process and supervising outside investment professionals.
- Determine an appropriate return and risk level for the Foundation.
- Establish allocation ranges for asset classes and investment styles deemed suitable for the Foundation.
- Determine prudent diversification of assets.
- Establish performance objectives and a regular review process.
Investment objectives are necessary and appropriate to properly measure and evaluate the success of the Foundation’s investment program. Performance will be evaluated net of investment management fees.
- A reasonable time horizon, among other factors, for evaluating the Foundation’s investment performance shall be long-term (five to ten years). Time frames for evaluating the performance of investment managers should approximate a market cycle (ten years).
- Recognizing the need for asset stability, protection of principal and capital growth, the Endowment Funds should be managed on a total return basis.
- Achieve a total rate of return, over rolling ten-year periods, which exceeds the rate of inflation (Consumer Price Index) by 5.0% per year on average.
- Outperform a passive portfolio, consisting of a similar asset allocation to the Foundation, over rolling ten-year periods.
- Risk, as measured by standard deviation, should be commensurate with a passive portfolio, consisting of a similar asset allocation to the Foundation, over rolling ten-year periods.
The Board has a direct oversight role regarding all decisions that impact the Foundation. The Board has delegated operating and supervisory investment responsibility for the Foundation to the Committee.
The Committee recognizes its responsibility to ensure that assets available for investment are managed:
- Exclusively for the benefit of the University and the Hospital and their missions.
- Prudently and in full compliance with all policies, applicable laws and regulations.
- Effectively, so as to protect the purchasing power over time of the assets within the Foundation.
Specific responsibilities of the various groups within the Foundation and outside service professionals retained by the Foundation are outlined below.
Responsibilities of the Board of Directors
The Board ensures that its fiduciary responsibility for the invested assets of the Foundation is fulfilled through appropriate investment structure, internal and external management, and portfolio performance consistent with all policies. Although the Board is not involved in day-to-day investment decisions, based on the advice and recommendations of the Committee, the Board shall:
- Approve investment policies, guidelines, and objectives that reflect the long-term orientation of the Foundation.
- Oversee activities related to compliance, decision-making, and structure within the Foundation.
- Review and accept the Minutes of the Committee.
Responsibilities of the Investment Committee
The Committee is responsible for the development, recommendation, implementation, and maintenance of all policies. The Committee shall:
- Recommend and set long-term investment policies and objectives for the Foundation. This includes studying and selecting asset classes, determining asset allocation ranges, and setting performance objectives for the Foundation and investment managers.
- Where warranted, especially in connection with investable assets, propose recommendations to the Board regarding the management of the Foundation.
- Determine that assets are prudently and effectively managed.
- Monitor and evaluate the performance of all service providers by regular review of reports provided to the Committee and by meetings with the service providers.
- Retain or dismiss outside professionals such as custodian banks, investment managers, and investment consultant.
- Receive and review reports from staff, investment consultant, and investment managers regarding the status of assets within the Foundation.
- Meet periodically to evaluate whether this policy, the investment activities, the risk management controls and processes continue to be consistent with meeting the goals and objectives set for the Foundation.
Responsibilities of the Staff
The staff will be responsible for the day-to-day administration and implementation of the policies set for the Foundation. The staff shall also be the primary liaison between all service providers. Specifically, the staff shall:
- Oversee the day-to-day operational investment activities of the Portfolio subject to policies established by the Board and Committee.
- Assist in establishing long-term investment policies and objectives for the Foundation. This includes studying and selecting asset classes, determining asset allocation ranges, and setting performance objectives for the Foundation and investment managers.
- Communicate the Statement of Investment Policy to outside professionals such as the custodian, investment managers, and investment consultant.
- Work with investment managers, investment consultant, and other outside professionals to meet the overall goals and objectives set for the Foundation.
- Rebalance assets among asset classes, investment styles, and investment management firms within allocation ranges previously approved as directed by the investment committee.
- Ensure that investment managers adhere to the terms of their contracts and that performance monitoring systems are sufficient to provide the Committee with timely, accurate and useful information.
- Receive and review reports from outside professionals regarding the status of the Foundation.
- Issue status reports to the Board and Committee on a periodic basis.
Responsibilities of the Investment Managers
The Investment Managers have full discretion to manage the assets of the Foundation in accordance with the investment objectives and guidelines expressed by this Statement of Investment Policy. It is expected that, as a minimum requirement, investment managers will comply with The Code of Ethics and The Standards of Professional Conduct as established by The CFA Institute. For Investment Managers retained under a mutual fund or commingled fund agreement, it is expected that the fund operate under the specific guidelines outlined in its prospectus or offering memorandum. For all other Investment Managers, not operating under a mutual fund or commingled fund agreement, these Managers shall:
- •Acknowledge in writing the acceptance of responsibility as a fiduciary and to adhere to the investment policies and guidelines prescribed for the Foundation.
- Communicate promptly with staff and investment consultant regarding all significant matters such as:
- major changes in the firm’s investment strategy,
- shifts in portfolio construction,
- changes in the firm’s ownership, organizational structure or professional staffing, and
- other changes of a substantive nature.
- Comply with all laws, legislation, and regulations that involve the Foundation as they pertain to the manager’s duties, functions and responsibilities as a fiduciary.
- Reconcile and certify in writing every month, accounting, transaction, and asset summary data with custodian or trustee valuations and communicate and resolve any significant discrepancies.
- Secure, reconcile and vote proxies on the securities in the portfolio in accordance with its fiduciary duties, professional judgment and in the best interest of the Foundation.
- Effect security trading on a best execution basis. Placement of orders should be based upon the assurance of prompt and efficient execution.
- Issue monthly and/or quarterly reports to the Committee, staff, and investment consultant with regards to portfolio performance.
- Meet as requested with the Committee, staff, and investment consultant to report on the management of assets.
- Fully disclose all fees and expenses on an annual basis.
Responsibilities of the Custodian Bank
The Custodian Bank is responsible for the safekeeping of Foundation assets. The Custodian Bank shall:
- Serve as custodian and act in a fiduciary capacity with respect to the assets of the Foundation.
- Provide safekeeping of securities entrusted to it; collect dividends and interest on these securities; make disbursements and manage cash flows as directed.
- Arrange for timely settlement of all transactions made in the portfolio.
- Provide complete and accurate accounting records including each transaction, income flow and cash flow by the investment manager, and overall portfolio.
- Issue monthly reports of holdings and transactions priced in accordance with industry standards.
- Meet as requested with staff and investment consultant to report on the administration of the assets.
Responsibilities of the Investment Consultant
The principal role of the Investment Consultant is to provide independent advice to the Foundation. The Investment Consultant shall:
- Act in a fiduciary capacity with respect to the University, the Hospital and the assets of the Foundation.
- Monitor and communicate long-term capital market trends and recommend broad-based asset-mix policies to be considered by the Committee and to be implemented by the investment managers, if approved.
- Review investment policies and objectives, and recommend changes as appropriate.
- Provide general advice concerning the allocation of new contributions as well as periodic asset allocation rebalancing.
- Research and recommend investment management firms.
- Monitor and assess service providers and report on changes within the organizations.
- Measure, evaluate, and report the Portfolio’s and investment managers’ performance results on a regular basis.
- Provide education to the Board, Committee, and staff.
- Meet periodically with the Board, Committee, and staff to report on the management of the portfolio.
- Provide support to the Board, Committee, and staff.
The following statements reflect the Committee’s understanding of capital market risk as well as measures adopted to control undue portfolio volatility:
- Risk, as measured by standard deviation, should be commensurate with a passive equivalent portfolio, consisting of representative benchmarks for each asset class and weighted to a similar asset allocation as the Foundation, over rolling ten-year periods.
- The Committee fully recognizes the likelihood of periodic market declines and is willing to accept the possibility of some short-term declines in market value in order to achieve potentially higher long-term investment returns.
- The Committee will consider investments appropriate for the Foundation based on thorough research. Assets of the Foundation are to be diversified to protect against large investment losses and to reduce the probability of excessive performance volatility.
- Diversification of assets is to be achieved by:
- allocating funds to various asset classes and investment styles within asset classes, and
- retaining investment management firm(s) with complementary investment philosophies, styles, and approaches.
The Committee, with assistance from staff and its investment consultant, shall determine the asset allocation strategy for the Portfolio. The Committee and staff will manage the asset allocation mix within the allocation ranges stated by this policy. To implement this strategy, the Committee will select an asset allocation mix which will diversify investments among asset classes, and which is designed to meet the objectives of the Foundation.
The following asset allocation parameters will guide investment activities for the Foundation:
|Asset Class||Target Allocation||Range|
|Non-US Developed Equities||16%||10-40|
|Non-US Emerging Equities||6.5%||0-15|
|US Core Fixed Income||8%||5-30|
- The Committee may diversify assets among multiple investment managers of varying investment styles to the extent that such diversification can be expected to reduce risk without sacrificing expected investment return, or that such diversification may produce greater investment return without incurring any greater risk.
- Cash inflows and outflows will be allocated in accordance with the asset allocation policy.
- The Committee will periodically review the Foundation’s asset allocation.
- Special investment situations may necessitate an amendment to the Statement of Investment Policy and Objectives as deemed appropriate by the Board and Committee.
Role of Asset Classes
- Domestic and International Equity – Equities provide long-term capital appreciation in excess of inflation. International equities are included primarily to enhance return and diversification. The equity portfolio includes both large, mid and small capitalization portfolios of different investment styles, (i.e. growth, value, opportunistic). Additionally, the international equity portfolio is diversified across developed and emerging markets.
- Hedge Funds – Strategies investing in equities, fixed income, derivatives and/or all of the above in an effort to improve the overall portfolio’s diversification and derive stronger overall returns. This can be achieved through absolute results over a full market cycle and/or diversification benefits via lower volatility and lack of correlation.
- Private Equity – By serving as substitutes for publicly traded domestic and international common stocks, the role of these investments is to enhance returns and diversification. These investments are typically long-term in duration and may provide little if any, current income. In order to achieve the target allocation in private equity investments, commitments in excess of the targeted percentages are anticipated. These excess commitments are necessary due to the long lead times required to fully fund a given commitment. While commitments may be drawn down over a period of years, distributions may begin before the initial commitments are fully drawn. Furthermore, these investments may produce negative returns and cash-flows in their early years because of management fees and write-offs. To mitigate this effect, the Foundation will attempt to spread out commitments to these investments over a reasonable time period to achieve vintage year diversification.
- Fixed Income – Fixed income investments are intended to preserve principal during periods of deflation, provide a source of income, and reduce overall portfolio volatility. These portfolios are primarily domestically focused but can include exposure to sectors that may not be included in the specified benchmarks.
- Select Strategies – This allocation is designed to provide flexibility to the portfolio and can include investment opportunities that do not fit well in other asset classes. Our view is that while these strategies may provide diversification, our overall objective is performance over a full market cycle.
All fiduciaries involved in the investment process shall act responsibly. The Investment Committee, the Investment Consultant, each Investment Manager, the Custodian, and each other fiduciary with discretion respecting management of the Fund, shall invest and manage Fund assets as a prudent investor would, by considering the purposes, terms, appropriation requirements, and other circumstances of the Fund.
In satisfying this standard, the fiduciary shall exercise reasonable care, skill, and caution. A fiduciary’s investment and management decisions respecting individual assets must be evaluated in the context of the Fund portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the Fund.
VIII. Policies and procedures
It is expected that the Foundation’ s actual asset allocation will vary from its target asset allocation given the varying returns earned on its investments in different asset and sub-asset classes over a given period of time. The Foundation’s portfolio will be rebalanced to its target normal asset allocation under the following circumstances:
- Utilize incoming cash flow (contributions) or outgoing money movements (disbursements) of the portfolio to realign the current weightings closer to the target weightings for the portfolio.
- The portfolio will be reviewed quarterly to determine if rebalancing is necessary.
- The investment consultant may provide a rebalancing recommendation at any time.
The Committee will periodically review and recommend an endowment payout or spending rate to the Finance Committee. This rate is applied to the three year moving average of market values, as of December 31 of the previous year, to determine funds available to each endowment for the subsequent fiscal year. The current Endowment payout is 4.0% and there is an additional 1% fee to cover expenses associated with the Foundation.
Criteria for Manager Termination
The Committee reserves the right to terminate an investment manager for any reason. Grounds for termination may include, but are not limited to, the following:
Note: Exceptions to the manager guidelines may exist. Investment manager guidelines are meant to foster discussion and possible action. They are not meant to automatically trigger a termination.
- Failure to comply with policies and guidelines for management of the portfolios, including holding restricted issues.
- Failure to achieve performance objectives specified in this policy. • Significant deviation from the investment manager's stated investment philosophy and/or process.
- Loss of key staff members or any other major organizational change. • Failure to meet minimum assets under management if significant account loss occurs.
- Significant asset growth that could negatively impact the strategy/investment process.
- Evidence of illegal or unethical behavior by the investment management firm.
- Unwillingness to cooperate with reasonable requests of the staff for information, meetings or other material related to its portfolios
- Loss of confidence by the Committee in the investment manager.
IX. Expendable funds objectives and guidelines
The investment objective of the Expendable Funds is primarily to preserve the principal of these funds and secondarily to receive interest commensurate with a low volatility strategy.
Each investment manager shall have full investment discretion with regard to security selection as set forth in this Statement of Investment Policy and Objectives. Commingled funds and/or mutual funds, which meet the general intent of the policy guidelines, may be utilized by the Portfolio.
Investment management firms are expected to act in an ethical manner and with integrity in all phases of the investment process. It is expected that, as a minimum requirement, investment managers will comply with The Code of Ethics and The Standards of Professional Conduct as established by The CFA Institute.
- The Expendable Funds shall be invested in fixed income securities and be primarily in money-market type investments and short-intermediate bonds.
- The portfolio should be diversified by issue, industry, sector, and quality and be readily marketable.
- Given the short-term nature of the Expendable Funds, the portfolio should emphasize liquidity and quality. The portfolio should have an average credit quality of A or higher (as measured by the major rating agencies).
X. Evaluation and review process
The Committee will evaluate investment performance on a regular basis. The Committee will review the following:
- The asset allocation set for the Foundation relative to the Statement of Investment Policy and Objectives and capital market outlook.
- The extent to which investment managers have managed their portfolios consistent with their stated investment philosophies and styles.
- The extent to which each investment manager has adhered to the guidelines and policies contained in the Statement of Investment Policy and Objectives.
- The performance of the portfolio and each investment manager to determine whether the objectives for the Foundation are being met.
The Committee will review the Statement of Investment Policy and Objectives periodically to determine that it continues to be appropriate in view of changes within the Portfolio and the capital markets. The Committee, as deemed appropriate, may consider exceptions to the Statement of Investment Policy and objectives.
Appendix A: Strategic Benchmark
The Foundation has adopted the following strategic asset allocation. All figures listed refer to an asset class’s percentage of the total portfolio. The representative benchmark will be used to gauge the relative success of each asset class and the total fund. As we build our Private Equity allocation, we will have intentional overweight positions to other areas of the portfolio. These are reflected here, identified as “x/y%
|Asset Class||Target Allocation||Benchmark|
|U.S. Large Cap Equity||12/16%
|US Small Cap Equity
|International Developed Equity||16/19%||MSCI EAFE|
|Emerging Markets||6.5%||MSCI EM|
|Select Strategies||10%||MSCI AC World|
|Core Fixed Income||8/10%||Barclays Aggregate|
|High Yield Fixed Income||3%||ML High Yield BB-B|
|Hedge Funds||10/15%||HFRI FOF|
|Real Return||4%/2%||Bloomberg Commodities|
|Private Equity||20%/8%||Cambridge All PE|
|Cash/Cash Equivalent||1%||US T-Bills|
Appendix B: Asset Class Definitions/Guidelines
The following guidelines are established for separately managed accounts and utilized during initial screens for all other investment vehicles. Furthermore, the Committee may use these guidelines for the ongoing review of all investments held within the Portfolio and may choose to liquidate any investment should it violate these guidelines.
- The domestic equity portfolio will be diversified according to economic sector, industry, number of holdings and other investment characteristics. However, it is recognized that any actively managed portfolio will not be as diversified as the market. To produce overall diversification, equity managers will be selected to employ different management strategies that together achieve the desired degree of diversification.
- Domestic equity managers are permitted to hold up to 15% of their portfolio in American Depository Receipts (“ADRs”) or foreign domiciled companies whose equity securities are traded in U.S. markets.
- No more than 5% at cost or 10% at market of a manager’s portfolio may be held in the securities of a single issuer.
- Short selling of securities is prohibited.
- Derivative instruments such as financial futures and options may not be used without the prior approval of the Committee.
- A manager may only deviate from these guidelines with advance written permission of the Committee.
- The manager is restricted from purchasing any security the Committee deems inappropriate for the portfolio. The Committee may select such securities at any time and the investment manager must liquidate the investment in such security upon notification.
The following definitions may be used to distinguish between developed and emerging international securities.
International Developed Equity: Listed equity securities traded on developed non-U.S. markets. Developed markets are defined as those included in Morgan Stanley’s EAFE index plus Canada.
Emerging Markets Equity: Listed equity securities traded on emerging non-U.S. markets. Emerging markets are defined as any market that is not included in Morgan Stanley’s EAFE index plus Canada.
All restrictions listed above for Domestic Equity, other than item number two (ADR’s), also applies to International Equity with the following additions:
- Managers must hold securities in a minimum of three (3) countries at all times.
- Currency exposure may only be hedged back to the U.S. dollar. The decision to hedge is left to the manager’s discretion. Derivative instruments may be used to achieve currency hedging as permitted under this Policy.
U.S. Fixed Income
- The duration of a manager’s portfolio should be within 80% and 120% of the duration of its market benchmark.
- Managers are permitted to invest in the following classes of fixed income securities:
- Bonds or notes issued or guaranteed by the U.S. Government or a U.S. Government Agency backed by the full faith and credit of the U.S. Government
- Mortgage-backed securities
- Corporate bonds issued in the U.S. and denominated in U.S. dollars
- Asset-backed securities
- Bond managers are expected to maintain an average quality rating for their portfolio that does not fall below an S&P rating of AA-.
- No more than 5% at market of a manager’s portfolio may be held in the securities of a single corporate issuer. This restriction does not apply to securities issued and guaranteed by the U.S. Government or a U.S. Government Agency backed by the full faith and credit of the U.S. Government.
- Derivative instruments may be utilized by a manager in order to obtain more efficient exposure to a specific type of security. However, at no time, may derivative instruments be used to leverage the portfolio. In addition, it is expected that a manager will have thoroughly tested the behavior of the derivative instrument under a variety of market conditions before purchasing the security for the portfolio.
- A manager may only deviate from these guidelines with advance written permission of the Committee.
In order to enhance portfolio results, the Foundation may elect to invest in alternative investment strategies such as absolute return hedge funds, equity hedge funds, private equity, real estate or commodities.
These investments are made with the intention of raising portfolio returns and/or lowering total volatility. In most cases, these investments will be implemented via limited partnerships, limited liability companies, business trusts and foreign (non-US) corporations. Therefore, restrictions are established by the offering documents for each partnership.
Investment policy statement, 2018