Investment Policy Statement
The Trustees of the Funds
(Adopted December 14, 2011)
EXECUTIVE SUMMARY
Type of Entity: Tax-exempt public foundation
Current Assets: $90,038,016.62, as of date of adoption.
Distribution Policy: 4.75%
Modeled Return: 5.50%
Asset Allocation: Lower Limit Target Upper Limit
Equity Fund
Stocks 42% 45% 50%
Equity Substitutes 25% 30% 35%
Bond Fund 15% 20% 28%
Short Term Fund 0% 5% 5%
BACKGROUND
The Trustees of the Funds of the Protestant Episcopal Church in the Diocese of Virginia, more commonly known as The Trustees of the Funds, was chartered by the General Assembly of Virginia in 1892 to raise, receive, manage and disburse funds for the support of the Episcopate, churches, related organizations, clergy, widows and orphans and for other purposes of the Diocese of Virginia. With roots to October 31, 1754, the Trustees of the Funds was created to support the Diocese of Virginia and, to use current language, is considered a related organization of the Diocese of Virginia. The Trustees are elected to three-year terms from a slate of nominees approved by the Annual Council of the Diocese of Virginia.
PURPOSE OF INVESTMENT POLICY STATEMENT
The purpose of this Investment Policy Statement (IPS) is to set forth the objectives and policies of the Trustees, guidelines to be used for the selection, monitoring and evaluation of investment managers, and guidelines to investment managers for the prudent investment management of the Fund’s assets.
This IPS will further the Trustees’ objectives, defined in the various sections that follow, by:
1. Stating in written form the Trustees’ expectations, attitudes and guidelines for investment of the Fund’s assets.
2. Specifying an investment structure, including various asset classes, investment management styles, allocations and ranges expected to produce overall diversification and acceptable total investment return over the investment time horizon.
3. Establishing formal criteria to select, monitor, evaluate and compare performance results of investment managers on a regular basis.
4. Encouraging effective communication between the Trustees, Investment Advisor(s), Investment Manager(s) and other interested parties.
5. Complying with all applicable duties of fiduciary prudence, due diligence, legal and regulatory compliance.
MANAGEMENT OBJECTIVES
The management objective for the Trustees is to preserve and enhance the Fund’s real, inflation-adjusted, purchasing power while providing a steady and consistent spending stream in support of the respective missions of the Fund’s Participants.
To support distributions and preserve purchasing power, the Trustees’ objective is to maximize investment return within reasonable and prudent levels of risk. While it is understood that each Participant in the Funds has the right to withdraw its investments at any time according to current withdrawal policy, it is the express intent of the Trustees to invest the Funds for the long term and accept that level of portfolio risk consistent with achieving long term growth and preservation of capital.
In pursuit of this objective, the Trustees have set an annual distribution rate policy range of between four percent to five percent, with the current rate being 4.75%. The annual distribution, calculated using the current distribution rate, is based on a rolling 12-quarter market value average of the Fund. The annual distribution is authorized by the Trustees after the third quarter of each calendar year.
The distribution rate will be reviewed annually for appropriateness in prevailing economic conditions. A Fund Participant may request a different payout percentage, subject to approval by the Trustees. To serve these management objectives, the investment objective of the Fund is to attain a real total return of at least 5.5 percent per annum over the long term.
ASSET ALLOCATION GUIDELINES
The Trustees believe that long-term performance, in large part, is primarily a function of asset class mix. The Trustees have reviewed the long-term performance characteristics of the broad asset classes, focusing on balancing the risks and rewards of using specific asset classes. The Trustees are conscious of the risk tolerance of the Participant electing to place assets with the Fund, and that is taken into consideration when determining asset allocation. The Fund’s asset structure should reflect a proper balance between the need for liquidity, preservation of purchasing power, long-term growth of principal and the risk tolerance of the Trustees.
To achieve this balance, the Fund shall be divided into three parts: an Equity Fund, a Bond Fund and a Short-Term Fund. Target allocations and ranges for each fund are as follows:
Asset Allocation: Lower Limit Target Upper Limit
Equity Fund
Stocks 42% 45% 50%
Equity Substitutes 25% 30% 35%
Bond Fund 15% 20% 28%
Short Term Fund 0% 5% 5%
Cash flow, such as deposits or pending divestments, will be allocated to rebalance any deviation from the target allocations, according to the policies detailed herein. Should no cash flow be pending, the Secretary-Treasurer shall rebalance by transferring among the funds.
Guidelines for the Equity Fund
The purpose of the Equity Fund is to provide an engine of real total return sufficient to drive the Fund to its return objective. The investment objective for the Equity Fund, as a whole, is to match or outperform, net of fees, the Wilshire 5000 stock index. To ensure that this objective is met, the performance of each equity manager will be measured against an appropriate equity index and against an appropriate universe of its peers.
Decisions as to individual security selection, security size and quality, number of industries or holdings, current income levels and turnover are left to broad manager discretion, subject to usual standards of fiduciary prudence.
However, in no case (excepting mutual fund shares) shall a single security exceed 10 percent of the Equity Fund’s market value at purchase. Additionally, no single major industry shall represent more than 25 percent of the market value of the Equity Fund. Foreign stocks may be purchased; however, the total investment in non-U.S. stocks, including foreign equity substitutes (further defined below) shall not exceed 50 percent of the market value of the Equity Fund portfolio.
To provide general control over liquidity, the Trustees maintain a target that at least 75 percent of the Fund will be considered fully liquid and that at least 90 percent of the Fund will be in investments that can be liquidated within two years. No more than 10 percent of the Fund may be in investments that are illiquid beyond two years (“illiquid”). Moreover, illiquid investments with lock-up periods will be diversified by inception date and by liquidation date. In this way, the Fund will hold illiquid investments with different maturities so that at all times some will be in the funding stage and others will be in the liquidation stage.
The Trustees do not permit separate account managers to utilize any investment asset of an underlying company whose primary or core business is the production or development of tobacco products.
The Trustees recognize that, due to the nature of equity markets, the Equity Fund will be subject to “market risk”, which is to say periods of declining prices. This risk is exacerbated during conditions of unanticipated inflation. To mitigate this risk, the Trustees will increase the diversity of the Equity Fund by investing portions of the Fund in assets that have a moderate or low covariance with the U.S. equity market, and growth potential that equals or exceeds that of U.S. stocks. These assets may include foreign stocks, real-asset investments in private funds and other assets termed “Equity Substitutes."
Equity investment managers may, at their discretion, hold investment reserves of either cash equivalents or bonds without limitation in terms of asset size or period of time, but with the understanding that performance will still be measured against the appropriate index and peer group as described above.
Guidelines for the Bond Fund
The purpose of the Bond Fund is primarily to provide a hedge against deflation. Its objective is to match or outperform, net of fees, the Barclay’s Government/Credit Bond Index. To ensure that this objective is met, the performance of each bond manager will be measured against an appropriate index and against an appropriate universe of the manager’s peers.
The duration of the Bond Fund should range from three to six years. The average bond rating of the Bond Fund’s holdings shall be “AA” or higher, and no investments are permitted in securities rated less than “BBB”. Credit risk and currency risk should be carefully considered when purchasing obligations denominated in foreign currencies, and such holdings are limited to no more than 25 percent of the Bond Fund. Equities, convertible bonds and tax-free municipal bonds are excluded.
Obligations issued or guaranteed by the U.S. Government may be held without limitation. All other securities in the Fund shall be well diversified with respect to type, industry and issuer in order to minimize default exposure. To the extent that cash equivalents are used, their quality shall be governed by the guidelines of the Short-Term Fund.
Guidelines for the Short-Term Fund
The purpose of the Short-Term Fund is to provide liquidity sufficient to meet short-term withdrawal needs of Participants and capital call requirements of contracted manager commitments. Its investment objective, as a whole, is to outperform by one-percent per annum, net of fees, a 91-day T-Bill index. To ensure that this objective is met, the performance of any Short-Term fund manager will be measured against an appropriate index.
Money market instruments, as well as bonds, may be used in the Short-Term Fund, but equities and convertible bonds are excluded. Since the Short-Term Fund is designed as a stable, temporary repository for funds to facilitate operations and management, its average duration should never be greater than 12 months.
Because of the Fund’s stability and liquidity requirements, its investments are permissible only within securities with certain minimum credit standards. These standards allow:
1) Obligations of, or guaranteed by, the U.S. government;
2) Corporate bonds rated “A” or higher by Moody’s or Standard & Poor;
3) Commercial paper rated Prime-3 or higher by Moody’s;
4) Negotiable certificates of deposit, bankers’ acceptances and floating rate notes issued by U.S. chartered banks rated “B” or higher by Thompson’s Bankwatch, Inc.;
5) Interest rate futures contracts, providing that such contracts are used only for the purpose of duration management;
6) Repurchase agreements secured by securities consistent with the guidelines above;
7) Money Market funds from commercial banks and other major investment managers containing securities consistent with the guidelines above. Short-Term obligations denominated in foreign currencies are not permitted in the Short-Term Fund.
In general, the Short-Term Fund shall be well-diversified with respect to type, industry and issuer in order to minimize risk exposure. However, obligations issued or guaranteed by the U.S. Government may be held without limitation.
DUTIES AND RESPONSIBILITIES
Trustees: As stewards of the Fund, the Trustees’ fiduciary duties include:
1) Preparing and periodically reviewing the Investment Policy Statement.
2) Prudently selecting and reviewing asset allocations
3) Prudently diversifying the Fund’s assets to meet the Policy’s risk/return profile.
4) Controlling and accounting for all expenses of investment, record-keeping and administration associated with the Fund.
5) Selecting, monitoring and supervising all service vendors.
6) Avoiding prohibited transactions and conflicts of interest.
Investment Advisor: The Trustees may elect to delegate investment duties to an objective, third-party Investment Advisor to assist in the overall investment process. The Advisor will be responsible for guiding the Trustees through a disciplined and rigorous investment process governed by the guidelines of this Policy. The Advisor’s process will be designed to enable the Trustees to meet the fiduciary duties outlined above.
Investment Managers: The Trustee’s and Investment Advisor’s investment process will be implemented by engaging investment managers who will execute specific investment decisions including security selection and price decisions. The Managers’ duties will include:
1) Managing the assets under their supervision in accordance with the provisions of their respective service agreements, prospectus or trust agreement.
2) Exercising full discretion on buying, managing and selling assets under their supervision.
3) Effecting all transactions on a “best price and execution” basis. If a Manager utilizes transactions of Fund assets to facilitate “soft dollar” relationships, detailed disclosure will be made to the Trustees.
4) Using the skill, care, prudence and due diligence that experienced professionals would use in similar circumstances, in accordance and compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and all applicable laws, rules and regulations.
5) Voting promptly all proxies and related actions in a manner consistent with the long-term interests and objectives of the Fund as outlined in this IPS. Each manager shall keep detailed records of the voting of proxies and related actions, and will comply with all applicable laws, rules and regulations.
6) Communicating with the Trustees all significant changes pertaining to the assets under their supervision and to their firm itself. Changes in management, ownership, financial condition or organization structure are examples of changes about which the Trustees should be informed.
7) If managing a separate account (as opposed to a mutual fund or commingled account), acknowledging the co-fiduciary responsibility by signing and returning a copy of this IPS.
Custodian: The Trustees may elect to delegate record-keeping, custody and administrative duties to an institutional Custodian. The duties of the Custodian include:
1) Maintaining separate accounts
2) Valuing the Fund’s holdings
3) Collecting all income and dividends owed to the Fund
4) Disbursing all distributions from the Fund
5) Settling all transactions initiated by the Investment Managers
6) Providing monthly reports that detail transactions, cash flows, securities held and their values and change in value since the previous report.
MONITORING OF PERFORMANCE, PARTIES AND POLICY
Investment Managers: The Trustees acknowledge that the securities markets are characterized by fluctuating rates of return, particularly during short-term periods. With such fluctuations in mind, the Trustees intend to evaluate Manager performance from a long-term perspective.
The ongoing review and analysis of Managers is equally important as is the original due diligence during the Manger selection process. Mangers’ performance will be monitored regularly, and it is at the Trustees’ discretion to take corrective action by replacing a Manager if they deem it appropriate at any time.
On a timely basis, but not less than semi-annually, the Trustees will meet to review each Manager with criteria including:
1) Investment results as compared with the appropriate index and their peer group.
2) Adherence to a style of investment discipline consistent with this Policy.
3) Material changes in Manager personnel, organization or philosophy.
4) Any regulatory or legal matters affecting the Manager
Investment Advisor: The Trustees recognize that maintaining a rigorous, disciplined investment process is essential in the performance of their fiduciary duties to the Fund Participants, and that the Investment Advisor is their principal guide in that process. The Trustees will periodically, and no less than every three years, review the Advisor’s services including:
1) Market guidance and developments in the investment profession and fiduciary field
2) Assistance in reviewing and adhering to asset allocations
3) Due diligence research and selection of Investment Managers.
4) Monitoring, analysis and reporting on Investment Managers.
5) Communication and responsiveness on an ongoing basis.
The Advisor’s performance will be monitored regularly and it is at the Trustees’ discretion to replace the Advisor if they deem it appropriate at any time.
Cost Review: The Trustees will review at least annually all costs associated with the management of the Fund’s investment process, including:
1) Expense ratios of each investment option versus other options, indices and peers
2) Whether each manager is adhering to the standard of “best execution” in trading securities
3) Advisor’s fees as measured against similar professionals in the field
4) Custody fees as measured against similar professionals in the field.
5) Administrative costs, to ensure appropriate balance between capabilities and costs.
Investment Policy Review: The Trustees will review this IPS regularly, and not less than every three years, to determine whether stated investment objectives are still relevant and feasible. It is not expected that short-term fluctuations in the financial markets would result in adjustments to this Investment Policy.
