Investment Guidelines

Statement of Investment Policy

The Trustees of the Funds of the Protestant Episcopal Church in the Diocese of Virginia hereby establish this Investment Policy Statement for the purpose of setting 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 Funds’ assets. We recognize that changing economic and market conditions may make it impossible for the Funds to precisely mirror all aspects of this investment policy at any point in time and, as such, we agree and understand that this policy is to serve primarily as a general framework within which the Funds are to be managed. While it is understood that each Participant in the Funds has the right to withdraw its investments at any time, 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.

The Trustees may elect to delegate the investment management duties for all or some part of the Funds to one or more investment manager(s) who shall be governed by the guidelines established by this Policy Statement. The Trustees may also elect to use commingled funds and shall select funds whose investment policies closely comply with the guidelines outlined below.

The Trustees will authorize the distribution in the fourth quarter of each calendar year of a percentage of the average of the Funds’ market value as of September 30 for the prior thirty-six months. The distribution percentage will be reviewed annually for appropriateness in the then current economic conditions. To support the continuous growth of assets above and beyond inflation, the Trustees have currently set the targeted annual payout rate at 5 percent. A Participant may request payouts at a different percentage, subject to the approval of the Trustees.

The management goal for the Fund is to preserve and enhance its real (inflation-adjusted) purchasing power while providing a steady and consistent spending stream for the support of the Fund Participants. Based on this management goal, the investment objective for the Fund is to attain a real total return of at least 5 percent per annum over the long term.

The asset structure should reflect a proper balance of the Funds’ needs for liquidity, preservation of purchasing power, long term growth of principal and the risk tolerance of the Trustees. To achieve its investment objective, the Fund shall be divided into three parts: a bond fund, an equity fund and a short-term fund. The purpose of the bond fund is primarily to provide a hedge against deflation. 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 Trustees recognize that pursuit of this objective will entail investment in securities with significant price variability. The short-term fund is to provide liquidity sufficient to meet short-term withdrawal needs according to the spending policy. Target allocations and ranges for each fund are as follows:

Cash flow (i.e., from deposits or pending withdrawals) will be allocated to investment managers by the Treasurer with the objective of rebalancing the allocation among funds and managers in accordance with the policies detailed herein. Should allocations exceed the tactical ranges, the Treasurer shall rebalance to within the ranges by transferring funds among managers.

The investment objective for the bond fund is to match or outperform, net of fees, the Lehman Brothers Government/Corporate Bond Index. To ensure that this objective is met, the performance of each bond fund manager will be measured against said index and against an appropriate bond manager universe.

The duration of the bond fund should range from three to six years. Obligations issued and paid in foreign currency are limited to no more than 25 percent of the fund.

The average quality of the bond fund shall be "AA" or higher, and no investments are permitted in securities less than "BBB" quality without specific Trustee approval. Credit risk and currency risk should be avoided.

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 for the short-term fund.

The investment objective for the short-term fund is to outperform, net of fees, a 91-day T-Bill index. To ensure that this objective is met, the performance of each short-term fund manager will be measured against said 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 fund is designed as a stable, temporary repository for funds, its average duration should never be greater than 12 months.

Because of the short-term fund's stability and liquidity requirements, its investments are permissible only within securities with certain minimum credit standards as follows:

1. obligations of, or guaranteed by, the US 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 Investors Service;
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 qualifying by the guidelines above;
7. money market funds from commercial banks and other major investment advisors containing securities qualifying by the guidelines above.

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.

The investment objective for the equity fund is to match or outperform, net of fees, the S&P 500 stock index. To ensure that this objective is met, the performance of each equity manager will be measured against an appropriate equity index (usually, but not always, the S&P 500) and against an appropriate manager peer group.

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 market value of the equity managers fund at purchase. Additionally, no single major industry shall represent more than 25 percent of the market value of the equity managers fund.

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 broadly affecting the entire equity market. 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 US stock market, and growth potential that equals or exceeds that of US stocks. These assets may include foreign stocks and other assets, termed “Equity Substitutes” that meet these criteria.

Equity 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 be measured against stock indices as described above.

All transactions should be entered into on the basis of best execution, which means best realized net price. Commissions may be designated for payment of services rendered to the Fund Assets in connection with its management, providing that the designation of these commissions does not hinder the manager's ability to achieve best execution.

All objectives and policies are in effect until modified by the Trustees. The Trustees will review these at least annually for their continued appropriateness. The deployment of both individually managed portfolios and total Fund Assets will be monitored for consistency of investment philosophy, return relative to objectives, and investment risk as measured by asset concentration, exposure to extreme economic conditions, and market volatility. Individually managed portfolios will be monitored by the Trustees on an on-going basis, but results will be evaluated on a rolling five-year basis. Total Fund results will also be evaluated on a rolling five-year basis.