This Investment Policy Statement (IPS) sets forth the principles and guidelines for the prudent and effective management of Seattle University’s endowment fund assets. The IPS is established by the University’s Board of Trustees and governs the parties involved in managing the investments of the endowment fund.
II. STATEMENT OF DUTIES AND RESPONSIBILITIES
Various parties contribute to the successful management of the endowment fund. Seattle University expects the following parties to perform their respective duties and responsibilities in accordance with accepted fiduciary standards, which require among other things, that they act in the sole interest of the University, in good faith, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.
A. Board of Trustees & the Investment Committee
The Board of Trustees (Board) has final authority in defining the strategic investment objectives and ensuring prudent oversight and governance of all aspects of endowment management. The Board shall set all policies of the endowment consistent with applicable laws, rules, and regulations and all subsequent amendments thereto related to nonprofit corporations organized solely for the use and benefit of education purposes. Additionally, the Board shall provide prudent oversight on all aspects of endowment management.
The Board shall appoint an Investment Committee (Committee) with the authority to implement this IPS, monitor asset allocation and investment performance, and select and evaluate investment consultants, managers and custodians.
B. Investment Committee and the Socially Responsible Investment (SRI) Advisory Working Group
The Investment Committee will appoint one member to chair an SRI Advisory Working Group (Working Group). The Working Group will hear, review and make recommendations to the Committee on concerns of the campus community relating to Socially Responsible Investing (SRI) pertaining to the Endowment Fund. The Working Group will serve as the liaison between the campus community and Investment Committee. There should be representatives on the Working Group from the campus community, including faculty, staff and students who have a background or interest in social responsibility and ethics as applied to investment decisions. The Working Group shall have no power or authority, other than to make recommendations to the Investment Committee.
C. Chief Financial Officer/Vice President for Finance and Business Affairs
The Chief Financial Officer/Vice President for Finance and Business Affairs will have the following duties and responsibilities:
- Invest assets with managers as determined by the Committee;
- Organize meetings of the Committee;
- Produce investment reports, studies and materials with the assistance of investment consultants; and
- Coordinate communications between the Committee, the Board, investment managers, and investment consultants.
D. Investment Consultants
At its discretion the Committee may retain outside consultants to assist in overseeing the endowment fund and achieving the investment objectives set forth in this IPS. The duties and responsibilities of the investment consultant may include assistance or services in some or all of the following areas:
- Provide proactive advice and relevant materials to the Committee on investment goals and objectives, investment structure and underlying investment options;
- Assist in the selection of investment managers;
- Monitor the ongoing performance of the investment options and investment managers;
- Assist in the selection of new investment options and the termination of options;
- Provide quarterly performance evaluation reports, including absolute and relative performance of each of the investment options relative to appropriate market indices and universes; and
- Meet as requested with the Committee to discuss investment strategy and review performance of the endowment fund.
E. Investment Managers
Investment managers retained by the University will have the following duties and responsibilities:
- Take actions and manage assets consistent with this IPS;
- Report the following information on a quarterly basis: total return net of all commissions and fees, additions and withdrawals from the account, current holdings at cost and market value, and sales and purchases for the quarter;
- Maintain regular communication with the Committee about investment strategy and outlook;
- Inform the Committee in writing as soon as practicable of any significant and/or material changes pertaining to the investment of fund assets, including, but not limited to: investment strategy, portfolio structure, tactical approaches, ownership/organizational structure, financial condition, professional staff, guideline changes, all SEC and other regulatory agency proceedings affecting the firm;
- Attend meetings, as requested by the Committee, to present portfolios and investment results; and
- Provide on an annual basis a copy of its form ADV, Part I and Part II to the Chief Financial Officer/Vice President for Finance and Business Affairs.
F. Custodian Bank
The custodian bank is responsible for safekeeping securities, collections, disbursements, and providing periodic accounting statements. In addition, the custodian bank will settle all separate account transactions and credit all income received from the University’s investments.
III. ENDOWMENT FUND SPENDING POLICY
The purpose of the endowment fund is to preserve its purchasing power, while providing a continuing and stable funding source to support the overall mission of the University. To accomplish this objective, the endowment fund seeks to generate a total return that will exceed its annual spendable amount, all expenses associated with managing the fund and the eroding effects of inflation.
The University’s spending policy allocates total earnings from the portfolio between current spending and reinvestment for future earnings and has been designed with the following objectives in mind.
- Account for the fact that the cost of an endowed program will increase over time relative to the increases experienced by the underlying activity. For example, the cost of an endowed chair will typically increase commensurably with faculty salary increases. If the endowment is to cover a reasonably constant portion of current operating expenses, endowment spending must increase at least as fast as inflation. If the growth of endowment spending is to be sustained indefinitely, the corpus of the fund must also increase at the rate of inflation after annual spending withdrawals and management, custodial, and consulting expenses.
- Preserve the purchasing power of the endowment after adjustment for the Higher Education Price Index.
- Preserve the purchasing power of the endowment spending withdrawals.
- Provide a small increment of endowment growth in excess of inflation.
Currently, the University uses a spending policy (i.e., spending per unit divided by an average of the trailing 12 quarters of net asset values per unit) of 4.5 percent. The Committee will periodically review the policy and, when appropriate, make recommendations to the Board consistent with these objectives.
IV. INVESTMENT OBJECTIVES
A. Long-Term Rate of Return Objective
The endowment fund’s primary long-term investment objective is to attain an average annual total return (net of investment management fees) of at least the Higher Education Price Index (HEPI) plus 4.5 percent over the long term (a minimum five-year period). The return objective may be difficult to attain in every five-year period but should be attainable over a longer time period. The Committee will strive to achieve these objectives within acceptable risk levels defined by this IPS. In addition to the absolute investment objective, the endowment fund is expected to earn annualized returns in excess of a policy portfolio blended customized benchmark to be selected from time to time by the Committee, measured over a minimum five-year period. The policy portfolio should reflect the Committee’s view of what investment strategy mix will best accomplish the long term objective. Peer group comparisons are secondary to the above objectives.
B. Risk Tolerance
The Committee will consider factors, including, but not limited to, variability of return, spending policy and liquidity when discussing and analyzing portfolio risk. Reasonable consistency of returns is desirable as a means of providing stability to the process of managing all University financial assets. Asset allocation guidelines and the investment manager structure should ensure adequate diversification in order to reduce the volatility of investment returns. Implementation may result in portfolio performance that deviates from policy but not so much as to alter the general characterization of risk as suggested by the policy portfolio.
C. Other Investments
For investments other than the endowment fund, the Committee will consider factors, including, but not limited to, liquidity requirements and the University’s tolerance for risk.
V. INVESTMENT POLICIES
A. Endowment Investment Constraints
- Liquidity: The fund requires no sizable liquid reserves, except for investment purposes and spending requirements. Potential sources of liquidity include new contributions and the sale of marketable securities, if necessary, to raise cash on short notice.
- Time Horizon: The fund has a long time horizon, which is typical for most endowments. The horizon extends far beyond a normal market cycle and, for the purpose of investment strategy, can be considered to be in perpetuity.
- Laws and Regulations: The University's investment and endowment polices are intended to comply with all applicable federal and state laws and regulations, including without limitation the Washington State Uniform Prudent Management of Institutional Funds Act (UPMIFA). The University classifies as permanently restricted net assets, the original value of gifts to donor-restricted endowments, the original value of subsequent gifts made to donor-restricted endowments, and income or appreciation of donor-restricted endowments that donors have stipulated are not expendable.
- Tax Considerations: The Endowment Fund is exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code. Consequently, tax considerations are not a meaningful constraint for the fund, other than the fact that investments with tax-exempt features should be avoided under all but the most unusual circumstances. In addition, the potential for unrelated business income tax (UBIT) should be evaluated when making investment decisions. Although UBIT investments are not restricted, they should be kept to a minimum in the total endowment fund portfolio.
- Concentration Constraints: All portfolios will be diversified. With the exception of passive strategies, no manager will oversee more than 10 percent of the portfolio at an investment’s inception; however, it is acceptable, at the Investment Committee’s discretion, that the market value subsequently increase above 10 percent, but not more than 12%, due to market value appreciation. Private equity investments will be exempt from these constraints.
- Proxy Voting: All proxies will normally be voted by the individual investment managers and will be carefully considered in the best interest of the endowment fund. The Chief Financial Officer/Vice President for Finance and Business Affairs may vote proxies or instruct managers to vote them consistent with direction from the Committee.
- Sustainability: Consistent with the University’s Jesuit Catholic values, the Committee will consider the University’s commitment to ethics and social responsibility in making investment decisions. While the Committee remains committed to its fiduciary duty to the University’s long-term financial growth and sustainability, it also recognizes the value of non-traditional investment opportunities in providing a reasonable return as well as furthering the University’s mission and values.
- Specific Constraints: The Endowment Fund may not own any direct investments in any fossil fuel companies listed on the “Carbon Tracker 200” or the “Filthy 15”.
B. Endowment Asset Allocation
- The endowment fund will be a broadly diversified portfolio with assets allocated in a manner that is intended to achieve the return objective, net of fees, of the Higher Education Price Index (HEPI) plus 4.5 percent. The purpose of diversification is to provide reasonable assurance that no single security, or class of securities, will have a disproportionate impact on the performance of the total endowment fund. Thus, the risk level associated with the portfolio investment is reduced.
As requested by the Board or from time to time on its own initiative, the Committee will make recommendations to the Board for changes to the long-term strategic asset allocation guidelines and tactical ranges. Asset allocation guidelines will reflect both the diversified nature of the portfolio and the need to emphasize equity-related investments to achieve the return objective. In addition, the endowment’s vulnerability to inflation will dictate more of an emphasis on equity than on fixed income investments. Allowable ranges will be determined to provide flexibility for shifts in the actual asset allocation resulting from differing market conditions and cycles. These ranges are not binding or intended to force an automatic rebalancing. Instead, the ranges should trigger an asset allocation review by the Committee. The Chief Financial Officer/Vice President for Finance and Business Affairs may transfer funds between and make subscription commitments to managers that have been approved by the Committee in order to maintain the balance of the fund within the approved ranges.
- The Committee will make decisions regarding allocations among investment strategies or the addition of new investments when such actions are expected to produce incremental return, reduce risk, or when conditions of a specific gift so require. The investment characteristics of an asset class - including expected return, risk, correlation, liquidity, and its overall role (high real returns, inflation or deflation hedge) in the portfolio – will be analyzed when making such decisions. It is expected that extreme positions will be avoided to prevent the possibility of a significant reduction in value given adverse market conditions.
- Each investment asset class has a defined role within the overall asset allocation structure of the endowment fund. These roles are:
- Domestic and International Equities - Provide long-term capital appreciation in excess of inflation.
- Fixed Income - Domestic or International - Preserve principal during periods of deflation, provide a source of current income, and reduce overall endowment volatility.
- Real Assets - Serve primarily as a hedge against high, unanticipated general price inflation.
- Venture Capital and Private Equity - Provide high real returns and, to a lesser degree, control volatility and hedge against specific economic risks.
- Marketable Alternatives - Diversify the overall portfolio and protect against declines in equity markets without substantial degradation of equity class returns.
C. Additional Guidelines
- All investment managers and investment consultants hired by the University are expected to act in an ethical manner and with integrity in all phases of the investment process. At a minimum, investment managers will comply with the Code of Ethics and the Standards of Professional Conduct as established by the Association for Investment Management and Research (AIMR) and report to the Committee any material violation of these standards.
- Investment firms managing endowment fund portfolios are required to adhere to instructions from the Chief Financial Officer/Vice President for Finance and Business Affairs regarding socially responsible investing.
- For separately managed accounts, individual statements of investment objectives and guidelines will be provided to each endowment fund portfolio manager to address issues such as performance benchmarks, risk parameters, industry or single holding limitations, and quality issues.
- Derivative instruments of various types are widely used by investment managers and can be advantageous for controlling investment risk, increasing returns, implementing strategies quickly and reducing costs. The University permits the prudent use of derivatives in a manner consistent with overall investment objectives and policies. When meeting with the University, investment managers should clearly state objectives and limitations of derivatives and the securities used.
VI. INVESTMENT MANAGER SELECTION AND PERFORMANCE EVALUATION
A. Manager Selection/Evaluation Criteria
The Committee will use due diligence in selecting/evaluating investment managers. In addition to evaluating a firm’s historical performance record against a variety of benchmarks, the Committee will consider a firm’s ethical and financial viability, environmental, social and governance factors, organizational structure, experience of key personnel, and investment philosophy.
B. Endowment Performance Evaluation
In order to evaluate the performance of endowment fund investments, the returns of the endowment fund will be measured against a custom benchmark composed of indices that serve as reasonable proxies for the asset classes contained in the policy portfolio. The performance of individual managers within the asset classes may be measured against more specific style or sector indexes as appropriate. The total endowment fund is expected to outperform the blended benchmark over periods of five years or more.
Approved by the Seattle University Board of Trustees September 13, 2013
Amended by the Seattle University Board of Trustees September 11, 2014
Amended by the Seattle University Board of Trustees February 23, 2017