University of Virginia Library

ATTACHMENT B
May 19, 1983 UNIVERSITY OF VIRGINIA
CONSOLIDATED ENDOWMENT FUND
INVESTMENT OBJECTIVES AND POLICIES

1. The Consolidated Endowment will be divided into four parts: "equity", "fixed income", faculty mortgage loans, and other internally managed funds.

2. The "equity fund" is designed to provide long term capital appreciation. It should normally represent 75-80% of total endowment assets at market value. Although the actual percentage of equities and equity reserves will fluctuate with market conditions, levels in excess of 75% will be closely monitored by the Finance Committee and sales will automatically be implemented when the ratio exceeds 85%. The Finance Committee of the Board of Visitors may change any of these ratios at its discretion, but it is anticipated that such changes will be Infrequent.

3. The investment objective of the "equity fund" is to earn a real total return (adjusted by the Consumer Price Index) equal to the University's spending from endowment. In addition, "equity fund" portfolios should out-perform the S&P 500 stock average net of fees and the A.G. Becker and Cambridge Associates common stock manager means. These objectives are to be measured over running five year periods. It is recognized that the real return objective may be difficult to attain in every five year period, but should be attainable over most five year periods.

4. "Equity fund" managers would normally invest in common stocks. However, such managers may at their discretion hold investment reserves of either money market instruments or bonds without limitation in terms of asset size or period of time with the understanding that performance will be measured against the common stock indices listed above.

5. "Equity fund" assets may also be allocated by the Finance Committee to separately managed portfolios of foreign securities excluding ADR's (up to 10% of market value), real estate equities (up to 10% of market value), and venture capital (up to 2% of market value). These ratios are also subject to review by the Finance Committee, but changes are expected to be infrequent.

6. The purpose of the fixed income portion of Consolidated Endowment is to provide a hedge against deflation and to increase current return relative to an all equity fund. The "fixed fund" should represent 15% or more of total assets. Should mortgage commitments decline below 10% for a significant period of time, the "fixed fund" will be increased by a corresponding percent.

7. Money market instruments as well as bonds may be used without limitation in the "fixed fund", but equities and convertible bonds are excluded. The "fixed fund" manager is expected to employ so-called active manager techniques such as interest rate anticipation and inter-sectoral arbitrage, but changes in average maturity should usually be moderate and incremental. Since the fund is designed as a deflation

hedge, an average maturity of five years would be the minimum. In addition, current coupons and call protection should be emphasized to assure a high and stable level of income.

8. The investment objective of the "fixed fund" is to outperform the Lehman Brothers/Kuhn Loeb Bond Index net of fees over running five year periods.

9. With respect to both common stock and bond managers within the "equity" and "fixed" funds, individual security selection, security size and quality, number of portfolio industries or holdings, current income levels, and turnover are left to broad manager discretion, subject to usual standards of fiduciary prudence. An exception is that private placements of any kind, including direct mortgages, may not be purchased. In addition, the use of options and financial futures require Finance Committee approval. Manager policies in these and related areas are attached as Appendix A.

10. New endowment gifts shall be allocated to individual managers by the Finance Committee after first receiving the advice of the Vice President for Business and Finance. As a general rule, new cash will be used to rebalance the total fund in the direction of a 75-80% permanent equity ratio. Within the "equity fund", new cash will be used to rebalance the portfolio assets of the managers in the direction of maintaining ratios between "core" and "specialty" managers as established by the Finance Committee. These are only

general rules, however, and may be disregarded or modified at any time by the Finance Committee with advice from the Vice President for Business and Finance.

11. The University's faculty mortgage program is designed to assist new faculty in the purchase of homes. The program also serves to dampen the volatility of the portfolio since positions are carried at book value, and to increase current return relative to an all equity fund.

12. The mortgage program has been capped by the Board of Visitors at $32 million. Should mortgage loans fall below 10% of the total portfolio, the "fixed fund" will be increased by a corresponding percentage.

13. The investment impact of the mortgage portfolio is moderated by the impact of the bond issue of 1972 that will be outstanding through February 1, 1997. This liability shall be netted when calculating the percent represented by mortgages in the total portfolio but not considered in relation to the $32 million cap.

14. Both the total fund and the individually managed portfolios will be monitored on a continual basis for consistency in each manager's investment philosophy, return relative to objectives, and investment risk as measured by asset concentrations, exposure to extreme economic conditions, and market volatility. Portfolios will be reviewed by the Finance Committee on a quarterly basis, but results will be evaluated on a running five year cycle.