BOT 607: Investment Policy

I. General Statement

As stated in the Constitution of the State of Michigan and in the Bylaws of the Board of Trustees of Michigan State University (Board), the Board is responsible for the “control and direction of all expenditures from the institution’s funds.” In carrying out this responsibility with respect to the University’s investments, the Board has established a framework for active, professional investment management. This policy states the responsibilities of the parties involved in carrying out the investment program.

The Board will establish an investment program for the investment of University funds for maximum return with an acceptable degree of risk. Within the context of its fiduciary responsibilities, the Board will exhibit social conscience in the administration of the University’s investments.

All institutional funds available for long-term investment (generally at least five years), with the exception of funds limited by law or by special donor restrictions, will be consolidated into the Board’s Common Investment Fund (CIF). (See Exhibit A for the CIF Statement of Investment Objectives.) All institutional cash except as otherwise required by contract or by another legal constraint, will be consolidated into the Board’s Pooled Cash Fund for investment purposes. The Pooled Cash Fund shall consist of i) the Liquidity Pool (short and intermediate-term commercially available funds) and ii) the Liquidity Reserve Pool. (See Exhibit B for the Pooled Cash Fund Statement of Investment Objectives.) The CIF, Liquidity Pool, and Liquidity Reserve Pool may be referred to in this Policy as the University’s investment portfolios.)

II. Nature of Assets

Three distinct types of assets are covered by this policy:

1. Institutional Funds - Assets owned and held for long-term investment by the University, such as employee retirement funds and endowment funds, which include endowment trusts and funds functioning as endowments.
2. Annuity and Life Income Funds - Assets held for permanent investment by the University as trustee for the benefit of named beneficiaries, to revert to the University upon the demise of the last beneficiary or after a specified period of time, which should be invested to produce annual returns at least equal to contractually required payments to beneficiaries.
3. Institutional Cash - Cash being pooled and invested pending its intended use.

III. Role of Board of Trustees

The Board:

1. Shall, upon the recommendation of the Committee on Budget and Finance and the President, approve (a) investment policies relating to the administration of the Pooled Cash Fund, including, but not limited to, investment objectives, which will include, but not be limited to, performance goals, strategic asset allocation, and risk budgets, (b) endowment spending rates, and (c) institutional liquidity targets;
2. Shall, upon the recommendation of the Investment Advisory Subcommittee, and in consultation with the Chief Investment Officer (CIO), approve investment policies relating to the administration of the CIF, including, but not limited to, investment objectives, which will include, but not be limited to, performance goals, strategic asset allocation, and risk budgets.
3. Shall approve the appointment of the Chief Investment Officer (CIO); and
4. Shall receive periodic reports on investment results through the Committee on Budget and Finance and Investment Advisory Subcommittee, and, through the Investment Advisory Subcommittee and President, on the performance of the CIO.

IV. Role of Committee on Budget and Finance

The Committee on Budget and Finance:

1. Shall, in consultation with the Senior Vice President, Chief Financial Officer and Treasurer and the President, make recommendations to the Board about policies relating to the administration of the Pooled Cash Fund; and
2. Shall receive periodic reports on the investment status of the Pooled Cash Fund from the Senior Vice President, Chief Financial Officer and Treasurer and shall transmit relevant information from such reports to the Board.

V. Role of the Investment Advisory Subcommittee

The Investment Advisory Subcommittee:

1. Shall, in consultation with the CIO, President and Senior Vice President, Chief Financial Officer and Treasurer make recommendations to the Committee on Budget and Finance and the Board about policies relating to the administration of the CIF;
2. Shall advise the CIO in the review and evaluation of investment opportunities and strategies;
3. Shall provide knowledgeable, objective, and independent advice to the Committee on Budget and Finance, the Board, and the CIO on investment policies and objectives, strategic investment planning and policy, investment opportunities, and such other matters as shall be determined by the Board;
4. Shall, in consultation with the CIO, annually review the performance and investment objectives of the CIF;
5. Shall, in consultation with the Senior Vice President, Chief Financial Officer and Treasurer, receive periodic reports on the investment status of the Pooled Cash Fund and annually review the performance and investment objectives of the Pooled Cash Fund;
6. Shall advise the CIO concerning Investment Consultants and investment managers for the CIF and advise the Senior Vice President, Chief Financial Officer and Treasurer concerning the Investment Consultants and investment managers for the Pooled Cash Fund;
7. Shall meet with the CIO on a regular basis, but in no case less frequently than three times a year, to receive reports on the performance of the CIF, the Investment Consultant(s), and investment managers; and
8. Shall consult and advise the President regarding the appointment and performance evaluation of a CIO.

VI. Role of the President

The President:

1. Shall recommend to the Committee on Budget and Finance, upon the recommendation of the Senior Vice President, Chief Financial Officer and Treasurer investment policies relating to the administration of the Pooled Cash Fund;
2. Shall recommend a CIO for appointment by the Board of Trustees and shall appoint an interim CIO when the position is vacant;
3. Shall assume supervisory responsibility for the CIO position, including, but not limited to:
   1. developing, in consultation with the Investment Advisory Subcommittee, performance standards, evaluation and compensation for the CIO; and
4. Shall provide broad administrative oversight of the University’s investment activities.

VII. Role of the Chief Investment Officer

The Chief Investment Officer:

1. Shall develop and recommend to the Investment Advisory Subcommittee, an appropriate strategy to meet the Board’s long-term investment objectives, which will include, but not be limited to, liquidity available for investments, performance goals, strategic asset allocation, and risk budgets, for the CIF;
2. Shall, after considering advice from the Investment Advisory Subcommittee, President, and Senior Vice President, Chief Financial Officer and Treasurer be responsible for the selection, retention, and termination of any Investment Consultant(s) for the CIF;
3. Shall manage the day-to-day activities of the CIF within the broad guidelines established by the policies adopted by the Board;
4. Shall monitor capital markets and economic forecasts, and provide the Board and President with an ongoing analysis of the global economic situation as it relates to the University’s investment policies and objectives;
5. Shall seek the advice of the Investment Advisory Subcommittee, President, and appropriate Investment Consultant(s) on issues related to the management of the CIF;
6. Within ranges and risk budgets established within Exhibit A of the Investment Policy, shall appoint new investment managers, terminate investments, reallocate assets, make follow-on investments with existing managers, and have authority to allocate funds through use of a joint investment vehicle entity, such as a limited liability entity, and authority to take all actions and execute all documents in connection with the formation, management, operation, and dissolution of any such joint investment vehicle entity;
7. For investments with material liquid commitments or gated redemptions longer than 3-years, shall obtain the approval of the Senior Vice President, Chief Financial Officer and Treasurer as regards the investment remaining within liquidity constraints specified in Exhibit A.
8. Shall provide a monitoring and measurement program that will permit evaluation of the performance of the CIF portfolio, asset classes within the portfolio, and investment managers in comparison with applicable investment market benchmarks and with other managers;
9. Shall report to the Investment Advisory Subcommittee, President, and Senior Vice President, Chief Financial Officer and Treasurer on a periodic basis, but not less than quarterly, rebalancing transactions and all new financial commitments to private investments completed during the quarter, and shall provide quarterly reports to the President and Investment Advisory Subcommittee showing potential rebalancing transactions that are likely to occur over the ensuing quarter;
10. Shall report monthly to the Investment Advisory Subcommittee, the President, and Senior Vice President, Chief Financial Officer and Treasurer any market value decline of 10 percent or greater in the value of the CIF;
11. Shall report quarterly to the Investment Advisory Subcommittee, the President, and the Senior Vice President, Chief Financial Officer and Treasurer any market value decline with respect to an investment manager that is in excess of two standard deviations of the long-term volatility of the applicable benchmark listed in Exhibit A;
12. Shall maintain communications, as appropriate, among the Board, the Committee on Budget and Finance, the Investment Advisory Subcommittee, the Investment Consultant(s), and the investment managers.

VIII. Role of the Senior Vice President, Chief Financial Officer and Treasurer

The Senior Vice President, Chief Financial Officer and Treasurer:

1. Shall advise the President and CIO on investment policies relating to the CIF and Pooled Cash Fund;
2. Shall develop and recommend to the President, through consultation with the Investment Advisory Subcommittee, investment policies relating to the administration of the Board’s Pooled Cash Fund;
3. Shall consult with the CIO with respect to private equity and long-term illiquid strategy and asset commitments and shall approve, in conjunction with the CIO, new private equity and long-term illiquid investment managers and make follow-on investments with existing managers;
4. Shall have the authority to appoint the investment custodians for the CIF and Pooled Cash Fund;
5. Shall have the authority to appoint, or may act in the role of, an investment manager for the Pooled Cash Fund and shall report any such appointments to the Committee on Budget and Finance, and the Investment Advisory Subcommittee;
6. Shall consult with the Committee on Budget and Finance and have the discretion and authority to terminate Pooled Cash Fund investment managers for reasons including, but not limited to, performance concerns, organizational changes, deviation from investment mandate, investment mandate is inconsistent with the current market environment, or restructuring of the relevant investment portfolio;
7. Shall provide a monitoring and measurement program that will permit evaluation of the performance of the Liquidity Reserve Pool and investment managers in comparison with applicable investment market benchmarks and with other managers; and
8. Shall provide a monitoring and measurement program that will permit evaluation of the performance of the Liquidity Pool and investment managers in comparison with applicable investment market benchmarks and with other managers.

IX. Role of Investment Consultants

An Investment Consultant:

1. Shall provide advice and consultation to the CIO in the areas of policy development, asset allocation, investment structure and analysis, investment manager selection, risk parameters, and investment performance review with respect to the CIF;
2. Shall provide advice and consultation to the Senior Vice President, Chief Financial Officer and Treasuer in the areas of policy development, asset allocation, investment structure and analysis, investment manager selection, investment custodian selection, risk parameters, and investment performance review with respect to the Pooled Cash Fund, and regarding endowment spending rates;
3. Shall provide, as requested by the President, advice and consultation in developing CIO performance standards and evaluations; and
4. Shall provide such other information pertaining to the Board’s investment program as may reasonably be required and shall report immediately to the CIO any major change in its confidence regarding the investments, investment managers, sector, or securities markets for which it is providing advice to the University.

X. Role of the Investment Managers

Each investment manager:

1. Shall report at least quarterly to the CIO and/or Senior Vice President, Chief Financial Officer and Treasurer as applicable, on its performance and other appropriate matters;
2. Is authorized to execute investment transactions within its established guidelines, subject to any restrictions established by the Board and/or CIO and/or Senior Vice President, Chief Financial Officer and Treasurer as applicable
3. Shall provide other necessary information for the development of interim reports and shall meet, as necessary, with the CIO and/or Senior Vice President, Chief Financial Officer and Treasurer as applicable; and
4. Shall vote all proxies in a manner most likely to preserve or enhance the value of the underlying investments and normally to support management on routine matters.

XI. Role of the Investment Custodians

Each investment custodian:

1. Shall hold all securities in an agreed-upon nominee name and form;
2. Shall execute all transactions as directed by the relevant investment manager;
3. Shall collect all income pertaining to the securities held, and shall temporarily invest such income in cash equivalents;
4. Shall periodically remit accumulated income to the University, for credit to the appropriate funds or trusts, pursuant to instructions received from the Senior Vice President, Chief Financial Officer and Treasurer;
5. Shall provide the University with a full monthly accounting of all transactions, together with a listing of all holdings at cost and market; and
6. Shall provide such other information as may reasonably be required.

XII. Endowment Spending

1. In fulfillment of its fiduciary duties as trustee of the University’s endowment and other Institutional Funds, the Board causes those Funds to be invested to generate amounts that may be expended for the purposes for which those Funds were established (“programmatic spending”) and amounts that may be accumulated for reinvestment to preserve the value of those Funds, and their purchasing power, against inflation. These are the priorities for the use of the University’s endowment and other Institutional Funds. The Board may also permit reasonable and appropriate costs to be charged to the endowment and other Institutional Funds. These charges may include reasonable and appropriate costs of administering and managing the Institutional Funds, such as reasonable and appropriate internal and external investment costs and, for certain Institutional Funds, fund-raising costs. Additional returns, if any, generated by the investment of the Institutional Funds may be used to add real principal growth to such Funds, to better preserve their long-term value, to improve and further diversify the investment options for such Funds, and, thus, to enhance opportunities to stabilize and increase annual expenditure for such Funds.
2. In accordance with these precepts:
   1. (i) The University will make available for programmatic spending 4.4 percent of the average market value of the CIF as calculated for the period comprising 20 quarters of the five fiscal years ending one year prior to the beginning of the fiscal year in which the spending is expected to occur, expressed as a dollar per unit annual distribution amount based on the number of units in the CIF at the time of the calculation. Programmatic spending distributions will be made to CIF unit holders on a periodic basis during the fiscal year based on the number of units in the CIF held when each periodic programmatic spending distribution is made.¹ The Senior Vice President, Chief Financial Officer and Treasurer will determine when the periodic programmatic spending distributions will occur
      
      (ii) This programmatic spending rate shall be approved annually by the Board, upon the recommendation of the Committee on Budget and Finance, in consultation with the Investment Advisory Subcommittee and President. The Senior Vice President, Chief Financial Officer and Treasurer shall develop, in consultation with the CIO and Investment Consultant(s), and recommend to the President the programmatic spending rate. In connection with each of these recommendations, the University’s financial staff shall present an analysis of the projected impact of inflation on the University’s endowment and other Institutional Funds, including how inflation is expected to affect their purchasing power (i.e., the expenditures of amounts for the purposes for which those funds were established).
   2. Reasonable and appropriate internal and external investment costs for the CIF, including the costs of the investment consultant, the investment managers, and the investment custodians and the University’s own investment management costs (staff and support), shall be deducted in determining the average market value of the CIF available for programmatic spending pursuant to Section XII (2)(a)(i) of this policy.
   3. The President, in consultation with the CIO and the Senior Vice President, Chief Financial Officer and Treasurer is authorized to establish annual assessments for endowment stewardship, including fund raising, against those of the University’s endowment and other Institutional Funds established entirely or primarily with private donations. The amount of the assessments must be reasonable and appropriate, particularly when considered in the context of the University’s priorities for the use of its endowment and other Institutional Funds. In any event, the amount assessed may not, without further Board action, exceed 1 percent of the average market value of the CIF units held by such Funds. The calculation of the amount assessed and its allocation to the Funds subject to assessment shall be conceptually consistent with the methodology by which programmatic spending distributions are calculated and allocated under Section XII (2)(a)(i) of this policy. Assessments will be made periodically during the fiscal year, as jointly determined by the CIO and Senior Vice President, Chief Financial Officer and Treasurer. Not less than 30 days prior to the annual review of the programmatic spending rate pursuant to Section XII (2)(a)(ii) of this policy, the President and the Senior Vice President, Chief Financial Officer and Treasurer shall provide a written report to the Committee on Budget and Finance and other members of the Board stating the amount, if any, of the assessment for the following fiscal year and how it was determined.
3. If the University has accepted a gift to an endowment fund documented by a gift instrument in which the donor gives legally binding instructions for the investment of, or expenditures from, that fund which are inconsistent with the foregoing, the University will comply with those special instructions. The Senior Vice President, Chief Financial Officer and Treasurer shall calculate the annual programmatic spending distribution and assessment for each endowment fund which is not invested in the CIF in accordance with applicable law and report the programmatic spending rate and assessment amount for each such fund to the Committee on Budget and Finance. Insofar as possible, given each such fund’s investments and the instructions of its donor, the priorities for the use of such funds should be the same as those for endowment funds invested in the CIF.

Retired Policy No. 01-07-01