INVESTMENT POLICY

INVESTMENT POLICY 01-07-01

  1. 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.
  2. 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.
  3. Role of Board of Trustees
    The Board:
    1. Shall, upon the recommendation of the Finance Committee and the President, approve (a) investment policies relating to the administration of its investment portfolios, 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 approve the appointment of the Chief Investment Officer (CIO; and
    3. Shall receive periodic reports on investment results through the Finance Committee and the CIO and, through the President, on the performance of the CIO.
  4. Role of Finance Committee
    The Finance Committee:
    1. Shall, in consultation with the Investment Advisory Subcommittee and the President, make recommendations to the Board about policies relating to the administration of the University’s investment portfolios;
    2. Shall, in consultation with the Investment Advisory Subcommittee, consult with the President regarding the annual performance review of the CIO; and
    3. Shall receive periodic reports on the investment status of the portfolios from the CIO and shall transmit relevant information from such reports to the Board.
  5. Role of the Investment Advisory Subcommittee
    The Investment Advisory Subcommittee:
    1. Shall advise the CIO in the review and evaluation of investment opportunities and strategies;
    2. Shall provide knowledgeable, objective, and independent advice to the members of the Finance Committee 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;
    3. Shall review policies recommended by the President relating to the administration of the University’s investment portfolio and, when appropriate, shall advise the Finance Committee about such policies;
    4. Shall, in consultation with the CIO, annually review the performance and investment objectives of the portfolios of Institutional Funds investments;
    5. Shall, in consultation with the Vice President for Finance and Treasurer (VPFT), annually review the performance and investment objectives of the Pooled Cash Fund;
    6. Shall advise the CIO concerning the investment consultant and investment managers for the Institutional Funds and advise the VPFT concerning the investment consultant and investment managers for the Pooled Cash Fund;
    7. Shall usually meet with the CIO quarterly, but in no case less frequently than three times a year, to receive reports on the performance of the Institutional Funds, the investment consultant(s), and investment managers; and
    8. Shall consult and advise the President regarding the appointment and performance evaluation of a CIO.
  6. Role of the President
    The President:
    1. Shall recommend to the Finance Committee, upon the recommendation of the CIO, investment policies relating to the administration of the CIF;
    2. Shall recommend to the Finance Committee, upon the recommendation of the VPFT, investment policies relating to the administration of the Pooled Cash Fund;
    3. Shall recommend to the Finance Committee, upon recommendation of the CIO, an appropriate strategy to meet the Board’s long-term investment objectives, which will include, but not be limited to, performance goals, strategic asset allocation, and risk budgets for the Institutional Funds;
    4. Shall recommend a CIO for appointment by the Board of Trustees and shall appoint an interim CIO when the position is vacant;
    5. Shall assume supervisory responsibility for the CIO position, including, but not limited to:

      a. developing, with advice from with the Investment Advisory Subcommittee and in consultation with Investment Consultant, CIO performance standards; and

      b. conducting, with advice from the Finance Committee and Investment Advisory Subcommittee and in consultation with Investment Consultant, the CIO’s performance evaluation.
    6. Shall provide broad administrative oversight of the University’s investment activities, including, but not limited to:

      a. General oversight of the CIO’s selection of Investment Consultants;

      b. General oversight of the CIO’s tactical asset allocation, rebalancing, and hedging within ranges and risk budgets established by the Board;

      c. General oversight of the CIO’s implementation of traditional asset class investment strategies, including investment manager selection;

      d. General oversight and monitoring of the CIO’s implementation of private equity and long-term illiquid asset class strategies, including investment manager selection (which selection shall require the approval of the VPFT);

      e. General oversight and monitoring of CIF performance measurement and evaluation;

      f. General oversight of the Pooled Cash Fund performance measurement and evaluation;

      g. General oversight of the Pooled Cash Fund investment manager selection; and

      h. General oversight of Investment Custodian selection.
  7. Role of the Chief Investment Officer
    The Chief Investment Officer:
    1. Shall develop and recommend to the President, through consultation with the Investment Advisory Subcommittee, investment policies relating to the administration of the Institutional Funds;
    2. Shall develop and recommend to the President, through consultation with 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 Institutional Funds;
    3. Shall, after considering advice from the Investment Advisory Subcommittee, President, and VPFT, be responsible for the selection, retention, and termination of the Investment Consultant(s);
    4. Shall be responsible for tactical asset allocation, portfolio rebalancing, and hedging within ranges and risk budgets established by the Board;
    5. Shall manage the day-to-day activities of the University’s CIF investment portfolios within the broad guidelines established by the policies adopted by the Board;
    6. 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;
    7. Shall seek the advice of the Investment Consultant(s), Investment Advisory Subcommittee, and President on issues related to the management of the CIF investment portfolios;
    8. With respect to traditional liquid asset classes:

      a. Shall appoint new investment managers, 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;

      b. Shall approve the dollar value of assets allocated to new and existing investment managers and reallocate assets among such managers in accordance with long-term strategic targets;

      c. Shall approve individual investment manager guidelines; and

      d. Shall monitor individual investment managers on a regular basis to ensure that performance expectations are met.
    9. With respect to private equity and long-term illiquid assets:

      a. Shall consult with the VPFT on strategy implementation;

      b. Shall, with the approval of the VPFT, appoint new investment managers, 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;

      c. Shall, with approval of the VPFT, approve the dollar value of assets allocated to new and existing investment managers and reallocate assets among such managers in accordance with long-term strategic targets;

      d. Shall, in consultation with the VPFT, approve individual investment manager guidelines; and

      e. Shall monitor individual investment managers on a regular basis to ensure that performance expectations are met.
    10. Shall consult with the IAS and have the discretion and authority to terminate CIF 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;
    11. 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;
    12. Shall report to the Investment Advisory Subcommittee, President, and VPFT 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;
    13. Shall report monthly to the Investment Advisory Subcommittee, the President, and VPFT any market value decline of 10 percent or greater in the value of the CIF;
    14. Shall report quarterly to the Investment Advisory Subcommittee, the President, and the VPFT 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;
    15. Shall continuously monitor and review each investment consultant’s reports, the actions of the investment managers, and the status of the University’s investment portfolios; and
    16. Shall maintain communications, as appropriate, among the Board, the Finance Committee, the Investment Advisory Subcommittee, the investment consultant(s), and the investment managers.
  8. Role of the Vice President for Finance and Treasurer
    The Vice President for Finance 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 Finance Committee, the Investment Advisory Subcommittee, and the Board;
    6. Shall consult with the IAS 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.
  9. 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 VPFT 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.
  10. Role of the Investment Managers
    Each investment manager:
    1. Shall report at least quarterly to the CIO and/or VPFT, 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 VPFT as applicable;
    3. Shall provide other necessary information for the development of interim reports and shall meet, as necessary, with the CIO and/or VPFT, 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.
  11. 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 VPFT;
    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.
  12. 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:
      (a)(i) The University will make available for programmatic spending 4.6 percent (approved at 4.4 percent effective July 1, 2018) 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. The VPFT 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 Finance Committee, in consultation with the Investment Advisory Subcommittee and President. The VPFT 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).

      b. 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.

      c. The President, in consultation with the CIO and the VPFT, 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 VPFT. 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 VPFT shall provide a written report to the Finance Committee 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 VPFT 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 Finance Committee. 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.

2The per unit annual distribution amount will be allocated evenly over the periodic programmatic spending distributions during the fiscal year. The amount of the periodic programmatic spending distributions will not be reduced if the number of units in the CIF increases between when the per unit annual distribution amount is calculated and when the periodic programmatic spending distributions occur.

Enacted: 1/26/79

Amended: 4/15/83, 6/8/84, 2/6/87, 10/14/88, 12/6/91, 4/10/98, 9/22/00, 6/5/03, 5/7/04, 11/12/04, 5/18/07, 12/05/08, 4/24/09, 4/16/10, 9/17/10, 12/10/10, 10/21/11, 12/14/12, 1/25/13, 4/12/13, 6/21/13, 9/11/15; 12/18/15, 4/15/16, 10/28/16, 10/27/17