Board Operations

Board of Trustees Policy

SUBJECT:

Investment of Funds

NUMBER:
2.7
DATE:
November 18, 2013
SUPERSEDES:
February 21, 2012, September 19, 2005

Purpose

It shall be the policy of the Montgomery County Community College to optimize its return through investments of its cash balances in such a way as to minimize non-invested balances and to maximize return on investments.

Policy

The primary objectives of investment activities shall be the following pursuant to the specific objectives of the investment pool.

  1. Legality—All investments shall be made in accordance with applicable laws of the Commonwealth of Pennsylvania and applicable federal laws.
  2. Safety—Safety of principal shall be of highest priority for short term investments. Preservation of capital in the portfolio of investments shall be achieved through the mitigation of credit risk and interest rate risk.
  3. Liquidity—All investments shall remain sufficiently liquid to meet all operating requirements that are reasonably anticipated.
  4. Total Return—All investments shall be made with the objective of attaining a market average rate of return, from capital appreciation and/or income, throughout the budgetary and economic cycles, taking into account investment risk constraints and liquidity needs.
  5. Diversification—All investments must be diversified to avoid incurring unreasonable risks associated with specific securities or financial institutions.

Authority

The Board of Trustees is responsible for adopting and maintaining investment policies that are consistent with the Board’s role as stewards of public dollars and the collective philosophy of the Board with respect to investment asset risk and liquidity. The College management team is responsible for the investment of operating funds under the policies established by the Board of Trustees. No person may engage in an investment transaction except as provided under the terms of the policy. Specific responsibilities include:

  1. The Board will establish and maintain reasonable and consistent investment objectives, policies and guidelines which will direct the investment of the operating funds.
  2. College management will prudently and diligently identify and recommend to the board qualified investment professionals, including investment management consultant(s), custodian(s), and trustee(s).
  3. College management will regularly evaluate the performance of the investment managers to assure adherence to policy guidelines and monitor investment objective progress. An annual review of this performance shall be submitted for Board approval no later than ninety (90) days after adoption of the annual budget.
  4. The Board will monitor the investment strategies and rates of return to ensure compliance with Board-established guidelines.

Requirements and Responsibilities of the Investment Manager

Investment managers must be a registered investment advisor under the Investment Advisors Act of 1940, or a bank. Each investment manager must acknowledge in writing its acceptance of responsibility as a fiduciary. Specific responsibilities of the investment managers include:

  1. Discretionary investment management including decisions to buy, sell or hold individual securities while observing and operating within all policies, guidelines, constraints and philosophies as outlined in this statement. Any deviation requires written approval from the President or the Vice President for Finance and Administration.
  2. Monthly reporting on a timely basis of account valuations and investment performance results. This report should communicate significant events that have occurred in the portfolio and what actions were taken as well as a general narrative discussing the portfolio’s activities and direction.
  3. Communicating any major changes to economic outlook, investment strategy, or changes within the investment management organization, or any other factors which affect implementation of investment process or their progress toward investment objectives.
  4. Complying with any legislative or regulatory states and stipulations.
  5. On an annual basis, the investment provider shall be required to submit any or all of the following.
    1. audited financial statements on a quarterly, semi-annual and annual basis
    2. proof of National Association of Securities Dealers (NASD) certification
    3. proof of SEC and/or Pennsylvania Securities Commission registration
    4. proof of Commonwealth registration
    5. signed affidavit stating the funds are invested in accordance with the Board’s approved investment program
  6. All investment advisors, investment service providers and investing entities are required to disclose to the Community College all situations where they have a material interest in the investment instrument recommended to the Community College.

Operational Approval Requirements

Shifts of investments to cash, cash to investment or between categories of investment of $2,000,000 or greater must be pre-approved by the Finance Committee of the Board of Trustees. In the event of an emergency or unplanned situation which requires liquidation of investment to cash in order to meet operating requirements, this liquidation may occur at the discretion of the President or the Vice President for Finance and Administration, but must be brought before the Finance Committee of the Board of Trustees for retroactive approval at the next available meeting.

Approval of Investment Agreements

All investment agreements must be approved by the Community College solicitor and the Board of Trustees prior to investment of funds. All changes to investment options and/or advisors must be approved by the Community College solicitor and the Board of Trustees.
Investment agreements must be signed by the Board Chairman, Board Secretary, and College President.

Investment Objectives and Guidelines

The College views its funds in three broad categories.

  1. Short-term (Temporary) Investments – fixed income investments which have a date to maturity of twelve (12) months or less. The portfolio will have an average effective duration of six (6) months or less. The short-term portfolio shall be maintained at a level sufficient to fund the College’s operations plus an amount to cover an emergency. Cash flow forecasts should be maintained and updated on an ongoing basis.
  2. Mid-term Investments – fixed income investments which have a date to maturity of 10 years of less, The portfolio will have an average effective duration of 5 years of less.
  3. Long-term investments – equity and fixed income investments, which are intended to be held for a period greater than 5 years.

Safety of principal and liquidity are the top priorities for the investment of the College’s short-term funds. Liquidity and total return are the top priorities for the College’s mid-term funds. Within those guidelines, income optimization should be pursued. Total Return is the top priority for the College’s long-term funds. Long-term funds may be invested in a wider range of assets in order to produce higher returns while managing risk to principal over a long-term investment horizon through a diversified asset allocation approach.

All securities shall be purchased in the name of the Community College, with the exception of all permissible pooled investments, and custody of the securities shall be specified within the investment agreements of the Community College.

Prohibited Investments

Currently excluded are illiquid asset classes and vehicles that do not have daily liquidity. This includes, but is not limited to:

  • Hedge Funds
  • Private Equity
  • Physical Assets of any kind, such as:
    • Real Estate
    • Physical Commodities
    • Artwork
  • Individual Investment in Private Placements
    • Letter Stocks
    • Short Sales
    • Margin Transactions

For separately managed accounts, collars, forwards, futures, options and other hedging strategies will not be utilized without the College’s prior approval.

Eligible Separately Managed Fixed Income Investments – Short-Term and Mid-Term Investments (as of Time of Purchase)

ITEM

 Portfolio % Limit

1.

Treasury Securities
U.S. Treasury obligations including Bills, Notes, Bonds and Treasury Inflation-Protected Securities (TIPs)


100%

2.

Government-Guaranteed Agencies
Obligations issued or guaranteed by U.S. Government-guaranteed agencies; fixed and floating rate. (Example: Government National Mortgage Association “Ginnie Mae”)


100%

3.

Government-Sponsored Agencies
Obligations issued or guaranteed by U.S. Government-sponsored corporations and agencies; fixed and floating rate. (Examples: Federal Home Loan Mortgage Corporation “Freddie Mac”; Federal National Mortgage Association “Fannie Mae”)


100%

4.

Commercial Paper/Master Notes
At the time of purchase must have a minimum short-term credit rating by at least one of the Nationally Recognized Statistical Rating Organizations (NRSROs) (SandP, Moody’s) of:
A1 and/or P1, or the tax-exempt equivalent
A2 and/or P2, or the tax-exempt equivalent

 

 

100%
25%

5.

Repurchase Agreements
Repurchase agreements collateralized by U.S. Treasuries, U.S. Government-guaranteed and -sponsored Agencies, and Mortgage-Backed Securities (MBS) issued by U.S. Government Agencies


100%

6.

Corporate Securities
U.S. dollar-denominated debt obligations of corporations including, but not limited to, floating rate notes, medium-term notes, bonds, and debentures.
At the time of purchase corporate bonds must have a minimum long-term credit rating by at least one of the NRSROs (SandP, Moody’s) of: A- and/or A3
BBB- and/or Baa3






100%
25%

7.

Banks and Financial Institutions
U.S. Financial Institutions – Securities and products including, but not limited to, certificates of deposit (CD’s), bankers’ acceptances, bank notes, bank deposits, and time deposits. At the time of purchase the issuer must have a minimum credit rating by at least one of the NRSROs (SandP, Moody’s) of: Long Term: A- and/or A3; or Short Term: A1 and/or P1, with the exception of CD’s less than $250,000 per issuer or the current FDIC insurance limit


100%

8.

Municipal Securities (tax-exempt and taxable)
Obligations of the U.S. states, local governments, and other municipal entities, including General Obligation and Revenue bonds, commercial paper, and Variable Rate Demand Notes (VRDNs)
At the time of purchase must have a minimum credit rating by at least one of the NRSROs (SandP, Moody’s) of:
Long Term: A- and/or A3
Short Term: A1 and/or P1, MIG1/VMIG1 and/or SP-1
A2 and/or P2, MIG2/VMIG2 and/or SP-2

 

 



100%
100%
25%

9.

Asset-Backed Securities (“ABS”)
ABS collateralized by, but not limited to, credit card, auto, home equity and student loans; both fixed and floating rate. At the time of purchase must have a minimum long-term credit rating by at least one of the NRSROs (SandP, Moody’s) of: AAA and/or Aaa


50%

10.

Money Market Funds
Money Market Fund (includes Corporate ecurities)


100%

Investment/Credit Restrictions per issuer (as of Time of Purchase)

    U.S. Government-guaranteed Agencies: Limit of 100%
    U.S. Government-sponsored Agencies: Limit of 100%
    Asset Backed Securities and Municipal Securities:Limit of 25%
    Corporate and all other issuers: Limit of 5%

Short-Term Investments

Maturity Restrictions: Maturity restrictions shall be at Time of Purchase.

  1. Individual Security Maturity

    • For any single issue the maximum final maturity will not exceed 1 year.
    • Calculation of maturity for Floating Rate Notes will use the reset date.
    • Calculation of maturity for Municipal VRDNs will use the put date.
    • Calculation of maturity for ABS will use the average life.

  2. Portfolio

    • The average effective duration for the portfolio will not exceed 1/2 year.

Performance Benchmark

  • Investment performance will be analyzed on a quarterly basis.
  • The performance benchmark will be the: 3 month Treasury Bill.

Mid-Term Investments

Maturity Restrictions: Maturity restrictions shall be at Time of Purchase.

  1. Individual Security Maturity

    • For any single issue the maximum final maturity will not exceed 10 years.
    • Calculation of maturity for Floating Rate Notes will use the reset date.
    • Calculation of maturity for Municipal VRDNs will use the put date.
    • Calculation of maturity for ABS will use the average life.
  2. Portfolio

    • The average effective duration for the portfolio will not exceed 5 years and will be within +/- 20% of the specified performance benchmark under normal market conditions.

Performance Benchmark

  • Investment performance will be analyzed on a quarterly basis.
  • The performance benchmark will be the: Barclays Intermediate Government/Credit Bond Index.
  • The secondary performance benchmark will be the: Barclays 1-3 year Government.

Eligible Investments - Long-Term investments

Asset Classes
Sub-Asset Classes

Minimum

Benchmark
Target

Maximum

Benchmark
Index

Cash Equivalents

0%

3%

10%

3 Month Treasury Bill

Total Fixed Income

10%

32%

60%

 

U.S. Core

10

25

40

Barclays Aggregate

International Core

0

7

20

Barclays Global Aggregate ex-U.S.

Other Fixed Income

0

0

15

 

High Yield-Floating Rate

0

0

15

CS Institutional Leveraged Loan

High Yield-Fixed Rate

0

0

15

Barclays High Yield

Emerging Markets Debt

0

0

10

JP Morgan EMBI Global

Total Inflation Hedges

5%

10%

30%

 

Global Inflation Linked Bonds

0

5

24

Barclays World Govt ILB

 Global REIT’s

0

3.5

20

SandP Developed Property

 Commodities

0

1.5

12

DJ UBS Commodity

Total Equity

35%

55%

65%

 

U.S. Equity

14

33

52

Russell 3000

U.S. Large Cap Equity

5

21.5

44

Russell Top 200/Russell 1000

U.S. Mid Cap Equity

0

9

24

Russell Midcap

U.S. Small Cap Equity

0

2.5

10

Russell 2000

International Equity

7

22

39

MSCI All Country World ex-US IMI (net)

International Large Cap Equity

3

14.5

33

MSCI EAFE (net)

International Small Cap Equity

0

2

8

MSCI EAFE Small Cap (net)

Emerging Markets Equity

0

5.5

16

MSCI Emerging Markets (net)

Performance Benchmark

The Performance Benchmark will be a weighted blend of the Benchmark Indexes noted below.

    Russell 3000: 33%, MSCI All Country World ex-U.S. IMI: 22%, Barclays Aggregate: 25%, Barclays Global Aggregate ex-U.S.: 7%, Barclays World Govt ILB: 5%, SandP Developed Property: 3.5%, DJ UBS Commodity: 1.5%, 3 Month Treasury: 3%.

Eligible Separately Managed Fixed Income Investments – Long-Term Investments (as of Time of purchase)

ITEM

 Portfolio % Limit

1.

Treasury Securities and Government Agencies
U.S. Treasury obligations, including Bills, Notes and Bonds
U.S. Government-guaranteed and Government-sponsored corporations and agencies.


100%

2.

Asset-Backed Securities (“ABS”)
ABS collateralized by, but not limited to, credit card, auto, home equity and student loans; both fixed and floating rate. At the time of purchase must have a minimum long-term credit rating by at least one of the NRSROs (i.e. SandP, Moody’s) of:
AAA and/or Aaa
AA- and/or Aa3
A- and/or A3

 

 


100%
50%
50%

3.

Mortgage-Backed Securities (“MBS”) and Collateralized Mortgage Obligations (“CMOs”)
MBS/pass-throughs and CMOs issued and guaranteed by U.S. Government-guaranteed Agencies and U.S. Government-sponsored Agencies.



50%

4.

Mortgage-Backed Securities (“MBS”) - Private
MBS including pass-throughs and Collateralized Mortgage Obligations (“CMOs”) issued or guaranteed by private-label issuers (example: Bank of America).
At the time of purchase must have a minimum long-term credit rating by at least one of the NRSROs (i.e., SandP, Moody’s) of AAA and/or Aaa.


50%

5.

Corporate Securities
U.S. dollar-denominated debt obligations of corporations including, but not limited to, floating rate notes, medium-term notes, bonds, debentures, commercial paper, and repurchase agreements. At the time of purchase corporate bonds must have a minimum long-term credit rating by at least one of the NRSROs (i.e., SandP, Moody’s) of:
A- and/or A3
BBB- and/or Baa3
High Yield: BB+ and /or Ba1 thru CCC- and/or Caa3

 

 

 

100%
100%
25%

6.

Municipal Securities
Obligations of the U.S. states, local governments, and other municipal entities, both tax-exempt and taxable, including General Obligation and Revenue Bonds, Commercial Paper, and Variable Rate Demand Notes (VRDNs). At the time of purchase must have a minimum credit rating by at least one of the NRSROs (i.e., SandP, Moody’s) of: Long Term: A- and/or A3


100%

7.

Money Market Funds
Money Market Fund (includes Corporate Securities)


100%

Investment/Credit Restrictions per issuer (as of Time of Purchase)

    U.S. Government-guaranteed Agencies: Limit of 100%
    U.S. Government-sponsored Agencies: Limit of 100%
    Asset Backed Securities and Municipal Securities:Limit of 25%
    Corporate and all other issuers: Limit of 5%

Maturity Restrictions: Maturity restrictions shall be at Time of Purchase.

  1. Individual Security Maturity

    • For any single issue the maximum final maturity will not exceed 30 years.
    • Calculation of maturity for Floating Rate Notes will use the reset date.
    • Calculation of maturity for Municipal VRDNs will use the put date.
    • Calculation of maturity for ABS will use the average life.

  2. Portfolio

    • The average effective duration for the portfolio will not exceed 7 year and will be within +/- 20% of the specified performance benchmark under normal market conditions.

Performance Benchmark

  • Investment performance will be analyzed on a quarterly basis.
  • The performance benchmark will be the: Barclays Aggregate Bond Index.

Eligible Equity Separately Managed Investments

Investment Universe

  • Companies Traded on NYSE, NASDAQ
  • U.S. Market Cap > $13 billion
  • ADR Market Cap > $13 billion
  • Members of Russell Top 200 Index plus approximately 50 ADR’s

Portfolio Concentrations

  • Initial positions 2-4% of equity portfolio, could build up to 8%
  • Diversified by issues (30-45 companies) and by sector (up to approximately +/- 50% vs. Russell Top 200 Index sector weights)

The Performance Benchmark: Russell Top 200 Index

Disclosure

Designated board officers and employees involved in the investment process of the Community College shall disclose any personal business activity that could conflict with the proper execution and management of the investment program or could impair their ability to make impartial decisions.

An investment advisor, broker/dealer, depository institution or underwriter engaged to provide a service to the Community College may not own or receive compensation from an entity which is providing an instrument to the Community College unless such relationship has been disclosed in writing to the Community College.

Audit

The Board of Trustees requires that all investment records be subject to annual audit by the independent auditors of the Community College. In addition, the Community College shall perform an audit of the established investment policy of the Community College and its compliance with the laws relevant to investments.

The audit shall include, but not be limited to, independent verification of all investments and corresponding collateral, and of amounts and records of all transactions as deemed necessary by the independent auditors.

It shall be the responsibility of the investment advisor, investment service provider and/or investing entity to maintain the necessary documents to permit independent audit of the investments of the Community College.

Investment Agreements

All investment agreements must be approved by the Community College solicitor and Board of Trustees prior to investment of funds.

All new investment options and/or advisors must be approved by the Community College solicitor and Board of Trustees.

All investment agreements must be signed by the Board Secretary and the President of the College.

 

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