Board Operations
Board of Trustees Policy
Subject: Investment of Funds
Number: 2.7
Date: January 2022
Supersedes: January 2019, November 2013, February 2012, September 2005
Purpose
It shall be the policy of the Montgomery County Community College to optimize its return through investment of its cash balances in two strategies, one short-term and one long-term oriented. The purpose of this Investment Policy Statement (IPS) is to establish a clear understanding of the investment goals and objectives, and the management guidelines applicable the College’s cash balances.
Policy
The primary objectives of investment activities shall be the following pursuant to the specific objectives of the investment pool:
- Legality —All investments shall be made in accordance with applicable laws of the Commonwealth of Pennsylvania and applicable federal laws
- 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.
- Liquidity —All investments shall remain sufficiently liquid to meet all operating requirements that are reasonably anticipated.
- Total Return —Total return shall be the highest priority of the long term investments, and a secondary objective of the short term investments. A total return approach is intended to generate returns from capital appreciation and/or income, in order to enhance the purchasing power of the current investments and future contributions.
- Risk —Risk is anticipated to be similar to that of the strategy benchmark of each investment pool.
- 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:
- The Board will establish and maintain reasonable and consistent investment objectives, policies and guidelines which will direct the investment of the operating funds.
- 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).
- 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.
- 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:
- 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.
- 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.
- 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.
- Complying with any legislative or regulatory states and stipulations.
- On an annual basis, the investment provider shall be required to submit any or all
of the following.
- Audited financial statements on a quarterly, semi-annual and annual basis
- Proof of National Association of Securities Dealers (NASD) certification
- Proof of SEC and/or Pennsylvania Securities Commission registration
- Proof of Commonwealth registration
- Signed affidavit stating the funds are invested in accordance with the Board’s approved investment program
- Risk statistics for the long-term portfolio
- 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
The Finance Committee of the Board of Trustees should be informed of shifts of investments to cash or cash to investments of no greater than $2,000,000 or no dollar limit for Board Approved Projects as an informational item at the subsequent Finance Committee of the Board of Trustee Meeting. Shifts of investments to cash, cash to investment or between categories of investment of greater than $2,000,000 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, 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 two broad categories.
- Short-term Investments – Fixed income and cash equivalent investments which have a date to maturity of five
years or less. The portfolio will have an average effective duration of +/- 20% of
the benchmarks duration. 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.
Safety of principal and liquidity are the top priorities for the investment of the College’s short- term funds. Within those guidelines income optimization should be pursued.
- Long-term investments –A balanced portfolio of equity, real assets, liquid hedge strategies fixed income
and cash equivalent investments which are intended to be held for greater than 5 years
while focusing on performance that exceeds the benchmark over rolling 3 to 5 year
periods.
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 Investments (as of Time of Purchase)
| Number | Item | Portfolio % Limit |
|---|---|---|
|
1. |
Treasury Securities |
|
|
2. |
Government-Guaranteed Agencies |
75% |
|
3. |
Government-Sponsored Agencies |
|
|
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) (S&P, Moody’s)
of: |
50% |
|
5. |
Repurchase Agreements |
|
|
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. |
20% |
|
7. |
Banks and Financial Institutions |
|
|
8. |
Municipal Securities (tax-exempt and taxable) Exclusively General obligation bonds and commercial paper of the U.S. states, local governments, and other municipal entities. At the time of purchase must have a minimum credit rating by at least one of the NRSROs (S&P, Moody’s) of: |
|
|
9. |
Asset-Backed Securities (“ABS”) |
|
|
10. |
Money Market Funds |
|
Investment/Credit Restrictions per issuer (as of Time of Purchase)
U.S. Government-guaranteed and sponsored Agencies: Limit of 100%
Asset Backed Securities and Municipal Securities: Limit of 25%
Corporate and all other issuers: Limit of 5%
If credit restrictions are exceeded due to a downgrade, the Investment Advisor will
have 15 days to notify the client.
In-house credit analysis for corporate securities is performed and approved issuers maintained on an approved list.
Short-Term Investments
Maturity Restrictions: Maturity restrictions shall be at Time of Purchase.
- Individual Security Maturity
- For any single issue the maximum final maturity will not exceed 5 years.
- Calculation of maturity for Floating Rate Notes will use the reset date.
- Calculation of maturity for ABS will use the average life.
- Portfolio
- The average effective duration for the portfolio will not exceed +/- 20% of the benchmarks
duration
Performance Benchmark
- Investment performance will be analyzed on a quarterly basis.
- The performance benchmark will be Merrill Lynch 1-5 year Government/Credit.
Eligible Investments - Long-Term Investments
| ASSET CLASSES SUB-ASSET CLASSES | MINIMUM | BENCHMARK TARGET | MAXIMUM | BENCHMARK INDEX |
|---|---|---|---|---|
|
Total Equity: |
45% |
60% |
75% |
|
|
U.S. Equity |
25 |
40 |
55 |
Russell 3000 |
|
U.S. Large Cap |
15 |
32 |
50 |
Russell 1000 |
|
U.S. Small Cap |
0 |
8 |
20 |
Russell 2000 |
|
International Equity |
7 |
20 |
35 |
MSCI All Country World ex-US (net) |
|
Developed Int’l Large Cap |
5 |
14.8 |
30 |
MSCI EAFE (net) |
|
Developed Int’l Small Cap |
0 |
0 |
10 |
MSCI EAFE Small Cap (net) |
|
Emerging Markets |
0 |
5.2 |
15 |
MSCI Emerging Markets (net) |
|
|
||||
|
Total Fixed Income: |
15% |
30% |
50% |
|
|
U.S. Core |
10 |
28 |
45 |
Bloomberg Barclay’s Aggregate |
|
U.S. Short Govt/Credit |
0 |
0 |
15 |
Bloomberg Barclays 1-3 Year Aggregate |
|
High Yield Fixed Rate |
0 |
2 |
10 |
Bloomberg Barclays U.S. Corporate High Yield |
|
High Yield Floating Rate |
0 |
0 |
10 |
CS Institutional Leveraged Loan |
|
International Core |
0 |
0 |
10 |
Bloomberg Barclays Global Aggregate ex-U.S. |
|
Emerging Markets Debt (USD) |
0 |
0 |
10 |
Bloomberg Barclays EM Aggregate USD |
|
|
||||
|
Total Real Assets: |
0% |
4% |
20% |
|
|
U.S. Govt Inflation Linked Bonds |
0 |
0.75 |
5 |
Bloomberg Barclays U.S. Govt ILB |
|
Global Inflation Linked Bonds ex-U.S. |
0 |
0 |
5 |
Bloomberg Barclays Global ILB ex-U.S. |
|
U.S. REIT’s |
0 |
0.75 |
5 |
S&P U.S. REIT |
|
Global REIT’s ex-U.S. |
0 |
2.5 |
7 |
DJ Global ex-U.S. Select Real Estate (net) (USD) |
|
Commodities |
0 |
0 |
5 |
DJ UBS Commodity |
|
|
||||
|
Total Hedge Strategies: |
0% |
4% |
15% |
|
|
Liquid Alternatives |
0 |
4 |
15 |
50% HFRX Absolute Hedge/50% HFRX Global Hedge |
|
|
|
|
|
|
|
Cash Equivalents: |
0% |
2% |
15% |
IA SBBI US 30 Day T-BILL |
Performance Benchmark
The Performance Benchmark will be a weighted blend of the Benchmark Indexes noted
below:
EQUITY: 32% Russell 1000; 8% Russell 2000; 14.8% MSCI EAFE (net); 5.2% MSCI Emerging Markets
(net)
FIXED INCOME: 28% Bloomberg Barclays Aggregate; 2% Bloomberg Barclays High Yield
REAL ASSETS: 0.75% Bloomberg Barclays US Gov’t ILB; 0.75% S&P US REITS; 2.5% DJ Global REITs ex
US (net)
HEDGE STRATEGIES: 2% HFRX Absolute Return; 2% HFRX Global Hedge
CASH EQUIVALENTS: 2% IA SBBI US 30 day T-Bill
Suplemental Benchmark
EQUITY: 41% Russell 3000; 22.5% MSCI All County World ex-U.S. (net)
FIXED INCOME: 34.5% Bloomberg Barclays Aggregate
CASH EQUIVALENTS: 2% IA SBBI US 30 day T-Bill
Eligible Separately Managed Fixed Income Investments – Long-Term Investments (as of Time of purchase)
| Item | Portfolio # Limit |
|---|---|
|
Treasury Securities and Government Agencies U.S. Treasury obligations, including Bills, Notes and Bonds |
100% |
|
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 min long-term
credit rating by at least one of NRSROs (i.e. S&P, Moody’s) of: |
|
|
Mortgage-Backed Securities (“MBS”) and Collateralized Mortgage Obligations (“CMOs”)
|
|
|
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). |
|
|
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 min long-term
credit rating by at least one of NRSROs (i.e. S&P, Moody’s) of: |
|
|
Municipal Securities |
|
|
Money Market Funds |
|
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%
If credit restrictions are exceeded due to a downgrade, the Investment Advisor will
have 15 days to notify the client.
In-house credit analysis for corporate securities is performed and approved issuers
maintained on an approved list.
- 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.
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.
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.