THE COMMUNITY FOUNDATION OF HARRISONBURG AND ROCKINGHAM COUNTY INVESTMENT POLICY
- General Guidelines
A. The Corporation
The Community Foundation of Harrisonburg and Rockingham County (TCFHR) is a non-profit, 501(c)(3) corporation located in Harrisonburg, Virginia. TCFHR was organized to facilitate flexible charitable giving and accepts contributions from individuals, trusts, business entities, civic organizations and other non-profit organizations. Funds are held, pooled and invested, and distributed as recommended by donors, all as determined/approved by the TCFHR Board of Directors and/or its designees.
B. The Funds
This policy shall govern the investment of all assets of TCFHR and shall specifically include the following:
1. Corporate cash
2. Board designated funds
3. All other unrestricted funds
4. All other restricted funds
5. All other endowment funds
It is expected that allocation requirements may be different for various TCFHR funds. Addenda to this policy will address the asset allocation for each of these portfolios and changes will be adopted as needed.
C. Compliance with Law
All actions undertaken or contemplated by this policy shall follow appropriate law. Included under this requirement is that all activities shall be deemed appropriate within the relevant sections of the Internal Revenue Code dealing with applicable tax requirements for 501(c)(3) organizations.
D. Policy Control and Update
This policy shall be approved by the Board of Directors (the Board) and controlled and administered by the Investment Committee (the Committee) which shall have responsibility for compliance and oversight.
E. Real Rate of Return
The Board and the Committee recognize that investment securities markets are volatile and that in the short term, market fluctuations may result in disappointing short-term performance incurred in pursuit of TCFHR’s long term goals.
TCFHR shall fund its working capital needs and capital needs from operations, portfolio income and the maturity of securities. TCFHR shall not be exposed to unusual market risk in meeting these requirements.
G. Volatility Expectations
The Board and the Committee understand that TCFHR has a long investment time horizon and is willing to accept short term volatility in order to earn its required long term return. In spite of this knowledge of the realities of capital markets, they do not want to compound ordinary operating risk with excessive portfolio risk.
H. Investment Objectives
The primary long term objective of TCFHR is to realize investment returns that exceed the annualized rate of inflation by approximately 5% over the long term. TCFHR seeks long term principal growth while preserving capital by means of minimizing the risk of substantial loss in asset value through investment in a diversified portfolio of quality investment securities. The primary investment goals are:
- Growth of the funds.
- Preservation of principal.
- Current distribution of 5% (4% per Spending Policy plus 1% TCFHR fees).
I. Asset Allocation
The Committee and the Board shall approve an efficient portfolio allocation designed to produce their optimal return at their investment horizon, with their risk tolerance and cash requirements. These allocations, which are intended to allow flexibility and action on the part of managers and can be changed at any time at the Committee’s discretion, are attached as an addendum to this policy.
J. Policy Update
The Committee and the Board shall determine acceptable risk parameters, long-term objectives, eligible asset classes, performance criteria and investment fund manager criteria at least once every three years.
Addenda attached to this policy are to be approved by the Committee and approved by the Board of Directors.
- External Money Managers
External money managers may be retained to manage some or all of TCFHR assets, at the Board’s discretion. The Board may also elect to manage some assets in-house.
All managers considered must meet the objective and subjective criteria outlined in this policy. The TCFHR Manager Search process is an attempt to fit existing managers to specific slots, as determined by TCFHR investment models, in anticipation of outperforming relative index returns.
Managers may be allowed to purchase on behalf of TCFHR, only the eligible securities identified in this policy. Each manager will be furnished a copy of this policy, and it will be incumbent upon them to follow it. Other purchases may be made only after discussion with and specific approval from the Committee. If a combination of managers is utilized for any of TCFHR’s funds, the objective shall be to utilize managers of varying styles so that total portfolio diversification is maximized and total portfolio efficiency is enhanced.
A. Basis for Manager Criteria
Manager searches are uncertain, and TCFHR realizes that it can not predict the future performance of any manager. It also recognizes that “portfolio risk” is lowered through asset class and style diversification, and has built this policy to take advantage of true diversification. The basis for any investment manager search authorized by TCFHR shall be to seek firms where the same people have been managing substantial resources very well, using the same investment discipline and style over a market cycle. When considering hiring a new manager, we will set Objective Standards according to our current needs.
B. Objective Standard Manager Characteristics May Include
- A minimum of $500 million under management.
- A minimum of six years of verifiable or audited performance results.
- Performance shall exceed the performance of 50% of managers of similar styles, over the review period, as ranked in a reputable performance ranking universe, such as Lipper for Mutual Funds or Zephyr for investment managers.
- Each managers historical record should be judged over multiple time frames.
- The manager must be located in the United States although he may have offices in foreign countries.
- Managers must have had no significant litigation that may have relevance to their honesty, integrity or abilities.
- Managers will also be monitored for regulatory violations.
C. Subjective Manager Characteristics
- The firm must experience no more than a reasonable amount of turnover in non-essential personnel.
- Turnover in essential personnel may be evaluated at any time at the discretion of TCFHR.
- Any firm wishing to be considered by TCFHR shall comply with a due diligence review intended to verify the points above.
- Any manager retained under this policy shall be bound by contract with specific directives documented and this policy incorporated by reference.
- Any manager retained under this policy will assume the burden of providing evidence of any non-compliance with this policy.
If external managers are utilized, they shall have complete discretion over investing their portion of the account assets as long as they remain consistent with their investment style and other factors stipulated in their directives and by this policy. It is required that each manager follow the dictates which would be expected of a prudent investor.
Where external managers are retained, it will be with the expectation of evaluating their performance over a rolling five year period.
F. Allocation Among Managers
Allocations will be adjusted to remain in compliance with the general asset allocation noted in each section dealing with specific accounts.
Allocations among managers may also be adjusted in order to remain consistent with any risk analysis associated with any review of this policy, whether it be an annual or any other review occurring at any time.
G. Reason for Termination of Managers
Managers may be terminated at any time at the discretion of TCFHR. Managers may also be terminated for any of the following reasons:
- A change in TCFHR’s required return, risk profile or investment horizon which results in the manager’s asset class or investment style being inconsistent with portfolio objectives;
- An investment manager is found to have changed its investment style;
- Any fundamental quality or personnel conditions within the manager’s firm change;
- The manager violates specific directives issued to him;
- There is regulatory action taken against the manager;
- Long term performance is not acceptable; or
- The manager fails to alert TCFHR about pertinent significant changes, lawsuits, misconduct, misrepresentations, lapse in integrity, or a general lack of attention to the TCFHR account.
TCFHR will allow each individual manager to vote all proxies, but will retain the right to vote proxies at their discretion. If TCFHR desires to take such proxy action, then it must notify the appropriate manager within a reasonable time period.
- Permitted Investments
A. Cash equivalents. All cash and equivalent investments shall be made with utmost concern for quality. Therefore, investment will be limited to U.S. Treasury bills, commercial paper rated P-1, and insured certificates of deposit. Other securities that reflect similar quality as those described above including, but not limited to, money market mutual funds, which meet such parameters, are permissible also.
B. Fixed income. Fixed income securities shall include securities issued by the U.S. government and its agencies and securities issued by U.S. corporations. The weighted average quality of the TCFHR’s fixed income portfolio must be at least “A” rated. Fixed income mutual funds, which meet such parameters, are permissible.
C. Equities shall include common stocks, preferred stocks and bonds convertible into common stocks. Investments in equities shall be limited to securities of corporations listed on the U.S. exchanges, the NASDAQ market or American Depository Receipts. Adequate diversification shall be maintained within the purchased equity portfolio so that no single security comprises more than 5% of the total value of the equity portfolio without Investment Committee permission. Donated stocks may be exempted from these criteria at the discretion of the board of TCFHR. Mutual funds, including international mutual funds, which meet the investment parameters, are permissible.
D. Prior Approval Investments. The following categories of securities and other investment activity are not permitted for investment without the prior written approval of TCFHR Investment Committee:
- Unregistered or restricted stock
- Foreign securities not traded on U.S. or NASDAQ exchanges
- Commodities, precious metals or tangibles
- Private placements
- Initial public offerings (must have two year trading history)
- Uncovered options
- Futures trading
- Short selling
- Margin trading
- High Yield Fixed Income
- Real Estate
- Performance Measurement and Review
The performance and due diligence criteria of each manager shall be monitored and reviewed at least quarterly. All monitoring and resulting corrective action shall be documented and submitted to the Committee as part of a formal review. As a basic requirement, each manager is expected to meet the criteria outlined in sections II. B. and II. G. Managers failing to meet that criteria will undergo a full review, and a decision must be made to retain or terminate them.
A. Performance Benchmarks
TCFHR is primarily concerned with the long-term performance of the investment portfolios, it recognizes that the long-term performance is comprised of numerous shorter periods in which investment performance can be measured. On a quarterly basis, each manager will provide TCFHR with a report(s) that details accounts’ performance and risk positioning.
Based on our fiscal year-end quarterly report, the Committee will do an assessment of the manager’s compliance with the criteria stated in this Investment Policy.
B. Performance Indices
Investment performance shall be measured by indices mutually agreed on by TCFHR and the investment manager including but not limited to the following:
- 90-day U.S. Treasury bills
- Barclay’s Aggregate Bond Index
- Standard & Poor 500 and 400 Mid-Cap
- Dow Jones Industrial Average
- MSCI EAFE
The Committee is open to other indices which provide a better match for the manager’s investment style or strategy
- Fair Value Measurements
TCFHR must report fair value to its fund holders and provide disclosure regarding the valuation process. In order to do so, it has adopted SFAS No. 157, Fair Value Measurements, standards. The Investment Committee will regularly review investment valuations and determine a level of reliability for each.
Fair value as defined in SFAS No. 157 is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. Based on SFAS No. 157 guidelines, TCFHR uses a three level fair value hierarchy describing the inputs that are used to measure assets and liabilities as follows:
Level 1 – Valuations for assets and liabilities traded in active exchange markets such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities and federal agency mortgage-backed securities which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange or dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
- Spending Policy
The Board and TCFHR recognize the need to preserve the integrity of the principal of endowed funds, thereby preserving the long-term ability of the endowment to make annual distributions. The Spending Policy and Endowed Funds Annual Distribution Policy take into consideration the fact that funds may have an increase or decrease in value or it may have income or loss that would in some years be less than or greater than the annual distribution amount. However, it is expected that over time the Spending/Distribution policies along with our overall Investment Policy will ensure the preservation of the principal of the fund including effects of inflation.
TCFHR will distribute 4% of the market value of the fund annually. The market value will be determined based on a 20-quarter moving average (or historic average if less than 20 quarters are available). Investment returns in excess of the annual distribution, administrative fees, and investment fees shall be retained in the fund.
This policy applies to all endowed funds unless otherwise specified by the gift instrument. This policy shall be reviewed from time to time by the Investment Committee of TCFHR and shall be adjusted as deemed appropriate by its Board. Any change to said policy shall be effective only prospectively to the next year.
Approved Targets and Benchmarks will be discussed at quarterly meetings with the Committee and adjusted accordingly. The Asset Allocation of the portfolio should be maintained within the allowable ranges indicated below:
|Core Fixed Income||30%-50%||30%-50%||15%-30%||0%-30%|
|Total Fixed Income & Cash||30%-60%||30%-60%||25%-50%||25%-60%|
|U.S. Large Cap||10%-15%||10%-15%||10%-15%||10%-15%|
TCFHR recognizes that a rigid asset allocation would be both impractical and to some extent, undesirable under various market conditions. Therefore, the allocation of the total assets may vary from time to time without being considered an exception to this investment policy. Asset allocations significantly outside of policy at the end of a quarter should be accompanied by a plan from the manager to bring the allocation back into the asset allocation range within two quarters. The Investment Committee realizes that in some market environments the targets, benchmarks and ranges might need to be temporarily set aside. Its strong preference is for the investment manager to communicate such changes to TCFHR Executive Director before taking such action, but TCFHR understands this may not be practical.
- Those funds solely invested in American Funds Balanced Fund are approved at investment targets of 60% equities and 40% fixed income, which are in line with their usual portfolio mix.
Standard Agenda Items Needed to Accomplish This Policy
- Quarterly – Monitor managers’ performance. Discuss and adjust targets and benchmarks as needed.
- Annually – End of fiscal year reports. Full assessment of managers’ compliance with criteria.
- 5 Years – Fully evaluate managers’ performance/returns. Is it time for an RFP or additional managers?
Revised July 10, 2014