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OUS POOLED ENDOWMENT FUND-AMENDMENT TO POOLED ENDOWMENT FUND INVESTMENT OBJECTIVES AND POLICY GUIDELINES

Staff Report to the Board

At its October 20, 2000, meeting, the Board approved, for recommendation to the Oregon Investment Council (OIC), the Pooled Endowment Fund allocation to the BGI Russell 2000 Index Fund be sold and the proceeds be invested with an actively managed small/mid cap fund with the investment firm Batterymarch. At an October 25, 2000, OIC meeting, it was stated that "the Oregon State Board of Higher Education Investment Committee allocation to the BGI Russell 2000 Index Fund be sold and the proceeds be invested in an actively managed small/mid cap fund with Batterymarch, benchmarked to the Russell 2500."

As a result of this change, the Investment Objectives and Policy Guidelines (Policy) requires modification. The current version of the Policy was finalized and approved at the June 16, 2000, meeting of the Board. The changes affect the Investment Guidelines, Policy Benchmarks, and Performance Monitoring Return Expectations of the Policy. The original version with changes follows. Proposed amendments are in bold italics and deletions are bracketed.

Portion of Policy Containing Proposed Amendments:

Added or changed language is in bold italics; deleted language is shown in brackets.

XI. INVESTMENT GUIDELINES

Small/Mid Cap Equity Requirements:

Investment in [smaller] small and mid cap companies with market capitalization similar to the Russell [2000] 2500 index (subject to the small/mid cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

SCHEDULE I
ALLOCATION OF ASSETS

The following represents target asset allocations and the ranges by asset category.

Allocation of asset by class:    
Class

Target Allocation

Ranges

Policy Benchmark

Equity Category

70%

60%-80%

 

Fixed Income Category

25%

20%-30%

Lehman Aggregate

Cash

5%

0%-10%

90 Day T-Bill

Alternative Assets

0%

0%-10%

 

The allocation of equity assets shall be as follows:  
Class

Target Allocation % of Equity

Ranges

Policy Benchmark

Large-Cap Equity

65%

55%-75%

S & P 500

Small/Mid Cap Equity

20%

15%-25%

Russell 2500 [2000]

International Equity

15%

10%-20%

MSCI EAFE

The Target Allocation Policy benchmark is 59.5 percent Russell 3000 Index, 10.5 percent MSCI EAFE Index, 25.0 percent Lehman Aggregate, and 5.0 percent 90 Day T-Bills.

EXHIBIT A

Performance Monitoring Return Expectations

Spending Policy

The distribution rate for the Fund is 4.5 percent of the five-year moving average unit market value for FY 2000-01 and will decrease to 4.0 percent of the five-year moving average unit market value for FY 2001-02 and thereafter.

Total Fund

The total fund will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

  1. Exceed the return of the Policy benchmark (Schedule I) by 0.50 percent (after fees) over a market cycle;
  2. Exceed the level of inflation by 5.0 percent or more as measured by the Consumer Price Index (CPI) over a market cycle; and
  3. Exceed the median fund in a universe of other endowments over a market cycle. A market cycle is defined as an investment period lasting three to five years.

U.S. Equities - Large Capitalization

Equity accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

  1. Exceed the return of the S&P 500 Index by 0.25 percent (after fees) over a market cycle; and
  2. Rank at or above median of a nationally recognized universe of equity managers possessing a similar style.

U.S. Equities - Small/Mid Capitalization

Small/Mid capitalization accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

1. Exceed [Equal] the return of the Russell 2500 [2000] index (after [before] fees) by 1.0 percent over a market cycle; and
2. Rank in the 40th percentile of a nationally recognized universe of small cap managers possessing a similar style.

International Equities

International equity accounts will be evaluated quarterly performance objectives include, but may not be limited to, the following:

  1. Exceed the Return of the EAFE Index by 1.0 percent (after fees) over a market cycle; and
  2. Rank in the 40th percentile of a nationally recognized universe of equity managers possessing a similar style.

Fixed Income

Fixed income accounts will be evaluated quarterly. Specific performance objectives include, but may not be limited to, the following:

  1. Exceed the Return of the Lehman Aggregate Index 0.5 percent (after fees) over a market cycle; and
  2. Rank in the 40th percentile of a nationally recognized universe of fixed income managers possessing a similar style.

Investment Committee Discussion and Action (November 16, 2000)

Upon review of the proposed amendments, the Investment Committee approved the changes to the Investment Objectives and Policy Guidelines.

Investment Committee Recommendation to the Board

The Investment Committee recommends that the Board approve, for recommendation to the Oregon Investment Council, the changes to the Investment Objectives and Policy Guidelines as submitted.

BOARD ACTION: