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AMENDMENT TO OUS POOLED ENDOWMENT FUND INVESTMENT OBJECTIVES AND POLICY GUIDELINES

Staff Report to the Board

Based on questions raised by OUS fixed income managers, staff determined that the Oregon University System Pooled Endowment Fund Investment Objectives and Policy Guidelines should include language to address the holding of High Yield Bonds and International Bonds that make up a portion of the fixed income allocation.

With the help of R.V. Kuhns consultants, additional policy language similar to that found in other endowment fund investment policies was drafted to address the situation. At its May 18, 2001, meeting, the Investment Committee approved the recommendation that the Board adopt the proposed new language and request approval by the Oregon Investment Council (OIC).

Below is a portion of the policy that includes the proposed amendment (new text is bolded):

XI. INVESTMENT GUIDELINES

The Fund shall maintain minimal cash, consistent with short-term requirements. When commingled funds are utilized as part of the investment program, the policies of the commingled funds, which are attached and updated annually, are the operative document, even in the presence of existing guidelines within this policy.

A. Short-term cash will be invested in the Oregon State Treasurer's Short-Term Investment Pool.

B. Fixed-income securities, for purposes of these guidelines, shall mean mortgage-backed securities, U.S. government securities, investment-grade corporate bonds, and other fixed income securities, such as certificates of deposit and commercial paper. The objective of this component of the Fund is to preserve capital in keeping with prudent levels of risk, through a combination of income and capital appreciation. Realization of income will be subordinate to safety, liquidity, and marketability (securities should be readily marketable). This component of the Fund shall adhere to the following categories:

  1. Investment-grade bonds are those bonds rated in the four highest grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A, or Baa) or Standard & Poor's Corporation (AAA, AA, A, or BBB).
  2. U.S. Treasury Securities shall consist of bills, notes and bonds. Securities of Federal Agencies and Federally Sponsored Agencies.

Fixed-income managers have full discretion over the allocation between long-term, intermediate, or cash equivalent investments, provided that the duration of any manager's portfolio shall not exceed the duration of the Lehman Aggregate Bond Index by more than one and one-half (1-1/2) years.

C. Equity securities are to be made primarily in well-established, quality companies. The objective specific to this component of the Fund is to maximize long-term total return through a combination of income and capital appreciation. The restrictions pertinent to this portion of the Fund are as follows:

Large-Cap Equity Requirements:
Not more than ten percent of the companies invested in should have market capitalizations less than $1 billion (subject to the large-cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

Small/Mid Cap Equity Requirements:
Investments in small and mid cap companies with market capitalization similar to the Russell 2500 index (subject to the small/mid cap equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

International Equity Requirements:
Investments in the equity securities of companies located outside the United States are permitted (subject to the international equity limitations of Schedule I). Portfolios should be comprised of at least 30 security issues.

D. Diversification

  1. Not more than five percent of the market value of any investment fund will be invested in any single issue, property, or security. This restriction does not apply to U.S. Government-issued securities.
  2. No investment in any single issue, security, or property shall be greater than five percent of the total value of the issue, security, or property.

Performance expectations for each of the asset classes is described in Exhibit A.

Investment Committee Discussion and Action (May 18, 2001)

Upon review of the proposed amendment, the Investment Committee approved the additional language as recommended by staff.

Investment Committee Recommendation to the Board

The Investment Committee recommends the Board adopts the proposed new language and requests approval by the OIC.

BOARD ACTION: