Investment of Funds
Endowment and Quasi-Endowment
Fund manager and asset class allocations are reviewed at quarter end. When allocations fall outside the allowable target ranges, the University rebalances investment pools toward targets during the next quarter. Depending upon the dollar magnitude, the adjustment to target may be done in incremental steps during a quarter.
Before the end of each quarter, funds are withdrawn from the investment pool for purposes of distributing earnings to individual endowment spending accounts. New funds are also added quarterly. These cash flows provide some level of opportunity to rebalance the investment pool. The University is guided by the following in determining the dollar amount of specific withdrawals from external fund managers.
- Adjusting any allocations where target ranges have been exceeded.
- Costs of liquidation relative to each manager portfolio – type of securities and total dollars held.
- Dollar magnitude of the withdrawal relative to the external managers total portfolio
In some instances, the portfolio may be relatively balanced and no allocations are outside target ranges. In those cases, the quarterly withdrawal is made from one or more external fund manager accounts where the current allocation exceeds the target. The major asset class allocation targets also become an important factor in the rebalancing decision making. To a great extent, when the portfolio is relatively balanced, the quarterly withdrawals result in a rebalancing to target among all the funds.
Endowment & Quasi-Endowment Receipts
Upon receipt, endowment or quasi-endowment funds are immediately deposited in a University bank account until transferred to a fund manager for investment at the next investment pool valuation date – usually at the end of the calendar quarter following receipt of the funds.
Unrestricted University Bequests & Gifts
The University of Iowa Foundation is the University's preferred arm of giving. However, from time to time there are gifts and often bequests that designate the funds be directed to the University. In those cases, every attempt is made to determine whether the donor had any prior affiliation with the University. For example, the registrar is contacted to determine if the individual or a close family member attended the University, and whether any particular degrees were awarded. This type of information and any other relevant information is forwarded to the President along with the amount of gift or bequest. The President determines how the funds are to be designated or invested.
Internal Operating Funds
a. Portfolio Asset Allocation. The allocation of unrestricted fund balances to external fund managers is dependent on operating cash needs. While there are no specific Board of Regent Policies regarding asset allocation, it is anticipated that at least half of the unrestricted fund balances be invested with external fund managers.
b. Benchmark. The following indices will be the benchmark for the portion of operating funds under internal management.
91-Day Treasury Bills
Merrill Lynch 1-3 yr. Government
Merrill Lynch 1-3 yr. Gov’t/Agency
The University restricts internal operating fund investments to obligations of the United States government, its agencies and instrumentalities. Working capital cash balances required to meet expected operating needs are generally held in money market accounts, interest bearing checking and savings accounts, and certificates of deposit.
While there is no specific Board of Regent Policies regarding portfolio turnover, it is anticipated that longer term performance will result from conservative investment strategies, not trading strategies. Therefore the University has held to a "buy and hold" strategy for the internally managed portion of the operating funds.
Although infrequent, whenever circumstances call for a liquidation of securities, the University reviews any cash balances of similar operating fund accounts and evaluates the merits of an internal trade versus an external sale of a security. This is consistent with the overall "buy and hold" strategy of the University.
At the request of the University, the Board of Regent's investment advisor periodically reviews investment objectives and asset allocations of institutional investment pools and provides specific recommendations for maintaining or modifying investment strategies. Any changes are approved by the Board of Regents, State of Iowa Investment Committee
Execution of Investment Transactions
The University has developed and continues to maintain an effective working relationship with Board approved brokerage firms through regular and active communications. The Board of Regent Policies requires competitive bidding except for certain exempted securities. For all transactions requiring competitive bids, the University has a rigorous solicitation process of seeking three or more bids before executing transactions. This helps to ensure that individual brokers exercise their best efforts in proving the most competitive prices.
DISTRIBUTION OF INVESTMENT INCOME
Endowment & Quasi-Endowment
The University of Iowa has endowment spending policies that attempt to balance the long-term objective of maintaining the purchasing power of the endowment with the goal of providing a reasonable, predictable, and sustainable level of funds to support current needs. The funding for spending distributions includes interest and dividends, and capital appreciation on investments.
The University of Iowa Foundation is the University of Iowa's designated fundraising organization and recipient of gifts on behalf of the University of Iowa. Therefore, for many years the endowment spending rules for the University have mirrored the Foundation. This has helped simplify the gifting process for donors and the budgeting process for University recipient departments. The University of Iowa and University of Iowa Foundation and utilize a "banded inflation" model for calculation of endowment spending. This methodology was implemented effective with distributions on September 30, 2010.
Calculation Methodology. Spending dollar payouts are adjusted annually by the trailing calendar year Consumer Price Index (inflation rate). Total payout is also restricted to no less than 4% and no greater than 6% of calendar year end market values. Fiscal year payouts are calculated and announced in March to facilitate the awarding of scholarships and the annual budget process by college departments for each upcoming fiscal year.
Underwater Accounts. The timing of initial investment of new gifts and economic circumstances may result in "underwater" accounts -- those where the current market value is less than the original gift value. These situations are handled on a case by case basis. A review of donor intent as to both purpose and accumulation of funds, investment return expectations, institutional needs and resources and other factors will determine if it is advisable to suspend spending distributions for a period of time.
There is a periodic review of all endowment and quasi endowment accounts that are restricted as to purpose. Administrators are reminded of the importance of ensuring that disbursements are in accordance with expenditure policies of the University and consistent with donor intent. Each administrator is asked to review and sign off on the endowment account activity. When necessary, future distributions are suspended pending the completion of an administrative review.
Where the University is named as a beneficiary of a trust, periodic disbursements are made by the trustee to the University. The trust statements are periodically reviewed for compliance with the original trust document, accuracy of distribution calculations, and prudent investment practices including asset allocation, investment and administrative fee assessments, and fund returns.
Market values and returns are calculated and reported net of fees. An administrative fee also is assessed each investment pool in relation to the cost of managing oversight of that pool. In the case of the long-term endowment investment pool, the administrative fee will also cover donor-related activities and development costs incurred by the University.
Treasurer's Temporary Pool
Income earned on invested operating fund balances is distributed monthly by Accounting and Financial Reporting to those accounts that participate in the Treasurer's Temporary Investment pool. Depending upon market conditions, the income distribution rate may be reset periodically.
INVESTMENT COST ALLOCATION
Allocation of Investment Costs
Banking and investment costs and a portion of internal operating expenses are funded through an administrative charge. Some costs, such as fund manager fees, are charged directly to the respective investment pool, while other general administrative costs are allocated among the three investment pools – the Long Term Endowment Pool, the Intermediate (Quasi) Pool, and Treasurer's Temporary Investment Pool.
All investment advisor, fund manager, and bank custody fees are charged directly to the three University investment pools. General bank service fees are also charged directly to the University's Treasurer's Temporary Investment Pool.
Allocated costs represent general operating expenses including salaries for Treasury Operations and an allocated portion of Business Office and Accounting Office salaries, and certain Treasury Operations administrative costs for software and training. These charges are allocated among the three investment pools.
All requests to the bond trustee for reimbursement of construction expenses are reviewed, signed by the Controller or his designee, and forwarded to Treasury Operations. Fund transfer instructions to the trustee are reviewed by Treasury Operations and must include a second signature of an authorized signer before transmitted to the trustee for processing. Transfers are only authorized to State University of Iowa bank accounts.