A. AUI Investment Policy Statement
AUI’s investment objective is to preserve the real (inflation adjusted) purchasing power of the reserve assets while providing a predictable and constant (in real terms) stream of earnings that may respond to foreseen, as well as unanticipated spending needs of AUI, including support for strategic initiatives. In this context, the reserves will be managed to achieve the maximum total return while minimizing risk as much as is possible and practical.
As a means of achieving the above-stated investment objective, the Corporate Financial Reserves are to be divided into two administrative accounts as follows:
1. Operating/Contingency Reserve Account
Funds in the Operating Reserve Account shall be invested in financial instruments that preserve principal while achieving a return on investment generally equivalent to broad indices for these types of investments. The balance of the Operating Reserve Account at the beginning of the AUI fiscal year shall be equivalent to the greater of (a) $1M, or (b) approximately two years of expenses that are not expected to be funded by either the indirect cost rate or by management fees.
The amount to be included in the Operating Reserve account is approved by the Board on an annual basis as part of the annual budgeting process which includes a recommendation by the Operations and Administration Committee. Allocation of funds to the Operating Reserve Account does not itself provide authorization for their expenditure. Authority to expend these funds is subject to the Board’s annual budget approval process. Operating Reserve Account funds may also be used to temporarily supplement funds in the operating cash account (see C. below) to cover revenue shortfalls and for cash flow management purposes.
Funds in the Operating Reserve Account are limited to cash, fixed income investments that guarantee investment principal, and any equivalents thereof.
2. Investment Reserve Account
Funds in the Investment Reserve Account shall be invested in cash, fixed income investments, equities and any equivalents thereof.
The equity portion should provide appreciation of principal that more than offsets inflation and provides a growing stream of current income. This entails the assumption of market variability and risk but balances risk and return potential in its allocation and management of the total funds available.
In addition to domestic common stocks, portions of the equity funds may be allocated to non-U.S. stocks or to other alternative equity investments as the Operations and Administration Committee determines appropriate. The alternative equity sub-portfolio should augment the return of the equity fund through investment in both non-marketable asset classes (e.g., venture capital, private equity, real estate, commodities and other resource related stocks) and alternative marketable strategies (e.g., distressed securities, event arbitrage).
These alternative allocation strategies may be undertaken directly through limited partnerships or other vehicles or through the employment of external managers for such purposes. The Committee may use its discretion within the guidelines regarding the most appropriate way to proceed.
B. Normal Asset Allocation, Risk Tolerance, and Performance Benchmark
The normal asset allocation of the entire Corporate Financial Reserves (i.e. the Operating Reserve Account and the Investment Reserve Account) is 70% equities and 30% cash/bonds, within a +/- 5% tolerance. Unless directed otherwise by the OAC, on a quarterly basis, the Treasurer shall reallocate Corporate Financial Reserves when the investments do not meet the normal asset allocation. The performance benchmark for the entire Corporate Reserves shall be a weighted blend of industry-recognized benchmarks, as approved by the Operations and Administration Committee. Examples include:
- 30% Barclays U.S. Aggregate Bond Index (Fixed Income)
- 60% MSCI All Country World Index (Equities)
- 10% HFRI Fund of Funds Composite Index (Alternatives)
C. Cash Management
Cash required for ordinary day-to-day operations shall not be factored into the Corporate Financial Reserves normal asset allocations, but rather shall be segregated into a separate operating cash account(s).
Cash in excess of operating cash needs will be transferred to Corporate Financial Reserves and included into the normal asset allocation.
The Corporate Financial Reserves financial performance, including asset allocation, shall be monitored by the Treasurer and reported to the OAC on a regular basis. The Board and Executive Committee shall receive Corporate Financial Reserve investment performance and asset allocation at each of their regularly scheduled meetings. The OAC shall also report to the Board the hiring of any new investment managers.
E. Roles and Responsibilities
The AUI Executive is authorized by the Board to retain one or more outside investment advisors or investment management firms (hereafter referred to as investment advisor/s), to manage the Corporate Financial Reserves under the direction of the AUI Executive, and in consultation with the OAC, acting in the place and stead of the AUI Board.
Trading authorization for the investment accounts shall be given to the following individuals:
- AUI President, Treasurer, Chief Financial Officer and Vice President of Administration
The investment advisor shall provide the Treasurer with monthly statements that will include the transactions and performance of the Corporate Financial Reserve accounts. The investment advisor should also provide recommendations for any changes to the portfolios, along with timely performance reviews, scheduled to coincide with the scheduling of OAC and Board meetings. The Treasurer shall communicate to the OAC the investment performance and any recommendations by the investment advisor.
F. Use of Investment Reserves
The Investment Reserves are not intended to be used for routine operational expenses. They may be used for business related opportunities, or other strategic initiatives, that are AUI Mission-oriented. All requests for Investment Reserve funds must be recommended by the President, reviewed by the OAC, and approved by the Board. Any business-related requests for such must be accompanied by a solid business plan, including the intended use of potential profits (e.g. profits to be returned to the reserves fund, or re-invested back into the opportunity or initiative being pursued).
G. Securities Backed Line of Credit
When assessing the funding of business related opportunities, the use of securities in the investment reserve account as collateral for a Line of Credit may be considered, to avoid, for example, withdrawing Investment Reserve funds, particularly during times of market downturns.
H. Policy Management
The OAC, in consultation with the Treasurer and AUI President, will periodically review and propose changes to the Investment Policy Statement, with final approval from the Board of Trustees.