Catholic Community Foundation of the Archdiocese of Baltimore, Inc.
Investment & Spending Policy
Revised: January 2012
The purpose of this investment policy is to establish the parameters and structure of the investment program for the Cahtolic Community Foundation (CCF) of the Archdiocese of Baltimore. The guidelines are designed to allow for sufficient flexibility in the management oversight process to capture investment opportunities as they may occur, while at the same time setting forth reasonable risk control parameters to ensure prudence and care in the execution of the investment program. The assets of this fund include the endowment and funds functioning as endowment assets of many parishes, schools and diocesan agencies (Participants).
The CCF Investment Program ("Investment Program" or "Fund") was established to pool the endowment assets of the Participants to achieve expanded diversification, more cost efficient investment services, and professional management that migh tnot be achieved due to limited investment fund size.
The Investment Policy shall be reviewed annually by the Investment Committee. The board is responsible for CCF's Investment Policy and may amend it from time to time.
The CCF has established the Investment Committee to provide oversight and review of the investment program and has entrusted the Committee, sunject to the direction and approval of the Board of Trustees of the Foundation, with the authority to retain professional services from investment consultants and investment managers and to delegate certain day-to-day responsibilities accordingly.
The goal of CCF Investment Program is to generate total return for the purposes of punding annual distributions and the preservation and growth of principal taking into account economic conditions, the possible effect of inflation or deflation; and expected invcome and appreciation of fund assets. The funds held by the CCF are endowment funds and it is not expected that the funds will be needed without substantial prior notice.
The primary objectives:
- Seek to achieve, a real rate of return at or above the spending rate over a market cycle.
- Preserve the real purchasing power of the principal; and
- Provide a stable resource of perpetual financial support to the Fund beneficiaries in accordance with CCF's Spending Policy.
The Investment Program's primary objectives are long term growth of capital and generation of income. While the Investment Program's objectives may not be achieved each quarter or each year, it is expected that they will be achieved over capital market cycles which normally extend over three to five year periods.
On an annualized, net-of-fees basis, the total return of the portfolio is intended to:
- Equal or exceed the spending rate plus inflation (CPI) over a rolling five-year period;
- Equal or exceed the average return of appropriate capital market indices weighted by the asset allocation target percentages over a rolling five-year period; and
- Equal or exceed the average return of a universe of similarly situated and managed funds.
Assets shall be invested with skill, care, and prudence taking into account the CCF's investment objectives and liquidity requirements. The investment portfolio shall be diversified to minimize the risk of large losses, unless circumstances at any given point in time indicate that diversification is clearly imprudent. Assets are to be fully invested at all times, including idle cash in short-term instruments. It is the desire of the CCF that direct ownership of securities shall, to the best of its ability, conform to the Social Responsible Investment Guidelines put forth by the United States Conference of Catholic Bishops, the SRI Guidelines, (attached). Recognizing that many corporations have broadly diversified operations, the Investment Committee will endeavor to limit investments in any security that has, as defined by our advisors, any material revenues as determined to be unacceptable as set forth by the SRI Guidelines. Generally, the materiality test shall be that not more than 10% of total revenue of a corporation may be invested in service or industry that is contrary to Catholic social teaching. If a corporation exceeds this limit, than, they shall be removed from the investment pool.
The achievement of the investment objectives requires a disciplined, consistent management philosophy that considers the occurrence of all events which might be considered reasonable and probable. They are not consistent with a philosophy which takes extreme positions or employs opportunistic styles.
The assets will be managed on a total return basis. While the Investment Committee recognizes the importance of preservation of capital, it also adheres to the principle that varying degrees of investment risk are generally rewarded with compensating returns. Riskier investment strategies may be pursued if such strategies are in CCF's best interest and are evaluated on a risk-adjusted basis.
The Fund shall be diversified both as to cash, bonds, stocks and alternative investments. Issues shall be thoroughly researched and selected on the basis of proven operating records, sound financial conditions, good marketability and reasonable market valuations. Investments in a single issuer, with the exception of the U.S. Government and its agencies, may not exceed 5% of the total market value of the Fund.
- Money market investments provide liquidity, stability of capital and a competitive level of income.
- Fixed income securities provide a consistent, competitive stream of income while working to reduce or stabilize the overall volatility of the Fund.
- Equity securities provide a growing stream of income and have the potential to increase real purchasing power through an increase in capital value of the dollars invested.
- Alternative investments such as hedge funds and private equity use a variety of securities and investment strategies to achieve performance in excess of their perspective benchmarks or to take advantage of favorable risk/reward market opportunities. Alternative investments are defined as investment vehicles or funds that have generally lower correlation to publicly traded equity and bond markets. Alternative investments can range between 0 and 40% of the portfolio. No single investment in the alternative investment category should exceed 15% of the portfolio and no single manager should exceed 10%. The use of alternative investments is designed to reduce volatility and risk while enhancing the probability of achieving the foundation's targeted rate of return. Therefore, any alternative investment selected by the committee should strictly adhere to the aforementioned description, emphasizing the reduction of risk.
- Illiquid investments may help the Fund achieve its long-term return goals. Illiquid investments usually have higher expected returns than their public market equivalents. Illiquid investments are defined as investments that do not provide the opportunity for redemption requests at least annually. Typically, illiquid investments are expected to have an investment period of multiple years. The Fund's policy target to commitments to illiquid strategies is between 0 and 20 percent of the Fund's market value. Fluctuations in valuations of the entire Fund and lagged reporting of the illiquid investments may cause allocations to temporarily deviate from the policy target. Because of their long-term nature, individual illiquid investment programs will be considered and approved by the Investment Committee prior to commitment.
SPENDING POLICY PHILOSOPHY
The purpose of the Catholic Community Foundation's spending policy is to maximize the impact of the Foundation while ensuring that beneficiaries receive distributions as designed by fund holders at the time the funds were established.
Effective July 1, 2008, no Spendable Income will be awarded for "underwater" funds (those funds where the historic gift value is greater than the market value). In addition, there will be no spending from a fund for the initial 12 months of the fund's existence.
Effective July 1, 2008, the allowable spending in any fiscal year is equal to 70% of the allowable spending in the prior fiscal year, increased by the rate of inflation, as measured by the Consumer Price Index, for the 12 months prior to the start of the fiscal year and; 30% of the long-term spending rate of 4% applied to the 12 quarter market average of the funds for the period ending December 31 prior to the start of the fiscal year. The effective spending rate should be between 3% and 5%. Notwithstanding the foregoing, the Board of Trustees of the Foundation shall consider the factors set forth in the Maryland Uniform Prudent Management of Institutional Funds Act in determining the prudent amount that may be expended from the funds comprising the CCF with respect to each fiscal year.
The purpose of rebalancing is to maintain the Program's asset allocation within the targeted ranges while controlling portfolio risk. It is CCF's policy to monitor portfolio allocations regularly and to rebalance as needed, and in a cost-effective manner, to remain in compliance with the policy.
Tactical rebalancing, which represents opportunistic portfolio positioning away from the asset allocation targets, is also permissible as long as the trades do not violate the stated ranges for each asset class and do not cause undue expense to the portfolio.
The Investment Committee may enter into an agreement with an Investment Advisor that allows the Investment Advisor to execute rebalancing transactions in the Fund on a discretionary basis. The Investment Advisor may not execute rebalancing transactions that would result, as of the date of the investment, in a commitment to a new illiquid investment program or an allocation outside the allowable asset allocation ranges defined in this investment policy statement without the prior approval of the Investment Committee.
ROLES AND RESPONSIBILITIES
CCF Board has delegated primary responsibility for the investments of the Fund to the Investment Committee. In carrying out its responsibilities, the Investment Committee shall perform the following duties with care, skill, prudence, and diligence:
- Establish policies and procedures for the management of the Fund
- Recommend asset allocation ranges and targets and other investment policies to the Board.
- Review Policy annually. Recommend any policy changes to the Board.
- Select investment advisors and managers to implement asset allocation and asset class strategy decisions within the guidelines established herein. The Investment Committee may retain an Investment Advisor to construct portfolios and to select and monitor investment managers in a sub-advisory capacity.
- Oversee and monitor the execution of the Fund's investment policies.
- Review and evaluate performance and risk characteristics of the Fund.
- Monitor performance and organizational changes of Investment Advisor and Investment Managers.
- Provide performance summaries to the Board.
Management and Staff
In the management of CCF assets, Management will:
- Implement the Policy as directed by the Investment Committee.
- Execute any documents necessary to facilitate the implementation for the Policy, including but not limited to contracts and subscription documents.
- Monitor significant changes of the Investment Advisor and Investment Managers, and assure that key changes and timely concerns are reported to the Investment Committee.
- Review and assure receipt by the Investment Committee of the Fund's quarterly reports.
The Investment Committee may utilize and Investment Advisor or Consultant to advise and assist the Investment Committee in its duties and responsibilities. The Investment Advisor will have discretion to develop and execute the investment program within the constraints of this Policy. In its advisory capacity, the Investment Advisor will:
- Assist in establishing investment policies, objectives, and guidelines.
- Know and comply with this Policy.
- Select, retain, and terminate investment managers or sub-advisors as necessary to execute the strategies of the investment program.
- Rebalance the Fund to maintain proper diversification within the ranges described in the Policy. In the event of a violation of the asset allocation ranges stated herein, the Investment Advisor will make reasonable efforts to inform the Investment Committee and, based upon a joint determination of the best interest of the Investment Program, advise as to whether rebalancing transactions should take place of if investments should remain outside the ranges and subject to further review.
- Review the Fund's investments at least monthly to ensure that policy guidelines continue to be met.
- Monitor investment performance and portfolio risks.
- Report to Management and the Investment Committee on a regular basis. Reports will include market value, performance, asset allocation, and other pertinent information.
- Alert Management and Investment Committee of significant changes to investment management or strategies affecting the Fund.
- Meet with the Board, the Investment Committee, and Staff on an as-needed basis.
To ensure diversification and to achieve the Fund's investment objectives, the Fund shall be allocated across a number of investment classes. The following table defines the Fund's target asset allocation and the minimum and maximum allocation limits of each asset class:
Target Asset Allocation Table
|Directional / Relative Value
||HFRI Fund of Funds Composite
||Weighted Average Real Assets benchmark*
Illiquidity Maximum as measured by commitments to various illiquid partnerships: 20% (this includes Private Equity, Venture Capital, Distressed Debt, Private Real Estate, Private Natural Resources)
Alternatives Target: 37% (this includes Private Equity, Venture Capital, Distressed Debt, Private Real Estate, Private Natural Resources, Directional Hedge, and Relative Value Hedge)
*Weighted Average Real Assets benchmark: 20% Barclays US Inflation Linked Index, 30% Dow Jones-UBS Commodity Index, 25% NCREIF ODCE Index and 25% S&P Global Natural Resources Index
||53% ACWI, 15% Barclays Agggregate, 16% HFRI FOF Composite, 16% Weighted Average Real Assets benchmark
||70% S&P 500, 30% Barclays Aggregate
Policy Benchmark: 53% WCWI, 15% Barclays Aggregate, 16% HFRI FOF Composite,
16% Weighted Average Real Assets benchmark %
Traditional Benchmark: 70% P&P 500, 30% Barclays Aggregate
The investment policies, guidelines and restrictions presented in this policy statement serve as a framework to help the Fund and its Investment Manager(s) achieve the investment objectives at a level of risk deemed acceptable. The Fund will be diversified both by asset class and within asset classes. Within each asset class, securities will be diversified among economic sector, industry, quality, and size. The purpose of diversification is to provide reasonable assurance that no single security or class of securities will have a disproportionate impact on the performance of the total fund. As a result, the risk level associated with the portfolio investment is reduced.
The purpose of equity investments, both domestic and international, by the Fund is to provide capital appreciation, growth of income, and current income, with the recognition that this asset class carries with it the assumption of greater market volatility and increased risk of loss. This component includes domestic and international common stocks, American Depository Receipts (ADRs), preferred stocks, and convertible stocks traded on the world's stock exchanges or over-the-counter markets.
Public equity securities shall generally be restricted to high quality, readily marketable securities of corporations that are traded on the major stock exchanges (including NASDAQ), over-the-counter exchanges or similar networks. Equity holdings must generally represent companies meeting a minimum market capitalization requirement of $50 million with reasonable market liquidity. Decisions as to individual security selection, number of industries and holdings, current income levels and turnover are left to broad manager discretion, subject to the standards of fiduciary prudence. However, no single major industry shall represent more than 20% of the Fund's total market value, and no single security shall represent more than 5% of the Fund's total market.
Private capital investments are typically done through limited partnerships or limited liability corporations offered by professional investment managers. Private capital strategies may include venture capital, private equity, natural resources and distressed investments. The Fund will only make illiquid investments using a fund-of-funds approach.
Within the above guidelines and restrictions, the Investment Manager(s) has complete discretion over the timing and selection of equity securities.
Fixed Income Securities
The purpose of fixed income investments, both domestic and international, is to provide diversification, and a predictable and dependable source of current income. It is expected that fixed income investments will not be limited to the long-term bond market, but will be flexibly allocated among maturities of different lengths according to interest rate prospects. Fixed income instruments should reduce the overall volatility of the Fund's assets, and provide a deflation hedge.
Fixed income includes both the domestic fixed income market and the markets of the world's other developed economies. It includes, but is not limited to, U.S. Treasury and government agency bonds, foreign government and supranational debt, public and private corporate debt, mortgages and asset-backed securities, and non-investment grade debt. Fixed income also includes money market instruments, including, but not limited to, commercial paper, certificates of deposit, time deposits, bankers' acceptances, repurchase agreements, and U.S. Treasury and agency obligations. The Investment Manager(s) must take into account credit quality, issuer concentrations, and maturity in selecting an appropriate mix of Fixed Income securities. Investments in fixed income securities should be managed actively to pursue opportunities presented by changes in interest rates, credit ratings, and maturity premiums.
Within the above guidelines and restrictions, the Investment Manager(S) has complete discretion over the timing and selection of fixed income securities.
Cash and Equivalents
The Investment Manager(s) may invest in the highest quality commercial paper, repurchase agreements, Treasury Bills, certificates of deposit, and money market funds to provide income, liquidity for expense payments, and preservation of the Fund's principal value.
Un-invested cash reserves shall be kept to a minimum since short term, cash equivalent securities are usually not considered an appropriate investment vehicle for long-term investments. However, such vehicles are appropriate as a depository for income distributions from longer-term investments, or as needed for temporary placement of funds directed for future investment to the longer-term capital markets. Also, such investments are the standard for contributions to the current fund or for current operating cash.
Within the above guidelines and restrictions, the Investment Manager(S) has complete discretion over the timing and selection of cash equivalent securities.
Private Capital Partnerships: Investments may also include venture capital, private equity, international private capital investments, natural resources, distressed debt and private real estate held in the form of professionally managed pooled limited partnership investments. Such investments must be made through funds offered by professional investment managers.
Commodities: Investments may also include commodities markets, which include (but are not limited to) futures, options on futures and forward contracts on exchange traded agricultural goods, metals, minerals, energy products and foreign currencies.
Distressed Debt Partnerships: Investments may also include partnerships focused primarily on investments in securities and other obligations of distressed businesses and financially troubled companies that are priced at significant discounts to their original value.
Real Estate: Investments may also include equity real estate, held in the form of professionally managed, income producing commercial and residential property. Such investment may be made only through professionally managed pooled real estate investment funds, as offered by leading real estate managers with proven records of superior performance over time.
Natural Resources: Investments may also include oil, gas, clean energy, services and timber investments, held in the form of professionally managed pooled limited partnership investments. Such investments must be made through funds offered by professional investment managers.
Marketable Alternatives: Investments may also include equity-oriented or market-neutral hedge funds (i.e. Long/Short, Macro Event Driven, Convertible Arbitrage, and Fixed Income strategies), which can be both domestic and international market oriented. These components may be viewed as equity-like or fixed income-like strategies as defined by their structures and exposures.
Derivatives and Derivative Securities: Certain of the Fund's managers may be permitted under the terms of their specific investment guidelines to use derivative instruments. Derivatives are contracts or securities whose market value is related to the value of another security, index, or financial instruments. Investments in derivatives include (but are not limited to) futures, forwards, options, options on futures, warrants, and interest-only and principal-only strips. No derivative positions can be established that create portfolio characteristics outside of portfolio guidelines. Examples of appropriate applications of derivative strategies include hedging market, interest rate, or currency risk, maintaining exposure to a desired asset class while making asset allocation changes, gaining exposure to an asset class when it is more cost-effective than the cash markets, and adjusting duration within a fixed income portfolio. All derivative positions must be fully collateralized. Investment Managers must ascertain and carefully monitor the creditworthiness of any third parties involved in derivative transactions.
Each manager using derivatives shall (1) exhibit expertise and experience in utilizing such products; (2) demonstrate that such usage is strategically integral to their security selection, risk management, or investment processes; and (3) demonstrate acceptable internal controls regarding these investments.
MEETINGS AND REPORTS
Reports will include investment returns, an asset allocation summary, estimated annual income, bond quality, bond maturity schedule, size & style and the industry diversification of the public equity and fixed income portions of the Fund. The Investment Firm(S) will provide, within 30 days following the close of the quarter, the above directly to the Treasurer of the Board, the Chair of the Investment Committee and the Director of the Foundation.
Meetings will be held at the request of the CCF Board.
CHANGES TO INVESTMENT OBJECTIVE AND POLICY STATEMENT
Changes to these general objectives and policies may be made by the CCF Investment Committee, subject to the consent of the CCF Board and shall be distributed to the Fund Managers and Advisors.
Approved by the Catholic Community Foundation Board of Trustees on February 29, 2012.