University Business Policies and Procedures Manual

7610
INVESTMENT MANAGEMENT
Effective Date: 03/01/06
Revised:  08/01/06, 03/25/08
Subject to Change Without Notice 

Authorized by UNM Regents' Policy 7.21 "Investment of Operational Funds and Bond Proceeds"

1. General

This policy applies to the investment of operational funds (Operating Fund) of the University. Investment of bond proceeds must also comply with all sections of this policy unless otherwise noted. Provisions specific to the investment of bonds proceeds are listed in Section 8. herein. This policy does not apply to endowments held by the University and the UNM Foundation, which are invested in accordance with the Foundation's "Consolidated Investment Fund Endowment Investment Management Policy." The purpose of this policy statement is to:

• Outline a methodology and an approach to be followed for management of the Operating Fund. It is intended to be sufficiently specific to be meaningful, yet flexible enough to be practical.
• Provide a framework and establish lines of authority for both general oversight and the operational management of Operating Fund investments.
• Define and assign the responsibilities of all involved parties.
• Establish a clear understanding for all involved parties of the investment goals and objectives for Operating Fund assets.
• Offer guidance and limitations to all persons and organizations regarding the investment of Operating Fund assets.
• Establish a basis for evaluating investment results.
• Establish the relevant investment horizon for which assets will be managed.

2. Investment Objectives

The investment objectives for operational funds and bond proceeds are set forth below in the order of priority. All investment decisions will adhere to the fundamental principles of safety, liquidity, and return.

2.1. Legal Restrictions

The University will invest funds in conformity with federal and state laws and regulations, including Internal Revenue Service (IRS) regulations pertaining to tax exempt bonds, bond resolutions and indentures, and other pertinent legal restrictions. These laws and regulations include but are not limited to NMSA 1978, Sections 6-8 and 6-10; Uniform Prudent Investor Act, NMSA 45-7 (601-612); and Internal Revenue Code IRC Section 148, Arbitrage.  

2.2. Preservation of Capital (UNM Managed Liquidity Portfolio)

[Each investment decision shall first consider that capital losses are to be avoided, unless it is economically viable to do so, whether from] the fixed income process shall consider the economic viability of each transaction regarding such factors as deterioration of financial fundamentals or erosion of market value due to rapidly changing interest rates or other market and non-market factors. The single most important objective of this investment program is the preservation of the principal.

2.3. Liquidity and Safety (UNM Managed Liquidity Portfolio)

The investment portfolios must be structured in such a manner which provides liquidity.  [that sufficient liquidity shall exist to pay obligations as they become due, without the requirement for unplanned liquidation of securities.] Investment assets shall be invested in liquid securities, defined as securities that can be transacted quickly and efficiently for the University.  [with minimal impact on market price]. The University Debt and Investment Advisory Committee shall establish criteria for the preparation of cash projections or liquidity needs. [and matching of maturities and maintenance of reserves.]

2.4. Income and Yield (Investment Portfolio)

The investment portfolios shall be managed in such a fashion as to generate returns equaling or exceeding benchmarks established by the Debt and Investment Advisory Committee, consistent with statutory and policy constraints which control permitted investments. Considering the University's fiduciary responsibilities, safety and liquidity are the overriding objectives of this policy, and yield is a secondary consideration.

2.5. Return on Investment (UNM Managed Liquidity Portfolio & Investment Portfolio)

The University seeks market rates of return on its investments, consistent with its liquidity requirements and quality and duration/maturity constraints, in relation to the Fund's benchmark. [The University further seeks to preserve its capital by maintaining a low volatility portfolio as it relates to price fluctuations, further modifying return objectives.]

2.6. Risk (UNM Managed Liquidity Portfolio & Investment Portfolio)

The University realizes that there are numerous ways to define risk. The University believes that any person or organization involved in the process of managing Operating Fund assets understands how risk is defined so that the assets are managed in a manner consistent with the investment portfolio's objectives and investment strategy as articulated in this policy. The University defines risk as:

• Cash Flow Risk - The probability of not achieving the Fund's short term cash flow requirements.
• Compliance Risk - Non-compliance with applicable State of New Mexico statutes concerning the investment of public funds.
• Interest Rate Risk - the potential for fluctuations in bond prices due to changes in interest rates and/or a duration/liability mismatch.
• Credit Risk - the possibility that a bond issuer will fail to make timely payment of either interest or principal to the portfolio.
• Reinvestment Risk - the possibility that the proceeds of a maturing or called security will be reinvested at lower yields as a result of a general interest rate decline in the bond market.
• Liquidity Risk - the possibility that the liquidity of the market for a security may decline thereby making it more difficult to dispose of the security promptly; presenting difficulties in valuation of the security; and causing the security to experience greater price volatility. This risk can be controlled by purchasing large, familiar issues with active secondary markets and allowing for adequate reserves through money market funds and other investments which provide for cash withdrawals on demand.

2.7. Management Philosophy

The University seeks to acquire securities with suitable characteristics to Operating Fund cash flows, and to hold those assets until such time as market conditions or other factors create clear opportunities for increased returns. Excessive trading without clearly demonstrable benefit to the University is prohibited.

2.7.1. Permitted Investments/Allowable Assets

The scope of authority for the types of investments that may be made with University funds is statutorily defined in NMSA 1978, Sections 6-8 and 6-10. University assets may be invested in any securities permitted by law, subject to the provisions of this investment policy. Allowable Assets include the following [cash equivalents]

• Money market funds
• Certificates of deposit (fully insured by FDIC)
• Commercial paper
• Banker's acceptances
• U.S. government agencies
• Corporate bonds (minimum A2/A rating or better)
• U.S. treasuries

Maximum maturity for any single security should closely correlate to the duration/liability schedule. Fixed income managers will maintain the duration of their portfolios to correlate to the duration of the index (market or customer liability index) assigned to their portfolio.

2.7.2. Prohibited Investments

Use of high risk (volatile) derivative securities is prohibited from purchase. Notwithstanding authority granted by law and elsewhere in this policy, in order to mitigate exposure to interest rate risk, market risk, and liquidity risk, the following investments and investment practices are prohibited. Prohibited investments include, but are not limited to the following:

• Domestic or international equity securities (i.e. stocks)
• Commodities and futures contracts
• Options
• Speculative securities
• Mortgages-backed debt and pass-through securities or obligations
• Fixed income mutual funds
• Private placements
• Limited partnerships
• Real estate properties
• Principal-only (PO) securities
• Interest-only (IOs) Securities
• Planned amortization class (PACs)
• Residual Tranche collateralized mortgage obligations
• Venture-capital investments
• Derivatives
• Collateralized mortgage obligations (CMOs) and other mortgage-backed securities, inverse floaters, leveraged floaters, capped and rate floaters, dual index floaters, and floating rate notes whose index is tied to a long-term interest rate or lagging index, e.g. Cost of Funds Index (COF1)
• Investment purchase on margin or short sales
• Leveraging the portfolio, lending securities with an agreement to buy them back after a stated period of time.
• Repurchase agreements are prohibited for operating funds, but are allowable for bond proceeds.
• GICs are prohibited for operating funds, but are allowable for bond proceeds.

2.7.3. Diversification

To the extent practical, assets shall be diversified to reduce the risk of loss resulting from an over-concentration of assets in a specific maturity, a specific issuer, or a specific class of securities. The [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis shall monitor the diversification of the aggregate portfolio monthly and shall report any issues to the Executive Vice President for Administration/CFO/COO.

2.7.4. Asset Allocation

The University has a very low tolerance for investment risk and investment managers will consider this risk tolerance and take appropriate steps to control risk by adhering to the University's desired asset class and sector allocation rates listed in the table below. 

Investment Instrument	Preferred Range (%)	Maximum % of Investment Funds
U.S. Government Obligations (Treasuries)	30 to 60 %	100%
U.S. Government Agencies guaranteed by the full faith and credit of the U.S.	30 to 60 %	100%
U.S. Government Agencies (non full faith and credit)	10 to 40%	50%
Corporate bonds - A rated or higher	10 to 15%	20%
Money Market Funds	0 to 20%	100%
Certificates of Deposit ("CD")	0 to 5%	10%
Commercial Paper	0 to 5%	10%
Federal Funds or Bankers Acceptances	0 to 5%	10%

2.7.5 Corporate Credit

As it pertains to corporate credit:

• No more than ten percent (10%) of the aggregate portfolio will be rebalanced to corporate credit during the initial rebalancing.  Prior to increasing this allocation towards the twenty percent (20%) maximum, the Investment Consultant will notify the University of New Mexico in writing.  Further rebalancing cannot occur until UNM has approved the incremental increase to corporate credit.
   
• No more than twenty-five percent (25%) of the aggregate weighting to corporate credit can be in any one(1) section/industry.
   
• The minimum credit rating to each issue is A2/A.
   
• The maximum purchase price for any one (1) bond is 102 ($1020).

3. Investment Responsibilities

All persons or entities that have responsibility for the investment of University funds are at all times bound by the requirements of this policy and federal and state laws and regulations. Individuals responsible for investment decisions shall exercise judgment, care, skill, and caution to invest and manage funds as a prudent investor would, by considering the objectives, terms, and distribution requirements while preserving capital. They shall comply with Regents' Policy 6.4 "Employee Code of Conduct and Conflicts of Interest."

3.1. University Debt and Investment Advisory Committee

The University Debt and Investment Advisory Committee is responsible for oversight of the University's debt management and investment programs ensuring they are managed in accordance with University policy and applicable laws and regulations. The Committee is also responsible for distribution of investment income, monitoring investment activities, and reporting the results of investment activity annually to the Board of Regents. The Committee shall:

• Establish, maintain, and administer this policy, and review it biennially to ensure it meets investment objectives and changes in market conditions.
• Ensure appropriate performance factors and safeguards are in place to guide the investment program.
• Establish and communicate goals and objectives for measuring the performance of the investment consultant and investment managers.
• Evaluate the performance of the investment consultant and managers to assure adherence to this policy.
• Monitor investment progress in meeting investment objectives.
• Recommend selection or replacement of qualified investment consultants and managers for approval by the Board of Regents.

The Committee is chaired by the Executive Vice President for Administration/CFO/COO and is composed of the Vice President for HSC/UNM Finance and University Controller, [Associate Vice President for Financial Services-Main Campus, Associate Vice President for Financial Services-Health Sciences Center,] Associate Vice President for Planning, Budget, and Analysis, UNMH Administrative Chief Financial Officer, Associate Vice President For Business Development & Auxiliary Services, [Associate Director for Fiscal Planning, Policy, and Analysis], Associate Controller for HSC, Associate Vice President for Planning, Budget, and Analysis-Provost's Office, Senior Budget Analyst, University Budgets Administrator, Manager of Banking, Tax, and Investments, and other members designated by the Executive Vice President for Administration/CFO/COO.

3.2. University Investment Administrators

3.2.1. Executive Vice President for Administration/CFO/COO

The Executive Vice President for Administration/CFO/COO is responsible for supervising the investment activities of the University and delegates to the [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis   responsibility for carrying out the day-to-day investment activities.

3.2.2. [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis

The [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis will monitor the investment portfolio and recommend adjustments as necessary in conjunction with the Executive Vice President for Administration/CFO/COO, investment consultant, and investment managers. The [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis will provide quarterly reports on cash flow requirements and investment results to the Debt and Investment Advisory Committee.

To minimize the possibility of a loss incurred by the sale of a security forced by the need to meet a required payment, the [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis will periodically provide, in writing, the investment consultant an estimate of the University's net cash flow needs. This must be provided in a timely manner to allow sufficient time for investment managers to build up necessary liquid reserves.

3.2.3. Vice President for Finance for HSC/UNM Finance and University Controller Associate Vice Presidents for Financial Services

The Vice President for Finance for HSC/UNM Finance and University Controller Associate Vice Presidents for Financial Services-Main Campus and Health Sciences Center are is responsible for ensuring adequate internal controls are in place to safeguard assets and ensure proper reporting.

3.3. Investment Consultant

Subject to approval by the Board of Regents, the University may engage the services of an investment consultant, registered with the Securities and Exchange Commission (SEC) and a member of NASD and/or other professional regulatory organizations, who has appropriate training and expertise and access to specialized information and analysis or analytical tools and systems. The investment consultant may represent only the interest of the University and any other relationship(s) that might provide basis for a conflict of interest are expressly prohibited. The investment consultant must disclose all forms of compensation or remuneration (whether from the University or from others) arising directly or indirectly from the investment consultant's relationship with the University and/or its investments.

The investment consultant will work under the oversight of the Debt and Investment Advisory Committee and the operational supervision of the University's investment administrators listed in Section 3.2. herein. The investment consultant will advise and assist the University in:

• defining its investment policy, objectives, and guidelines;
• selecting investment managers;
• reviewing investment managers over time;
• measuring and evaluating investment performance;
• monitoring the investment program;
• reviewing the portfolio's investment history, historical capital markets performance; and
• other tasks as deemed appropriate.

3.4. Investment Managers

Subject to approval by the Board of Regents, the University may contract with investment managers who possess appropriate experience, credentials, resources, and infrastructure to select, purchase, sell, or hold specific securities to assist the University in meeting its investment objectives. Investment managers are responsible for making specific investment decisions, subject to the limitations of this policy, and will be held responsible and accountable to achieve the objectives stated in this policy.

3.5. Custodian Institutions

Subject to approval by the Board of Regents, the University shall contract with financial institutions to serve as safekeeping agents and custodians who will directly (or through agreement with a sub-custodian) maintain actual possession of securities owned by the University, who will open accounts, collect dividend and interest payments, redeem maturing securities, and effect receipt and delivery following purchases and sales, all on behalf of the University. The custodian may also perform regular reporting of all assets owned, purchased, or sold, as well as, movement of assets into and out of the University's accounts.

All investment securities purchased by the University or held as collateral on repurchase agreements shall be held in third-party safekeeping at the financial institution designated as custodian. All securities held for the University will be held free and clear of any lien and all transactions will be conducted on a contemporaneous transfer and next day settlement basis. On at least a monthly basis, the custodian will provide reports which list all transactions that occurred during the month and all securities held for the University at month-end including the book and market value of holdings.

3.6. Investment Expenses

All expenses related to the investment management of University funds must provide good value, and must be customary, appropriate and reasonable, and may, at the option of the University be charged to the investment portfolio as deemed necessary.

4. Internal Controls

The Debt and Investment Advisory Committee shall establish a system of internal controls designed to prevent and control losses of University investment assets arising from fraud, error, misrepresentation, unanticipated market changes, conflicts of interest, or imprudent actions. In accordance with Regents' Policy 7.21, all investment transactions require prior authorization from two University administrators with signature authority on the University's depository accounts.

5. Specific Investment Goals and Benchmarks

Performance goals and factors will be established for portfolios, under the general supervision and oversight of the Debt and Investment Advisory Committee and the investment consultant. Benchmarks, or bond market indices, shall incorporate targets or ranges for attributes such as rate of return, maturity/duration, risk/volatility measures, credit quality, or other factors that the Debt and Investment Advisory Committee deems important and whose characteristics are largely representative of the actual portfolio. Benchmarks are important elements in managing performance and in safeguarding financial assets; therefore, the Debt and Investment Advisory Committee is granted latitude, flexibility and discretion, in compliance with this policy, in establishing an overall performance management framework.

The Debt and Investment Advisory Committee with the advice and consent of the investment consultant, shall periodically establish investment horizons, and appropriate benchmarks for use in measuring performance. Such performance measures shall be in writing and must be reviewed and updated as dictated by market conditions, the Operating Fund cash flow requirements, and investment horizon. Benchmarks and performance measurement shall be reviewed at least quarterly or more often as needed.

The University understands that as it seeks to achieve the objectives, the portfolio may experience volatility in returns, as interest rate, yield-curve, pre-payment and basis risk are present in even short maturity investment portfolios. Furthermore, the University acknowledges that market prices of individual securities may vary due to pricing by external services. The University seeks overall returns that are consistent with its risk tolerance and performance benchmarks, and which satisfy its investment objectives viewed together and in their entirety.

The investment objectives listed in this policy pertain to the aggregate investment portfolio, and are not meant to be imposed on each investment account. The goal of the investment managers, over the investment horizon, shall be to:

• Meet or exceed a custom liability index, market index, or blended market index, selected and agreed upon by the University and the investment consultant that most closely corresponds to the style of investment management. Investment managers should refer to the benchmark that corresponds to their style of investment management and/or customized index. Investment managers are to meet or exceed the specific benchmark assigned to their style of investment management which was selected and agreed upon by the Debt and Investment Advisory Committee and the investment consultant.
  
  
• Display an overall level of risk in the portfolio, which is consistent with the risk, associated with the appropriate benchmark. Risk will be measured by the standard deviation of quarterly returns, as well as any duration/liability mismatch.
  
  
• Specify investment goals and constraints for each investment manager which are compliant with this policy.

6. Investment Performance Review and Investment Manager(s) Evaluation

Performance reports shall be compiled at least quarterly by the [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis, in conjunction with the investment consultant and managers; to be communicated to the Debt and Investment Advisory Committee for its review. The investment performance of total portfolios, as well as, the investment managers, will be measured against benchmarks that have been adopted by the Debt and Investment Advisory Committee and the investment consultant.

Investment managers, when employed, shall be subject to quarterly reporting and review requirements. Investment managers may be required to submit more frequent activity and performance reports (for example if a manger is subject to requirements stemming from adverse performance review) or to aid the University in cash flow forecasts, portfolio rebalancing, or any other purposes. The University, with the assistance of the investment consultant, will evaluate the managers over an appropriate time horizon, which is generally considered to be twelve (12) quarters. The University may determine to employ a shorter time horizon. The Committee may at any time instruct the Executive Vice President for Administration/CFO/COO to terminate the relationship with any investment manager; cancellation or suspension of a manager's contract will not be executed without first consulting with the Debt and Investment Advisory Committee and the investment consultant.

The University will include specific benchmarking, risk, time horizon and other performance factors within investment managers contracts. The Debt and Investment Advisory Committee shall approve such performance factors prior to their incorporation. Without intending to constrain the University's options for managing investment managers performance, the following factors must be considered when assessing performance:

• Investment performance which, over the appropriate time horizon is materially less than anticipated (i.e. fails to achieve the benchmark) given the discipline employed and/or greater variability of return than the established parameters would dictate.
• Failure to adhere to any aspect of this policy, including but not limited to communication and reporting requirements.
• Meaningful quantitative changes (performance related) and/or failure to conform to the University's objectives on maturity, duration or risk.
• Significant qualitative changes to the investment management organization.
• Engaging in speculative investment practices or excessive trading that does not benefit the Operating Fund.

7. Reporting Requirements

The Monthly Investment Report shall contain sufficient information to permit an independent organization to evaluate the performance of the investment program. The [Associate Director for Fiscal Planning, Policy, and Analysis] Associate Vice President for Planning, Budget, and Analysis and/or investment manager(s) shall prepare and submit the report to the Debt and Investment Advisory Committee and the Executive Vice President for Administration/CFO/COO that summarizes the following:

• a listing of the existing portfolio in terms of investment securities, balances, maturities, return, and other features deemed relevant;
• the book value of all holdings;
• the investment earnings for the reporting period;
• report of holdings of variable rate and structured notes; and
• any areas of policy concern warranting possible revisions of current or planned investment policies.

The Debt and Investment Advisory Committee will report the results of investment activity annually to the Board of Regents.

8. Bond Proceeds

• Repurchase agreements are prohibited for operating funds, but are allowable for bond proceeds.
• GICs are prohibited for operating funds, but are allowable for bond proceeds.

Comments may be sent to UBPPM@UNM.edu
http://www.unm.edu/~ubppm