Statement of Investment Beliefs and Principles for the Endowment Fund
UNIVERSITY OF GUELPH
Statement of Investment
Beliefs and Principles
For the Endowment Fund
Approved by the Board of Governors on June 3, 2016
The Endowment Investment Policy (the “Policy”) reflects a number of decisions taken by the Board of Governors at the time of the policy development, and at subsequent reviews. These decisions, in turn, reflect certain beliefs held by the Board of Governors at the time the decisions were taken or approved.
To the extent these beliefs remain consistent over time, so too should those elements of the Policy that rest upon them. The purpose of this document is to set forth the Board’s beliefs and principles, so that the historical context in which decisions were made will be better understood by readers and users (both current and future).
This statement shall be reviewed at least every three years to ensure that it continues to reflect the views and opinions of the Board.
II. Purpose of the Endowment Fund
- The primary purpose of the endowment portfolio is to invest capital to provide annual income that will grow with inflation.
- Endowment capital is invested for long periods, often expressed as “in perpetuity” meaning short term returns need not outweigh long term performance.
- Environmental, social and corporate governance components of business practices offer insight into long term returns and investment risk. Therefore the University will have an interest in considering these factors when making long term investment decisions.
- While the endowment portfolio has the primary purpose of providing for the real protection of designated spending, the composition of its investments should reflect the University’s role in contributing to the well-being of society with a global perspective.
- To the extent possible and prudent, the University can contribute to address global issues of economic growth, social improvement and environmental sustainability through the management of endowment investments.
- Good governance contributes to superior, timely and sustainable results. Roles and processes related to the investments should be well documented and communicated to all relevant parties;
- All parties involved in the investments will yield superior investment results if the parties’ objectives are clear, the parties are empowered to act and the parties are accountable for their results;
- Transparency supports compliance with policy and allows for effective stakeholder understanding of University investment activities.
IV. Investment Process
- It is more cost-effective to hire external managers than to build in-house expertise in order to meet the various investment objectives;
- In the selection of external managers the University strives to hire the best in class who demonstrate strong ethical standards, committed professional management as well as a proven track record of performance.
- Appropriate and timely reporting of investment activities and results is required in order to monitor the investments’ performance against the relevant benchmarks.
- The investments should be made in the context of understanding the primary objectives of the endowment fund.
- It is important to manage the cost effectiveness of the investment process including ensuring the cost of investment management is balanced in the context of returns.
V. Market Beliefs
- Over the longer term assets that have greater risk are expected to provide greater returns. Risk in this context is broader than the general measure of volatility of returns especially when measuring investment outcomes across different markets. Therefore qualitative factors in assessing risk may be considered when developing investment policy.
- To achieve the long term objectives of the endowment fund, a certain level of risk must be taken. This will involve the selection of certain asset classes with greater volatility but greater expected return over longer periods of time.
- The majority of the variability in the investment returns, and the implied inherent risk, can be explained by the strategic asset allocation selected. As a result, the strategic asset mix decision is critical in determining the risk profile of the investments;
- The investments should be diversified across a broad range of financial assets, asset classes, geographies and management styles as portfolio diversification provides reduction in investment risk;
- Simplicity and transparency are essential attributes of any asset, asset class, or investment strategies that could be contemplated for portfolio diversification;
- The use of derivative instruments should be limited to risk mitigation purposes (e.g., limiting currency exposures) and for efficient access to certain asset classes (e.g., index replication) and not for return enhancement;
- The risk and return characteristics of specific asset classes should be reviewed periodically to evaluate if the investment strategy or the asset allocation for the Policy and its impact on specific investment risk and return metrics is still appropriate;
- Active investment management where markets can be inefficient represents an opportunity to earn higher returns thereby justifying fees. Passive investment management is not excluded when the belief is not as strong;
- Over the long term, fluctuations in currency tend to offset but over the short term, currency risk can matter when a specific exposure to an asset class is sought. Currency management (at a specific manager level or on an overall basis) in order to reduce some of the volatility that may result from interim currency fluctuations can be used if the trade-off between benefit and cost is favourable.