Subject: Bell Endowment Funds Investment Management Policy
Approved by: The Board of Regents
Approval date: November 27, 2009
Effective date: November 27, 2009
Revised: December 13, 2012; October 2017
Administered by: Vice-President (Finance and Administration)
1 — PURPOSE, PHILOSOPHY AND BELIEFS
It is the purpose of this Policy to ensure that the University's Bell Endowment Fund (the “Fund”), made up of the Marjorie Young Bell Endowment Fund and the Ralph Pickard Bell Endowment Fund, is invested in a way that will a) protect its purchasing power over the long term, thus ensuring that future generations of students and faculty will receive at least as much benefit from the Fund as the current generation, and b) provide a stable and significant level of support for the University.
It is the University’s philosophy to aim at above average expected returns net of all expenses, including transaction costs, investment management fees and administrative fees.
In this pursuit, annual return volatility that is moderately higher than average is expected and is acceptable.
In particular, the University observes that the net expected real return (net of inflation and all expenses) must equal or exceed the net spending rate (defined as the disbursements net of all expenses as a percentage of the Fund’s market value) in order to have an above average chance of meeting objective (a) in section 1.1.
The Marjorie Young Bell Endowment Fund Committee (the “Committee”) will from time to time review and confirm the investment beliefs which guide it when decisions are made concerning this Policy and under the authority of this Policy.
Currently, the Committee believes:
- that it is prudent to diversify the Fund both within and across asset classes;
- that debt securities do not provide a sufficient real return to be as significant an asset class as equities (and other growth asset classes) if the Fund is to meet the dual purposes of protecting the purchasing power of the Fund for future generations and of providing a significant level of support;
- that a greater allocation to equity investments than in the median balanced fund should provide greater long-term returns than the median balanced fund, although with greater short-term volatility and with returns that will vary significantly (positively and negatively) from median balanced fund returns;
- that a significant allocation to foreign equities increases portfolio diversification and thereby decreases the volatility of returns;
- that debt securities have a role in the Fund because they reduce the volatility of returns, provide a hedge against deflation and help maintain the Fund’s ability to support the University’s spending policy during periods when equity prices decline;
- that active management has the potential to add value (net of fees) relative to index returns over the long term, although that potential varies by asset class and, in some cases, may not be commensurate with the difference in active vs. passive management fees (e.g. with Canadian bonds and U.S. large cap equity);
- that active management can also reduce portfolio risk below market risk;
- that using specialist managers improves the odds of outperformance and using multiple managers provides diversification of active management;
- that due to the high correlation of the Canadian stock market to the Canadian dollar, some foreign currency exposure may reduce total portfolio risk;
- that, even if foreign currency exposure at higher levels begins to increase expected total portfolio risk, because of the cost of currency hedging and of the benefit from active management, normally the Fund will not benefit over the long term by requiring its managers to engage in currency hedging unless there is a reasonable expectation that there will be a significant adjustment in currency values;
- that diversifying investments across a number of assets classes will increase the risk adjusted returns of the Fund;
- that investing the Fund along with the University’s larger General Endowment Fund is the most effective way to invest the Fund in a manner that is consistent with these beliefs given that the management of General Endowment Fund adheres to these same principles and that aggregating assets will increase both the Fund’s and the General Endowment Fund’s capacity to diversify across asset classes; and
- that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).
2 — GOVERNANCE
2.1 Board of Regents
The Board of Regents has delegated its responsibilities concerning the management of endowment funds to its Executive Committee.
2.2 Executive Committee
The Executive Committee has the following responsibilities:
- to approve policies related to the investment of and disbursements from the Fund;
- to review these policies periodically to ensure that they are effective in protecting the purchasing power of the Fund over the long-term and in providing a stable and significant level of support for the University; and
- to appoint managers to invest the Fund's assets and custodians to hold those assets.
2.3 Marjorie Young Bell Endowment Fund Committee
The Board of Regents re-established the Marjorie Young Bell Endowment Fund Committee, through a document signed on behalf of both the Committee and the University on December 30th, 1990, to advise and make recommendations to the Executive Committee concerning the above matters, to review the Marjorie Young Bell Endowment Fund’s performance at least annually, and to advise the Executive Committee of the results of that review. At its meeting on January 31, 1994, the Finance Committee of the Board of Regents also transferred purview over the Ralph Pickard Bell Endowment Fund to the Marjorie Young Bell Endowment Fund Committee. This Committee is also responsible for carrying out the responsibilities assigned to it under this Policy.
2.4 Vice-President (Finance and Administration)
It is the responsibility of the Vice-President (Finance and Administration) to assist the Marjorie Young Bell Endowment Fund Committee in its work covered by this Policy, to perform specific responsibilities specified in this Policy and to ensure the proper administration of this Policy.
Managers have the following responsibilities:
- to provide investment counsel to the University;
- to manage the portion of the fund under their management according to the law and University policy including their mandates;
- to provide the University with periodic reports including valuations and a summary of the performance of funds under their management;
- to select investments within each asset class under their management;
- to act with the care, diligence, and skill of a professional investor in dealing with the property of another; and
- to comply with the standards of professional conduct and the code of ethics administered by the CFA Institute.
Custodians have the following responsibilities:
- to maintain Investments in safekeeping;
- to complete transactions;
- to maintain accounting records with respect to the assets in its safekeeping including purchase and sales transactions and maturity, dividend and investment payments and to provide the University with periodic reports thereon; and
- to fulfil other duties of a custodian as required by law or by contract.
3 — RETURN OBJECTIVES AND RISK TOLERANCE
3.1 Return Objective
The University’s return objective over the long-term (10+ years) is to earn net of all expenses, a real (net of inflation) annual rate of return, including dividends, interest and both realized and unrealized capital gains, that at least covers the spending rate approved by the Board of Regents from time to time.
However, in any one year the annual real return may be significantly below this objective, and as a result there will be times when a 4-year rolling annual rate of return will be less than the above long-term target.
3.2 Risk Tolerance
Risk has been defined as the probability that the real annual rate of return, net of all expenses, will average less than the actual average net spending rate over a 10-year period.
Since none of the revenues of the University’s general operations come from the Fund, and since the Fund has a long investment horizon, a moderately high level of risk is acceptable. In particular it is acceptable to expect more return volatility than a typical Canadian balanced fund although the expected return volatility should be less than the broad equity market (e.g. as represented by the MSCI World Index).
3.3 Operation of the Fund
The Fund will be invested in the same manner as the General Endowment Fund.
Accordingly, the following aspects of the Fund management shall be governed by the General Endowment Fund Investment Policy (#7205):
- portfolio diversification;
- eligible investments;
- investment structure (number of managers, active vs. passive mandates, etc.);
- target asset mix;
- allowable ranges for each asset class;
- rebalancing policy;
- securities lending;
- voting rights;
- use of external custodians; and
- ESG Factors and Active Ownership
Environmental, social and governance (ESG) factors have the potential to affect the Fund’s long-term investment performance. Consequently, ESG considerations are integrated into investment analysis and decisions with the aim of avoiding potential volatility and more reliably predicting long-term financial performance.
Examples of ESG factors that investors may consider as part of their analysis of companies and industries include (but are not limited to):
- Environment – Climate change; greenhouse gas (GHG) emissions; resource depletion, including water; waste and pollution; deforestation.
- Social – Working conditions, including slavery and child labour; local communities, including indigenous communities; conflict; health and safety; employee relations and diversity.
- Governance – Executive pay; bribery and corruption; political lobbying and donations; board diversity and structure; tax strategy.
ESG issues are incorporated into the selection of investment managers and other service providers. Performance and disclosure on ESG issues for companies within the Funds’ portfolios are monitored and investment managers are encouraged to actively vote by proxy at all company meetings and engage with investee companies in order to improve corporate ESG performance.
Investment managers are evaluated with the assistance of external consultants. During selection and monitoring processes, investment managers are evaluated as to the extent to which ESG and active ownership practices are integrated into a manager’s investment process and decision making. The extent to which ESG information is integrated across idea generation, portfolio construction, implementation and firm-wide commitment is assessed.
4 — PERFORMANCE EVALUATION
4.1 Absolute Performance Evaluation
The performance of the Fund will be measured against the long-term performance objective specified in section 3.1 above over rolling 4-year and 10-year periods. In addition, the return volatility experienced over rolling 4-year periods should be consistent with section 3.2.
4.2 Relative Performance Evaluation
Over 4-year rolling periods, the annual return achieved by the Fund, net of expenses shall be measured against the return that would have been achieved by a passively managed portfolio rebalanced quarterly to the target asset mix identified in the General Endowment Fund investment policy for the applicable period.
The General Endowment Fund policy shall specify the relative performance objectives for each individual investment mandate used by the Fund.
5 — CONFLICT OF INTEREST POLICY
These guidelines apply to the following parties: the University, members of the Board of Regents and University Committees; the Managers; the Custodians; and any employee, agent, or third party retained by any of the foregoing to provide services to the Fund.
5.2 Limitation on the Exercise of Powers
No party listed above may exercise his powers in his own interest or in the interest of a third person, nor may he place himself in a situation of conflict or potential conflict between his personal interest and his duties with regard to the investment of the Fund.
5.3 Duty to Disclose
Any party listed above shall disclose in writing, or orally if the knowledge of the duty to disclose arises in the course of discussion at a meeting, immediately upon first becoming aware of the association, interest or involvement, the nature and extent of any direct or indirect association or material interest or involvement that would result in any actual, potential or perceived conflict of interest with regard to the investments of the Fund.
5.4 Participation Following Disclosure
If the party disclosing the conflict has the capacity to participate in or to make decisions affecting the investment of the Fund, the party may only continue to participate with the approval of the University. The party may elect not to participate with respect to the issue in conflict. If the person disclosing the conflict has voting powers, he may continue to participate with respect to the issue only with the unanimous approval of the other participants with voting rights. His notification shall be considered a continuing disclosure on that issue for purposes of the obligations outlined by these guidelines.
6 — GENERAL
6.1 Reviews of the Policy
Every three years the Committee will do a review of this Investment Policy and shall advise the University through the Vice-President (Finance & Administration) of any recommended changes to the policy. Following that review the Executive Committee shall consider any such recommended changes and will either confirm or amend the policy accordingly.
6.2 Reports on Performance
At the end of each quarter the Vice-President (Finance and Administration) will report to the members of the Committee the returns on the Fund by asset class, comparing those returns to the benchmark returns that have been established by the University for its endowment funds. At least once per year, the evaluation under sections 4.1 and 4.2 shall also be provided to the Committee.
6.3 Reports on the Work of the Investment Committee
Since the Bell Endowment Fund will be invested with the General Endowment Fund, in accordance with the University’s Endowment Management policy and under the purview of the Investment Committee, which is a standing committee of the Board of Regents, at each meeting the Committee will be informed on the work of the Investment Committee.