Administrative Policies and Procedures Manual - Policy 7610: Investment Management
Date Originally Issued: 03-01-2006
Revised: 08-01-2006, 03-25-2008, 01-11-2011, 06-25-2012
Subject to Change Without Notice
Authorized by Regents' Policy 7.21 "Investment of Operational Funds and Bond Proceeds"
Process Owner: Associate Vice President for Planning, Budget, and Analysis
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, § 6-8-1 et seq. and § 6-10-1 et seq.; “Uniform Prudent Investor Act,” NMSA 1978, § 45-7-601 et seq.; and Internal Revenue Code on Arbitrage, 26 USC § 148.
2.2. Preservation of Capital (UNM Managed Liquidity Portfolio)
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. Investment assets shall be invested in liquid securities, defined as securities that can be transacted quickly and efficiently for the University. The University Debt and Investment Advisory Committee shall establish criteria for the preparation of cash projections or liquidity needs.
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 and 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.
2.6. Risk (UNM Managed Liquidity Portfolio and 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, § 6-8-1 et seq. and NMSA 1978, § 6-10-1 et seq.. University assets may be invested in any securities permitted by law, subject to the provisions of this investment policy. Allowable assets include the following:
- Money market funds
- Certificates of deposit (fully insured by the Federal Deposit Insurance Corporation [FDIC])
- Commercial paper
- Bankers’ acceptances
- U.S. government agencies
- Corporate bonds (minimum BBB/Baa2 rating or better) per issue
- Industrial Floaters
- U.S. treasuries
- Municipal bonds-both taxable and tax exempt (minimum A/A2 rating or better) per issue
- Global fixed income securities: non-dollar denominated securities.
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. Investments should have an average duration of three (3) years or less.
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
- 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 except when utilized to protect the Global Fixed Income Portfolio
- 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 (COFI)
- 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
- Guaranteed Investment Certificates (GICs) are prohibited for operating funds, but are allowable for bond proceeds
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 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. Investments should have an average duration of three years or less, an average credit quality of A1/A+ or better, no use of leverage, and security ratings of investment grade.
||Preferred Range (%)
||Maximum % of Investment Funds
|U.S. Government Obligations (Treasuries)
||30 to 60 %
|U.S. Government Agencies guaranteed by full faith and credit of the U.S.
||30 to 60 %
|U.S. Government Agencies (non-full faith and credit)
||20 to 60%
|Taxable and/or Tax-Exempt Municipal Bonds
||0 to 20%
|Corporate Bonds - BBB/Baa2 rated or higher
||20 to 40%
|Money Market Funds
||0 to 20%
||0 to 10%
|Certificates of Deposit ("CD")
||0 to 5%
||0 to 5%
|Federal Funds or Bankers' Acceptances
||0 to 5%
|Global Fixed Income Securities
||0 to 15%
2.7.5. Corporate Credit
As it pertains to corporate credit:
- No more than twenty-five percent (25%) of the aggregate weighting can be invested in any one (1) industry or sector.
- No more than five percent (5%) of the portfolio may be invested per issuer (excluding U.S. Government and Agency securities) at time of purchase.
- The minimum credit rating to each issue is BBB/Baa2 by at least two nationally recognized statistical rating organizations (NRSROs). If only one NRSRO rates the bond, then that rating shall apply.
- There is no "cap" for the maximum bond purchase price of any single security.
2.7.6. Global Fixed Income Securities: International and Emerging Markets Fixed Income Guidelines
Investments will consist of non-dollar denominated fixed income securities of companies and governments outside of the United States such as sovereign debt of such countries as Norway, Canada, Australia, New Zealand, and Singapore. Types of securities to be utilized include international and emerging market sovereign debt, commercial paper, government notes and bonds, as well as corporate notes and bonds. Currency forwards may be implemented as a hedge to the Global Fixed Income Portfolio when deemed appropriate. For purposes of these investments, an institutional or emerging market sovereign debt generally will be considered to be located outside the United States if it meets one (1) or more of the following criteria:
- the issuer or guarantor of the security is organized under the laws of, or maintains its principal place of business in, a non-U.S. country;
- the currency of settlement of the security is a currency of a non-U.S. country;
- the securities are traded principally in a non-U.S. country; or
- during the company's most recent fiscal year, it derived at least fifty percent (50%) of its revenues or profits from goods produced or sold, investments made, or services performed in a non-U.S. country or has at least fifty percent (50%) of its assets in that country.
Up to twenty-five percent (25%) of the non-dollar denominated fixed income securities may be hedged into U.S. dollars when the U.S. dollar is attractive relative to foreign currencies. The underlying securities will have an average credit rating of A/A2 or higher by at least two Nationally Recognized Statistical Rating Organizations (“NRSRO”). In addition, the portfolio will not invest more than five percent (5%) of the total market value of its investments (measured at the time of purchase) in the debt obligations of any single fixed income issuer; however securities issued and guaranteed by OECD nations may be held without limitation. Also, no investment in corporate securities will be made in issues with an outstanding value less than $50 million, par value, at the time of purchase. The portfolio will generally have an average effective maturity of between six (6) months and three (3) years and an average effective duration of approximately two (2) years.
In addition, funds will be invested in accordance with guidelines on file with the Associate Vice President for Planning, Budget, and Analysis.
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 representatives from Financial Services, the Office of Planning, Budget, and Analysis, 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 Vice President for Planning, Budget, and Analysis responsibility for carrying out the day-to-day investment activities.
3.2.2. Associate Vice President for Planning, Budget, and Analysis
The 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 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 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. University Controller
The University Controller 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 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 manager's 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 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.
Any exceptions to this policy must comply with Regents' Policy 7.21 "Investment of Operational Funds and Bond Proceeds" and be authorized in writing by the University President.