MUSC Foundation Investment Policy Statement 2020

Table of Contents

Purpose

This Investment Policy Statement (“Policy”) is issued by the Board of Directors (“Board”) of the Medical University of South Carolina Foundation (“Foundation”).

The purpose of this Policy is to define the policies and procedures that will guide the Board in the management of the Foundation’s investable assets (“Investable Assets”).  This Policy is intended to serve as an operating document to guide the investment activities of the Foundation.  It defines the responsibilities of the various groups accountable for guiding the investment process and supervising outside investment professionals.  This Policy defines the investment parameters for the Foundation’s various investment portfolios (“Portfolios”).

Investment principles

The Foundation and Board will follow prudent investment principles, fulfill their fiduciary duty, and manage the Assets in accordance with the investment standards established in the South Carolina Uniform Prudent Management of Institutional Funds Act (“SCUPMIFA”), S.C. Code Ann.34-6-10 et.seq.

Asset diversification, return expectations, and risk parameters will be defined in this Policy for each Portfolio based on the specific objectives, investment horizon, and constraints associated with that Portfolio.  Performance will be evaluated over full market cycles, and the Foundation accepts appropriate levels of risk associated with expected levels of return.

Roles and responsibilities

The Board has a direct oversight role regarding all decisions that impact the Foundation.

The Board recognizes its responsibility to ensure that Investable Assets are managed:

  • Exclusively for the benefit of the Medical University of South Carolina and the Medical University Hospital Authority and their missions.
  • Prudently and in full compliance with all policies, applicable laws and regulations.
  • Effectively, so as to protect the purchasing power over time of the Investable Assets within the Foundation.

The Board has delegated operating and supervisory responsibility for the Foundation’s Investable Assets to the Investment Committee (“Committee”).

Specific responsibilities of the various groups within the Foundation and outside service professionals retained by the Foundation are outlined below.

Responsibilities of the Board of Directors

The Board ensures that its fiduciary responsibility for the Investable Assets of the Foundation is fulfilled through appropriate investment structure, internal and external management, and portfolio performance consistent with all policies. Although the Board is not involved in day-to-day investment decisions, based on the advice and recommendations of the Committee, the Board shall:

  • Approve investment policies and guidelines.
  • Oversee activities related to compliance, decision-making and organizational structure within the Foundation.
  • Review and accept the minutes of the Committee.

Responsibilities of the investment committee

The Committee is focused on expressing the Foundation’s mission and evaluating the investment policies most likely to achieve it.  The Committee ensures that the Foundation’s policies are properly implemented and monitors the effectiveness of staff and other service providers to which it has delegated specific authorities.  The Committee shall:

  • Determine the purpose, objectives, investment horizon, constraints, risk profile, and liquidity parameters for each Portfolio.
  • Set asset allocation targets, ranges, and benchmarks for each Portfolio.
  • Define the roles of asset classes, investment strategies, and risk guidelines for the Portfolios.
  • Recommend the Foundation’s Investment Policy Statement to the Board.
  • Review governance procedures and make recommendations to the Board.
  • Meet periodically to evaluate whether this Policy, the investment activities, the risk management controls, and processes continue to be consistent with the Foundation’s goals and objectives.
  • Receive and review reports from staff, investment consultants, and investment managers regarding the status of the Foundation’s Investable Assets.
  • Review the Portfolios on a quarterly basis for compliance with current policies and quality of management.
  • Make exceptions to this Policy if and when they are determined to be in the best interest of the Foundation.
  • Monitor and evaluate the performance of Staff and all service providers by regular review of reports provided to the Committee and by meetings with the service providers.
  • Retain or dismiss outside professionals such as investment consultants or custodian banks.

Responsibilities of the CEO and Staff

The Committee recognizes that its professional staff (“Staff”) is best situated to make day-to-day investment decisions.  The Committee has delegated authority to the Chief Executive Officer (“CEO”) to implement key policy and operational decisions for the various portfolios.  As such, the CEO is primarily responsible for the portfolios generating competitive performance against relevant benchmarks.  The CEO and Staff: 

  • Oversee the day-to-day operational investment activities of the Portfolio subject to policies established by the Board and Committee. 
  • Work with investment managers, investment consultants, and other outside professionals to meet the overall goals and objectives set for the Foundation. 
  • Assist in establishing long-term investment policies and objectives for the Foundation.  This includes studying and selecting asset classes, determining asset allocation ranges, and setting performance objectives for the Foundation and investment managers.
  • Evaluate, retain, and terminate investment managers, in consultation with investment consultants and the Investment Committee chair.
  • Establish performance benchmarks for individual investment managers. 
  • Establish and implement manager monitoring procedures.
  • Perform, in coordination with Investment Consultant, continuing due diligence on investment managers in the Portfolios.
  • Rebalance the Portfolios periodically to provide the necessary liquidity for the Foundation and to maintain compliance with this Policy.  Rebalancing consists of buying and selling assets among asset classes, investment styles, and investment management firms within the approved allocation ranges.
  • Provide liquidity for payments to beneficiaries and to fund the Foundation’s operations.
  • Ensure that investment managers adhere to the terms of their offering documents or contracts. 
  • Provide the Committee with timely, accurate and useful information to make policy decisions and monitor Portfolio performance.
  • Receive and review reports from outside professionals regarding the status of the Investable Assets.

Responsibilities of the Investment Consultant

The principal role of the Investment Consultant is to provide independent advice to the Foundation. The Investment Consultant shall:

  • Act as if it were a fiduciary of the Foundation.
  • Monitor and communicate long-term capital market trends and recommend broad-based asset-mix policies to be considered by the Staff and Committee and to be implemented by the investment managers, if approved.
  • Review investment policies and objectives, and recommend changes as appropriate.
  • Provide general advice concerning the allocation of new contributions as well as periodic asset allocation rebalancing.
  • Research and recommend investment management firms.
  • Perform continuing due diligence on investment managers in the Portfolio.
  • Measure, evaluate, and report the Portfolio and investment managers’ performance results on a regular basis.
  • Provide additional analysis of Portfolios as requested by the Committee or Staff. 
  • Provide education to the Board, Committee, and staff.
  • Meet periodically with the Board, Committee, and staff to report on the management of the portfolio.
  • Provide support to the Board, Committee, and staff.

Responsibilities of the Investment Managers

The Investment Managers have full discretion to manage the Investable Assets of the Foundation in accordance with the specific guidelines outlined in its prospectus, offering memorandum, or investment management agreement.

Investment Managers shall:

  • Communicate promptly with staff and investment consultant regarding all significant matters such as:  major changes in the investment strategy, shifts in portfolio construction, changes in the firm’s ownership, organizational structure or professional staffing, other material changes
  • Comply with all laws, legislation, and regulations that pertain to the manager’s duties, functions, and responsibilities as a fiduciary.
  • Secure, reconcile and vote proxies on the securities in the portfolio in accordance with its fiduciary duties and professional judgment.
  • When appropriate, reconcile and certify, in writing, accounting, transaction, and asset summary data with the custodian or trustee valuations and communicate and resolve any significant discrepancies.
  • Issue monthly and/or quarterly reports to the Committee, staff, and investment consultant with regards to portfolio performance.
  • Meet as requested with the staff, investment consultant, or Committee to report on the management of assets.
  • Fully disclose all fees and expenses on an annual basis.

Responsibilities of the Custodian Bank

The Custodian Bank is responsible for the safekeeping of Foundation assets. The Custodian Bank shall:

  • Serve as custodian and act in a fiduciary capacity with respect to the assets of the Foundation.
  • Provide safekeeping of securities entrusted to it; collect dividends and interest on these securities; make disbursements and manage cash flows as directed.
  • Arrange for timely settlement of all transactions made in the portfolio.
  • Provide complete and accurate accounting records including each transaction, income flow and cash flow by the investment manager, and overall portfolio.
  • Issue monthly reports of holdings and transactions priced in accordance with industry standards.
  • Meet as requested with staff and investment consultant to report on the administration of the assets.

Role of asset classes  

Equity

Equities are the growth engine of a portfolio and are expected to provide long-term capital appreciation in excess of inflation and spending.

Equity strategies may include public and private investments and include both U.S. and non-U.S. companies.

Core equity strategies invest in diversified portfolios (more than 50 holdings) and tend to have broad regional exposures.  Non-core equity strategies are defined as having concentrated portfolios (less than 50 holdings) or specific style/country exposures.

Private investments in illiquid equity strategies (“Private Capital”) are expected to generate higher long-term returns than public equity investments.  Private Capital includes strategies like private equity, venture capital, natural resources, and value-add/opportunistic real estate. 

Some Private Capital strategies produce negative returns during their early years because of fees.  In order to reach the Policy’s allocation targets, the Portfolio is expected to make commitments to illiquid investments in excess of the policy targets.  These excess commitments are necessary due to long lead times required to fully fund the commitment and the intervening distributions which may be made. 

The Equity asset class also includes alternative equity strategies like long/short equity hedge funds and distressed debt that have high net exposures and similar risks to equity. 

Fixed Income

Fixed income investments are intended to preserve principal during periods of equity market stress and deflation, provide a source of income, and reduce overall portfolio volatility.

The Foundation’s fixed-income investments will be primarily US-focused but may include exposure to sectors and countries that are not included in the specified benchmarks.  Fixed income investments may include different credit qualities and utilize both public and private securities.  Cash and cash-like investments are included in the fixed income asset class.

Diversifying Strategies

Some investment strategies do not fit neatly into a traditional asset class like many hedge funds and other niche strategies.  In the Foundation’s Portfolios, these Diversifying Strategies are intended to generate returns that have a low correlation to equity markets but higher returns than long-only fixed income strategies. 

Some real asset strategies, like commodities and core real estate, may perform well in periods of inflation and provide some protection to the real value of the Portfolio.  These types of strategies will be classified as Diversifying Strategies under this Policy.

Derivatives and Derivative Securities

Certain of the investment 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 instrument. Investments in derivatives include (but are not limited to) futures, forwards, options, swaps, warrants, and interest-only and principal-only strips. No derivative positions can be established that has the effect of creating portfolio characteristics outside of Policy guidelines.

Some examples of appropriate applications of derivative strategies include hedging market, interest rate, or currency risk; maintaining exposure to the 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. 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 integral to their security selection, risk management, or investment processes; and (3) demonstrate acceptable internal controls regarding these investments.

Risk tolerance

The following statements reflect the Committee’s understanding of capital market risk as well as measures adopted to mitigate some investment risks:

Portfolio Risk

Each Portfolio’s realized risk should be commensurate with its benchmark.  Risk metrics may include statistics like standard deviation or maximum drawdown.    The Committee fully recognizes the likelihood that the Foundation’s Portfolios may experience periodic declines.  It accepts this risk with the goal of achieving its portfolio objectives.

Portfolio Diversification

Each Portfolio’s assets are to be diversified appropriately to protect against significant investment losses and to reduce the probability of excessive-performance volatility.  Diversification of assets is to be achieved by allocating to various asset classes and to different investment styles within asset classes. 

Fund Diversification

The Committee may limit the maximum amount allocated to a single fund depending on the perceived risks of the strategy or the management company. 

 Strategy  Liquidity Max Allocation
(as % of Portfolio assets at time of investment or commitment)
Core Equity or Fixed Income Daily, Weekly, Monthly 10%
Non-Core Equity or Fixed Income
Concentrated Equity (less than 50 holdings)
Diversifying Strategy
Daily, Weekly, Monthly, Quarterly, Annually 5%
Private Capital Illiquid >3% commitment
Index Funds, etfs Daily, Weekly, Monthly No more than 50% to a single sponsor

Illiquid Investments

Private, illiquid investments are expected to generate higher returns than similar public market investments. The Foundation seeks to benefit from this advantage and may invest a portion of the Portfolio in illiquid assets.  However, the Foundation has little or no control over the distributions of these illiquid investments.  Therefore, the Committee will determine appropriate investment targets for illiquid investments in each Portfolio that balance the need for short-term liquidity and the expectation of long-term returns.  

Other policies and procedures

Rebalancing

The purpose of rebalancing is to maintain the Portfolio’s asset allocation within the Policy’s targeted ranges, thereby ensuring that the Portfolio does not incur additional risks as a result of having deviated too far from the policy portfolio.

Strategic rebalancing will occur on a systematic basis.  When any of the asset categories breaches its allowable range, it will be rebalanced back to target. 

Operational rebalancing to accommodate cash flows in and out of the portfolio because of contributions or spending is expected to have minimal impact on asset allocation and will be at the discretion of Staff.  

Annual Review of Investment Policy

The Committee will review this Policy annually to determine that it continues to be appropriate in view of changes at MUSC, the Foundation, or within the Portfolios and capital markets.

Exceptions to the Policy

The Committee may consider and allow exceptions to the Policy, as it deems appropriate. Any such waiver or modification shall be made only after a thorough review of the portfolio allocation, investment manager, or investment strategy involved. An addendum supporting such waiver or modification shall be maintained as a permanent record of the Investment Committee. All such waivers and modifications shall be reported to the Board of Trustees at the meeting immediately following the granting of the waiver or modification.

Previously Amended: May 2018


Appendix A  |  Long-Term Portfolio

Endowed funds and other long-term funds are invested in the Long-Term Portfolio. 

Investment Horizon

Perpetual

Investment Objective

Maintain the real value of the Portfolio net of inflation and spending

Spending Policy (where applicable)

5.0% of the market value based on the average of the last three calendar year-end market values.  The 5% payout is split between MUSC beneficiaries (4% annually) and the Foundation’s management fee (1% annually).

Risk Profile

The biggest risk is not maintaining the real value of the portfolio net of spending.

The Foundation seeks to avoid permanent loss of capital through poor manager selection or selling assets to reduce risk in the Portfolio after it has already incurred unrealized market losses.

The Foundation seeks long-term real returns and has the capacity to withstand short-term losses.  Volatility is not a significant consideration for the Portfolio.

Strategic Asset Allocation Targets and Ranges

 Asset Category  Benchmark  Target Range 
 Equity  MSCI All Country World Index  75%  70 – 80% 
 Fixed Income  Bloomberg Barclays US Aggregate Bond Index  10%   5 – 15% 
 Diversifying  3Mo tbills + 4%  15%   10 – 20% 

Liquidity Targets

  Liquid
Daily - Monthly
Semi-Liquid
Quarterly - Annual 
Illiquid
Longer than One Year 
 50%  10% 40%

Benchmarks

Policy Benchmark

75% MSCI All Country World Index (“ACWI”) / 10% Bloomberg Barclays US Aggregate Bond Index (“BB Agg”) / 15% 3motbills + 4%.

Inflation Benchmark

CPI + 5%

Passive Benchmark

75% ACWI / 25% BB Agg

Appendix B | Short Term Portfolio

The Short Term Portfolio is used to invest the short-term spending portion of most expendable funds (2 years expected spending), building funds, small expendable funds (less than $10,000), and other funds of a short-term nature.

The investments of most expendable funds are split between the Long Term Portfolio (~75%) and the Short Term Portfolio (~25%).

Investment Horizon

Two Years

Investment Objectives

Preserve principal net of fees

Liquidity Profile

Beneficiaries may request all their funds at any time.

Risk Profile

Low risk. Volatility commensurate with the passive benchmark.

Strategic Asset Allocation Targets and Ranges

 Asset Category  Benchmark Target   Range
 Cash  3 Mo tbills  30%  20% – 50%
 Short Term Fixed Income  Bloomberg Barclays 1-3 Year Govt/Credit  70%  50% – 80%

Liquidity Targets

Liquid
Daily - Monthly
Semi-Liquid
Quarterly - Annual
Illiquid
Longer than One Year
 100% 0% 0%

Benchmarks

Policy Benchmark

3Mo tbill + 1.5%

Passive Benchmark

30% 3Mo US tbill / 70% Bloomberg Barclays US 1-3 Yr Govt/Credit Index

Other Considerations

Fund Diversification – This Policy’s general requirements specify that a maximum allocation of 10% of the Portfolio’s value may be invested with a single core fixed income manager (pg 8-9, Fund Diversification).  This translates into a minimum of 10 different funds in a portfolio.  For the Short Term Portfolio, this requirement is unwieldy because of the portfolio’s smaller size (~$20-30 million) and less necessary because of its lower risk investments (i.e. Cash and short-term fixed income only). 

Therefore, the Short Term Portfolio will have a fund diversification requirement of investing with at least three managers.  Each fund should hold a diversified portfolio, appropriate for its mandate.    

Allowable Assets – A portion of the short term bonds in this portfolio may be non-investment grade but not more than 20% of the portfolio value.

Appendix C  |  Split Interest Gifts

The Foundation may receive several types of split-interest gifts.  These gifts are called split-interest because the donor or their designee retains ownership, typically for life or a designated period of time.   The two most common types of split interest gifts are Charitable Gift Annuities and Charitable Trusts. 

Charitable Gift Annuities.  Annuity gifts include contracts for a specified payout for the life of the donor or a designated term.  These contracts obligate the Foundation to continue the payouts according to the terms, first from the gift assets or, if depleted, from the unencumbered assets of the Foundation.

Charitable Trusts.  Charitable Trusts are trust agreements that obligate the Trustee (the Foundation in most cases) to pay a specified amount of the gift to the income beneficiary for life or for a period of time.  The income beneficiary may be the donor or their designee for the more common Charitable Remainder Trusts.  There may be several permutations as to how the payout to the income beneficiary is calculated, but the payout percentage cannot be less than 5% or more than 50%.  At least 10% of the initial contributed value must go to the charitable beneficiary.    In charitable remainder trusts, the asset balance at the end of the trust term is transferred to Foundation.  If the assets in the trust, the initial gift plus earnings, are depleted, there is no continuing obligation to the donor.  

The Investment Committee (“Committee”) has oversight of the funds that are managed as part of the Foundation’s planned giving assets for which the Foundation is the trustee. These funds, unless there are specific directions otherwise, are managed by Wells Fargo Private Bank on a discretionary basis (using third party investment managers) in accordance with the following guidelines. 

Charitable gift annuities

Investment Horizon

10-15 Years

Investment Objectives

  1. Increase the value of the assets remaining to the Foundation and its constituencies
  2. Conserve the ability to make payments to the donor through their lifetime.

Spending Policy

The investments are managed in a single commingled pool. Each individual contract has its own spending requirement. Spending ranges from 4.8% to a deferred payout of 18.4%. In the aggregate, the average annual payout from the pool is 6.5%.

Risk Profile

The Foundation guarantees the payout to the donor from the assets of the contract or, if those are exhausted, other unencumbered assets of the Foundation.

Strategic Asset Allocation Targets and Ranges

   Conservative Growth
Equity  71%
 Fixed Income 25%
 Real Assets 2%
 Cash 2%

Liquidity Targets

Liquid
Daily - Monthly
Semi-Liquid
Quarterly - Annual
Illiquid
Longer than One Year
 100% 0% 0%

Benchmarks

Policy Benchmark

71% MSCI ACWI / 25% Bloomberg Barclays US Aggregate Bond Index / 2% NAREIT / 2% 3Mo tbills

Charitable trusts

Investment Horizon

Various

Investment Objectives

  1. Increase the value of the assets remaining to the Foundation and its constituencies
  2.  Conserve the ability to make payments to the donor through their lifetime or the term of the trusts.

Spending Policy

The investments are managed in a separate fund for each trust. Each individual contract has its own spending requirement.

Risk Profile

The Foundation does not guarantee the payout to the donor if the underlying assets are exhausted.

The asset class targets for each trust are based on the risk profile of that specific trust. Each Risk Profile will be defined by the probability that the value of that trust falls below its remainder value (i.e. 10% of the initial gift).

Strategic allocations are based on Wells Fargo’s various model portfolios and are described using Well Fargo’s model names.

Probability of Falling Below Remainder Value Strategic Allocation
 >75%  Aggressive Income
 50-75%  Conservative Growth & Income
 25-50%  Moderate Growth & Income
 10-25%  Aggressive Growth & Income
 <>  Conservative Growth

Strategic Asset Allocation Targets and Ranges

  Aggressive Income  Conservative Growth & Income   Moderate Growth & Income Aggressive Growth & Income   Conservative Growth
Equity   31% 42% 52% 60% 71%
 Fixed Income  64% 53% 43% 35% 25%
 Real Assets  2% 2% 2% 2% 2%
 Cash  3% 3% 3% 3% 2%

Liquidity Targets

Liquid
Daily - Monthly
Semi-Liquid
Quarterly - Annual
Illiquid
Longer than One Year
 100% 0% 0%

Benchmarks

Policy Benchmark

Dependent upon the allocation targets for each trust.


Investment Policy Statement: May 1, 2020