0010.02
Exeter College
Investment Policy Statement
Introduction
The Investment Policy is a statement of objectives and principles agreed by the Governing Body. The
purpose of the Investment Policy is:
To confirm the purpose of the Exeter College endowment.
To define the objectives, target returns, risk tolerance, constraints and operational
parameters that apply to the investment of the College’s endowment assets.
To describe the parameters within which investment decisions may be taken by the
Investment Committee and College officers with responsibility for investment management
(as set out in the section below on governance).
To define the fiduciary responsibilities of College officers and external members serving on
the Investment Committee
To establish the governance arrangements that apply to the management of the
endowment including potential conflicts of interest, the selection, appointment and review
of third-party investment advisers, managers and administrators, and the evaluation of fees
and incentives payable for investment services.
The Investment Policy relates to the College’s endowment investments. The endowment in this
context refers to assets which are not functional assets of the College (such as property used for
teaching, research and student accommodation). These endowment assets are a mix of agricultural
and residential property and financial assets such as equity funds, commercial property funds and
private equity funds. The primary purpose of the endowment is to provide an annual transfer from
the total return of the assets to support the College’s ongoing operations. From time to time the
Governing Body may use some of the unrestricted endowment to fund capital projects. Endowment
is replenished through new philanthropic gifts and through growth in the investments over time.
Overall Objective
The College relies on the annual transfer from the endowment to sustain its core activities and any
unplanned drop in the annual transfer would have severe consequences for the College, particularly
if it were persistent. Thus, a precipitous and prolonged fall in investment value could compel the
College to retrench and any decision to spend endowment funds on a capital project should include
a plan to replenish these funds with new philanthropic gifts. Philanthropic fundraising is not the
responsibility of the Investment Committee.
The College operates a total return investment strategy, meaning that it seeks to generate an
annual return from a combination of income generated by investments (interest, dividends and
rent) and capital appreciation (an increase in the market value of investments). The money that is
transferred to the College in each year to fund regular activity is calculated using a spend rule,
which is which is described in detail below.
Return Objective
The primary investment objective is to replenish the value of endowment consumed each year
calculated using the spend rule (see below) and to compensate for the erosion in spending power
attributable to inflation – the real rate of return. This can be expressed as a target of inflation plus a
1
0010.02
margin above the annual transfer rate, which is currently 3.25%. Based on the expected volatility of
the overall Endowment portfolio, the margin required is assessed to be between 0.75% and 1.0%, so
the target return would be inflation plus 4.0% - 4.25%. The College uses the UK Retail Prices Index
(RPI) as its measure of inflation; if RPI is no longer supported, the Governing Body will consider the
appropriate alternative measure to use. Periodically, the Investment Committee will review the
sustainable rate of consumption from the Endowment, based on an evaluation of long term
expected real returns from the asset classes in which it invests. Based on this analysis, the
Investment Committee will advise the Governing Body on the appropriate spend rate.
The Investment Committee will implement shorter-term investment strategies, agreed in
conjunction with its advisers, which are appropriate to the prevailing economic and market
conditions. The variable nature of returns from year to year is such that the real return objective
should be assessed over rolling periods of at least five years.
Risk and Investment Horizon
The College expects to continue in perpetuity and can, therefore, take a very long perspective on its
investment strategy. In practice, this means that it can be patient for value to be realised from
certain investments but it also requires strong, recurring growth from most of its investments in
each year to achieve the real return objective.
The College accepts that it will take investment risks to achieve the returns it seeks and that volatility
is an unavoidable consequence. The College will seek to mitigate the most extreme impact of
volatility through diversification of asset classes and will permit the mix of asset types to be varied
within wide ranges to reduce exposure to risk or to capture expected higher rates of return as
market conditions change. High levels of cash or near-cash investments are an accepted alternative
to sovereign debt in periods of uncertainty or extreme market stress.
The endowment should not be exposed to a concentration of sector, style, credit, duration or
manager risk. In general, where actively managed funds are purchased, exposure to any single
manager or team, including a management group, will not exceed 5% of the total portfolio by book
cost and should not exceed 10% of market value. Reasonable time will be allowed to correct any
breach of the 10% upper limit, to preclude distressed selling in volatile markets. These restrictions
will not apply to index tracking and exchange traded funds which invest direct into the underlying
assets without the use of replication or over-lay strategies where manager risk does not arise. The
restrictions do apply to funds which use derivatives and collateral hypothecation where there is a
risk of significant loss.
The Committee will monitor the risk-return characteristics of the Endowment portfolio using
recognised methodologies such as efficient frontier and VaR measures and will make reasonable
adjustments for the effect of the illiquid portion of the portfolio, in particular directly-held property
and private equity.
Strategic Benchmark
The College has an estate of agricultural land which was acquired in earlier generations and now
provides a valuable alternative source of value and a counterbalance to the volatile market assets
acquired more recently. A modest portfolio of Oxford residential property was bought into the
Endowment to release cash towards the funding of Cohen Quadrangle. These houses are part of the
investment portfolio which the Investment Committee can consider switching into other
investments.
2
0010.02
The agricultural holdings provide regular returns through rents and are a store of capital value.
Periodically, certain holdings can produce exceptional capital returns through development or the
release of suppressed value through a change in the tenancy arrangement.
The Strategic Benchmark is a composite comprising recognised indices to represent asset classes,
(global equities, fixed interest, property, etc), which represents the mix of legacy investments (the
agricultural and residential property) and those other assets which the Endowment may acquire to
achieve its returns and manage its various risks, (financial, or tradable, assets invested in global
equities, commercial property, fixed interest, etc.). The Strategic Benchmark has a target allocation
for each asset class and a wide permissible range within which the Investment Committee has
discretion to vary the actual allocation.
The ranges are binding on the Committee but if an exceptional market movement causes one to be
breached the Committee may use its judgment whether to correct the breach immediately or to
manage it within the market conditions that have caused it. In any case, the Committee will report
such a breach to the next Governing Body meeting with an account of how it is responding to it. The
risk and return characteristics of this benchmark can be estimated using historic records for each
investment type.
The current Strategic Benchmark for the Endowment is:
Fixed Interest * (10% within range 0% - 20%, but exceptionally up to 50%)
Reference Benchmark: 100% FTSE All Gilts Index
Public Equity, including active long-short managers (50% within range 35% - 75%)
Reference Benchmark: MSCI All Country World Index (ACWI)
Unconstrained multi-asset managers (0% within range 0% - 8%)
Reference Benchmark: HFRI Fund Weighted Composite Index
Private Equity (8% within range 0% - 15%)
Reference Benchmark: MSCI World Small Cap Index (USD)
Commercial Property (5% within range 4% - 12%)
Reference Benchmark: IPD UK Property TR
Residential Property (5% within range 0% - 10%)
Reference Benchmark: IPD UK Property TR
Agricultural Property (20% within range 15% - 25%)
Reference Benchmark: IPD UK Property TR
Cash1 (2% within range 0% - 10%, but exceptionally up to 50%)
Reference Benchmark: Sterling 3 month LIBOR
1 Where market conditions mitigate against Fixed Interest, cash is a permissible alternative within the 10% target
benchmark objective.
3
0010.02
Ethical Investment
As an educational charity the College is fully aware of its wider responsibilities to the community in
which it operates, and will seek to invest its endowment in accordance with the ethical standards of
its charitable purpose.
In particular given the permanent nature of the core part of the endowment, the College will seek to
invest in a manner consistent with its strategic objective of measuring and mitigating the adverse
environmental impact of the College.
In this regard:
The College will seek transparency in the nature of its investments and their activities
Consistent with the asset allocations set out herein, the College expects its financial
endowment to be principally invested in regulated funds managed by investment firms of
high repute and domiciled in recognised UK/EU/US jurisdictions or equivalent. The College
has no current direct holdings of individual stocks and is unlikely to invest directly in
individual stocks in the future.
Wherever feasible, the College will monitor and screen its financial investments using best
practice techniques to measure the environmental, social and governance (“ESG”) impact of
their underlying investments. It will incorporate this analysis in its investment decisions with
the aim of improving the overall ESG characteristics of its portfolio over time.
A portion of the investment portfolio will be allocated to explicit ESG and SRI (socially
responsible investment) funds and, subject to performance, the College’s intention is to
increase this allocation over time.
Annual Transfer Rule
Currently, the headline transfer rate is 3.25% annually of the year-end endowment value. This is
embedded in a smoothing mechanism whereby the transfer in any current financial year is based on
a combination of the prior years’ transfer value adjusted for inflation and the product of the transfer
rate (3.25%) applied to the closing market value of the endowment at the end of the financial year
(the ‘Market Value Element’). These two components are weighted, with the current year’s transfer
being comprised as follows:
70% to the inflation-adjusted prior year’s transfer value and
30% to the Market Value Element.
This apportionment is intended to reduce the impact of fluctuations in the market value of the
Endowment from one year to the next.
The rule may be expressed as:
Transfer value t = 70% of [Transfer value t-1 x (1 + Z%)] + 30% of [3.25% x year-end endowment
valuation t],
where ‘t’ = the current financial year and Z is the rate of inflation.
The fiscal year for Exeter College begins on 1 August; therefore closing market value t-1 = value on
31 July. Inflation is measured by the UK Retail Prices Index (RPI) or an alternative index approved by
Governing Body.
4
0010.02
Allowable Investments
The Endowment will operate within the Charity Commission guidelines on investment incorporated
as an appendix to this Investment Policy. This includes the purchase and sale of listed Traded Option
contracts but precludes the writing of options; it also includes the use of forward contracts,
particularly for currency hedging. The Endowment may invest in funds which themselves use
leverage, but the Investment Committee will not leverage the portfolio (i.e. borrow to invest).
Currency Exposure
The College’s base currency is UK sterling. By the nature of global investment, the portfolio is
exposed to a number of other currencies, the principal ones being the US dollar and the Euro. The
Committee will have the discretion to hedge currency risk using forward contracts and other
derivative instruments where appropriate and permissible. In making new investments the
Committee will have the discretion to invest in funds that are themselves permanently hedged (in
part or in full) relative to sterling where that option exists.
Taxation
The College, being a UK charity, is exempt from UK Income Tax, UK Capital Gains Tax, UK Stamp Duty
Reserve Tax and Stamp Duty Land Tax. Wherever possible, investment funds will be chosen that
benefit from these tax exemptions but where there is evidence that the potential for superior
returns outweighs the benefit of tax relief, the tax status of a fund should not be considered the
overriding priority. Development of farmland or other property assets can be deemed to be “trading
activity” by HMRC and the profits liable to Corporation Tax. The Investment Committee must seek
professional advice on each proposed development and advise the Governing Body on measures to
mitigate a liability to Corporation Tax.
Liquidity
Normally, the requirement for immediate liquidity will be limited to funding investment
management expenses, calls on commitments to limited partnerships, and paying the annual income
calculated under the spend rule. At times when the Governing Body plans to spend significant
endowment funds on capital projects, the Investment Committee may elect to raise the liquidity
well in advance of the funds being required, notwithstanding the possible effect on performance.
The Investment Committee will monitor the marketability of assets in the portfolio using a liquidity
ladder.
Responsibilities
Fiduciary responsibility for the management of endowment assets within the framework of the
Investment Policy in force at any time and within the scope of UK law and Charity Commission
guidelines resides with the Governing Body of the College. Investment reports tabled regularly at
Governing Body meetings must enable the Governing Body to exercise oversight. To enable
investment decisions to be made and implemented in a timely manner, the Governing Body will
delegate the operational management of the endowment to an Investment Committee as follows:
The Governing Body will appoint an Investment Committee consisting of the Rector (Chair),
the Bursar, the Accountant, three fellows (by rotation) and four external members. All
5
0010.02
members of the Committee will have one vote each. The Finance & Estates Bursar is the
convener of the Investment Committee.
The Investment Committee, in consultation with the investment adviser(s), will be
responsible for recommending an Investment Policy to the Governing Body that meets the
changing needs and circumstances of the College, including taking account of best practice
in investment management and developments in capital markets. The Investment Policy will
be put to the Governing Body annually, in Trinity Term, for revalidation or for consideration
of recommended changes.
The Investment Committee will be responsible for advising the Governing Body on the
appointment of an investment adviser(s) to support the management of the endowment
with regular investment advice, due diligence in the selection of individual investments and
managers, portfolio analysis and performance reporting. The Investment Committee should
review the investment adviser(s) not less than every five years and make recommendations
to Governing Body to re-appoint or to replace.
The Investment Committee will be responsible for the implementation of the Investment
Policy, including the selection and review of all investments and managers, the assessment
of market conditions and decisions to add or remove holdings from the portfolio.
Decisions will be taken at scheduled meetings of the Investment Committee but if decisions
need to be taken between scheduled meetings, it will be acceptable do so by e-mail
circulation and/or teleconference discussions, which will be documented and added to the
minutes.
The Investment Committee will be responsible for monitoring performance and for
reporting to Governing Body.
Members of the Investment Committee who are not members of the Governing Body of
Exeter College will have a general duty of care but will not have any of the fiduciary
obligations of a trustee.
External Members
The Governing Body will appoint up to four external members to the Investment Committee to serve
at any time. These will be persons who are not members of the Governing Body and are not officers
of the College. External members will have relevant professional experience and expertise that can
enhance and support the work of the Investment Committee. External members are expected to
participate fully in the deliberations of the Committee and to bring their own perspective; they are
not to be observers. Each external member will serve for an initial term of four years, renewable at
the discretion of the Governing Body for further terms. Additional external experts may be seconded
for a limited time by the Committee itself to provide advice on specific issues; seconded experts will
not have a vote. External members will not be remunerated and will not receive expenses; their
contribution to the Committee will be
pro bono.
Reporting
The Investment Committee will be responsible for ensuring that comprehensive records are
maintained of all its decisions.
The Investment Committee will be responsible for recommending to Governing Body the
appointment of an agent to value the endowment and measure performance, and for
recommending a range of measures and benchmarks, both absolute and relative, that are
appropriate to the categories of investment in the endowment at any time.
6
0010.02
Fees and Expenses
The Investment Committee will be responsible for evaluating the fees and other costs charged by
managers or advisers or embedded in funds, and for ensuring that they are justifiable in the context
of the after-cost returns achieved and of charity investment.
Custody
The Investment Committee will be responsible for ensuring that appropriate, secure custody
arrangements are in place such that the implementation of the investment strategy can be achieved
in a cost-efficient and timely manner and that the reconciliation of balances and movements is
undertaken regularly and to the satisfaction of the College Auditors. The Committee may
recommend the use of third party custodians for the approval of the Governing Body.
Conflicts of interest
Any member of the Investment Committee connected to any organisation or person associated with
the management of the endowment must declare it. Any member of the Committee who is
connected with or has an interest in a security, company, fund, investment manager or scheme
promoter under consideration may participate in the discussion but may be asked to withdraw from
the meeting while other Committee members decide on the action to take. All such potential
conflicts of interest and the manner in which they are managed by the Committee will be recorded
in the minutes and brought to the attention of the Governing Body.
By College Order 20/026, this policy was approved by Governing Body on 11th March 2020, with
immediate effect.
7
0010.02
Extract from Charity Commission Guidance CC14
5. Deciding what to invest in
This section sets out some of the basic types of financial investment that are
available to charities. Once the trustees have established their charity’s investment
policy, they (or their investment managers), can decide on the type and range of
assets that will achieve their investment objectives.
5.1 What can a charity invest in?
The short answer (legal requirement)
Trustees can make financial investments in any asset that is specifically intended to
maintain and increase its value and/or produce a financial return.
Trustees must also be clear about the difference between investment and trading
(see
5.2 and
Legal underpinning: charities and investment matters (part 1)
In more detail
Trustees can invest in any type of investment while following the principles set out in
this guidance. Possible types of investment include:
interest bearing cash deposits in bank or building society accounts (see
section 9) shares in a listed company (listed equities)
interest bearing loans to a company or the government (bonds or gilts)
buildings or land
common investment funds and other collective investment schemes (see
5.3) non traded equity in private companies
hedge funds
commodities
derivatives
In all cases trustees must consider:
how suitable any investment is for their charity - this will be influenced by the
charity’s attitude to risk across its investment portfolio
the need to have a mix of assets in their portfolios - this can protect the charity’s
investments from sudden variations in the market and reduce the risk of the loss
Some types of asset, for example derivatives and commodities, are likely to be
suitable only as part of a well-diversified investment portfolio because of the higher
risk they can represent. Trustees should take professional advice where appropriate
in selecting and reviewing these types of investment.
8
0010.02
5.2 What is the difference between trading and investment?
If trustees purchase an asset with the intention of selling it for a profit after a short
amount of time, it is likely to be considered as trading. Being clear about the
difference is important because:
a charity itself can only undertake trading activity when this is directly furthering or
supporting its aims
profits made from trading are not always subject to tax relief
This distinction is particularly important when looking at derivatives, property,
commodities and other opportunities which can be regarded either as an investment
or as trading, depending on the context in which they are made. Trustees should be
able to demonstrate their intention through their decision making.
9
