Investment Policy

Document Number000784
Date Approved30 June 2006
Date Last Amended25 May 2012
            

1.      Introduction

1.1.     The University is regulated in its investment activities by the provisions of Schedule 2 of the University of Newcastle Act 1989.

1.2.     This Investment Policy includes guidelines for asset allocation, funds management, reports on investment performance and market benchmarks to assist in tracking and adjusting investment performance targets.  The formal management  of the University’s investments is required to ensure that the University at all times is able to fund as a minimum the following amounts of its liabilities in respect of Employee entitlements, Superannuation scheme funding, Statutory funds and working capital. Over time, the objective is to fully fund all such liabilities and continue to do so once that position has been reached.

Minimum Funding                     Liability

100%                                        Employee entitlements –current

100%                                        Employee entitlements -non current

100%                                        UNSSS

100%                                        Statutory funds

100%                                        Working capital  (4 weeks)

2.      Policy Intent

2.1.     The purpose of the Investment Policy is to establish a framework for the Management of the University of Newcastle (UoN) funds. The Policy will seek to maximise returns whilst limiting UoN’s exposure to risk to an acceptable level.

This Investment Policy is to be reviewed every three years by the Council on advice from the Finance Committee and may also require review should substantial other current or non-current liabilities be recognised by the University.

2.2.     Socially Responsible Investment

The University of Newcastle (UoN) is concerned that it should be seen as a socially responsible investor (SRI) in making any investment in individual securities or enterprises. Depending on the type of investment made the following principles will apply:

(a)  Direct Investment

UoN will not knowingly invest in an organisation that operates at the expense of the environment, human rights, the public safety, the communities in which the organisation conducts its operations or the dignity of its employees.  Specifically, there will be no investments in alcohol, tobacco or gambling.

 

(b)  Managed Funds

The University has an obligation to maximise returns on assets under its control, to diversify risk and to ensure the funds are efficiently managed.  This objective will require investment through managed funds at the present scale of the University’s assets.  The University will consider the policies of investment managers of managed funds with regard to socially responsible investment objectives along with all other managed funds when implementing this Investment Policy.  Fund Managers including SRI are to be assessed against common performance criteria, as described/outlined in Section 5 of this policy, with a view to maximising returns, diversifying risk, and ensuring efficient management of funds.

3.      Relevant Definitions

Nil

4.      Policy Statement and Principles

Investments shall be made solely in the interests of the University and will seek to maximise returns whilst limiting UoN's exposure to risk to an acceptable level.

4.1.     The Finance Committee will consider the forward investment strategies as part of the annual budget cycle.

4.2.     Investments shall be made with care, skill, prudence and diligence.

4.3.     Fluctuations in investment returns directly affect the annual operating outcome of the UoN.  The long term return on investments influences the level of funding required for funded liabilities.

4.4.     The Finance Committee shall assess the risk of investment in each investment Pool in relation to aggregate liabilities and obligations identified with each Pool and having regard to the combined risk and return characteristics of the investment funds relating to each Pool.

4.5.     Investment risks shall be considered when implementing diversification both within and between asset classes.  Risks considered shall include:

  • Market risk is the risk that movements in the value of the assets as a consequence of market movements are not matched by a corresponding movement in the value of liabilities.  Market movements are changes that occur in the economic environment such as changes in interest rates, share prices and foreign exchange rates.
  • Interest rate risk is a particular market price and arises where a change in the value of the liabilities does not lead to an exactly offsetting change in the value of assets causing the financial position of a business unit to deteriorate or improve.
  • Liquidity risk is the risk that assets cannot be liquidated in sufficient time to pay the UoN’s liabilities and arises because of a maturity mismatch between assets and liabilities.
  • Credit risk is the risk of counterparty failure.
  • Operational risk is the risk of system/internal control failure.

4.6.     The University may employ one or more investment managers to attain its investment objectives.

4.7.     Investments may be managed by professional Fund Managers either within individually managed accounts under written agreements and with custody held on behalf of the Pools through a professional custodian, or within a managed fund operating as a registered scheme under Corporations Law.  The Finance Committee shall determine the most appropriate of these two methods of investing after considering advice on manager capabilities and the relative cost, security and ease of administration of investment by the University.

4.8.     Fund Managers may utilise futures, options and other derivatives in managing the investment vehicles in which the University invests.  Where this is the case, the Finance Committee shall consider the risks and controls in place by reviewing the Fund Managers’ derivatives risk statements and obtaining regular reporting of the Fund Managers compliance with them.

4.9.     UoN is exempt from income tax and imputation credits on dividends received from Australian shares will be fully refundable.  This significant advantage should be given consideration in ongoing investment strategy.

4.10.   The Finance Committee is responsible for the monitoring of investment activity.  Their specific responsibilities relating to investment management include:

  • Approving the appointment of UoN staff to execute specific investment transactions within the specific authority limits of the delegation schedule.
  • Approving investment policies including objectives and guidelines that will direct investment activities.
  • Ensuring appropriate coverage of liabilities with investments or a strategy to do so.
  • Approving the appointment of external investment professionals.
  • Monitoring the performance of the Fund Manager(s) to assure adherence to policy guidelines and to monitor investment performance.
  • Monitoring control procedures:  For example, in replacing Fund Manager(s) due to fundamental change in the investment management process.
  • Ensure that Fund Manager(s) acknowledge in writing their responsibility for investing University funds and complying with the requirements of this policy.

4.11.   Under Section 17 of the Act the Council has delegated to the Finance Committee (The Committee) its powers in relation to investments.

4.12.   The Finance Committee is required to advise the Council in relation to approvals sought from the Treasurer of NSW regarding the engagement of Funds Managers as part of its Constitution.

5.      Guidelines and Investment Objectives

Set out below are the guidelines and investment objectives that are essential to UoN meeting its obligations under the University of Newcastle Act 1989 in relation to investments.

The funds of the University are divided into three separate investment Pools for investment purposes as follows:

Pool S - Short to Medium Term Working Capital Fund

Pool L - Long-Term Investment Fund;

Pool B - Bequests; and

5.1.     Pool S Objectives

The objectives for Pool S have been established on the understanding that whilst short to medium term working capital needs to be able to be drawn on at short notice, it is anticipated that in normal operating circumstances of the University a major portion of this Pool will remain permanently invested and the opportunity for secure returns greater than ‘at call’ deposit rates are to be sought.

Return Objective: To match or outperform the average return of UBSWA Bank Bill Index over rolling 2 year periods and after fees paid for investment management.

Risk Objective: It is recognised that abnormal changes in market yields and their effect on valuation of investments held may cause small annual negative performance, expected to occur on average no more frequently than one year in fifty.

5.2.     Pool L Objectives

Pool L Objectives have been established on the understanding that the funded liabilities for employee entitlements which the Finance Committee has determined be invested in Pool L, have a duration before payment is expected to be required of at least 5 years and a weighted average duration of total funded liabilities of at least 7 years. 

Return Objective: To match or outperform the average return of CPI plus 4% pa over rolling 7 year periods after deduction of investment fees paid for investment management.

Risk Objective: Annual returns are expected to be quite variable with a likelihood that on average 1 year in 5 may produce a negative return.

5.3.     Pool B Objectives

Pool B Objectives have been established on the understanding that bequests invested in pool B are able to be invested at the discretion of the University.  It is further assumed that annual distributions paid in respect of these bequests will average 4%pa of the annual value of the bequest accounts and that residual investment return credited to the bequest accounts will allow the bequest accounts to retain real value over time in line with increases in the CPI.

Return Objective: To match or outperform the average return of CPI plus 4% pa over rolling 7 year periods after deduction of investment fees paid for investment management.

Risk Objective: Annual returns are expected to be quite variable with a likelihood that on average 1 year in 5 may produce a negative return.

  6.    Investment Pool Guidelines & Strategic Asset Allocations

  6.1.   Pool S – Short to Medium Term Working Capital

6.1.1.       Guidelines for investments where held and managed directly by the University

Type of Debt*

Individual Holding

Sector Limit

Debt of Commonwealth, State or Semi-govt Authorities

No limit

No limit

Senior debt of four largest Licensed Australian Banks.
(Based on net assets).

$200m

No limit

Senior debt of other licensed banks, Corporate bonds, mortgage backed Securities, and ASX listed hybrid securities.
(No more than 20% of securities outstanding in a particular issue)

$100m

No limit

(A) Rated AAA (long term) or A1 (short term)

$50m

$200m

(B) Rated A- (long term) or A3 (short term)

$50m

$200m

(C) Rated BBB (long term) or B2 (short term)

$20m

$40m

*Credit ratings of Standard & Poors, Moody’s or Fitch or equivalent required

 

  • Maximum duration of any security – no more than 4 years.
  • Foreign currency bank accounts are to be operated to cater for estimated   requirements over a twelve month period to a maximum of A$10m.
  • Investment in instruments which involve any exposure to equity, or which involve gearing (i.e. where the actual exposure is a multiple of the face value of the investment) is prohibited.
  • Investment in derivatives is prohibited.

  6.1.2.       Guidelines for investments held in externally managed funds

 

 Type of Debt *  Individual Holding  Sector Limit
 Cash Management Products rated AAF  $75m  $75m
 Cash Management Products rated AF  $50m  $50m
 *Credit ratings of Standard & Poors, Moody’s or Fitch or equivalent required.

 

If the rating of any borrower represented in the portfolio is downgraded such that the new rating falls outside the above guidelines, or if any borrower represented in the portfolio is placed on a negative credit watch, this will be reported to the Finance Committee, together with a report on any resultant action taken by the Fund Manager.

6.2.     Pool L - Long Term Investment Fund

Strategic Asset Allocation Benchmarks and Ranges for Pool L are as follows: 

Asset Class *

Strategic Benchmark

%

Ranges

%

Australian Shares #

35

20 - 50

Overseas Shares (UH) #

10

5 - 15

Overseas Shares (H) #

10

5 – 15

Unlisted Property Funds

7.5

0 - 15

Australian Listed Property

2.5

0 – 5

Overseas Listed Property (H)

2.5

0 – 5

Absolute Return Funds

12.5

0 – 20

Fixed Interest and Cash

20

0 – 40

Total

100

 

UH – currency unhedged; H – currency hedged

#      Subject to availability of managed funds on comparable terms of fees and compliance, up to 5% of the portfolio will be directed to share investments following specific Socially Responsible Investment objectives.

Rebalancing the portfolio’s asset allocation within the ranges shown is managed by the Chief Financial Officer after seeking advice from the Investment Consultant.

6.3.     Pool B - Bequests Fund

Strategic Asset Allocation Benchmarks and Ranges for Pool B are as follows: 

Asset Class *

Strategic Benchmark

%

Ranges

%

Australian Shares #

35

20 - 50

Overseas Shares (UH) #

10

5 - 15

Overseas Shares (H) #

10

5 – 15

Unlisted Property Funds

7.5

0 - 15

Australian Listed Property

2.5

0 – 5

Overseas Listed Property (H)

2.5

0 – 5

Absolute Return Funds

12.5

0 – 20

Fixed Interest and Cash

20

0 – 40

Total

100

 

UH – currency unhedged; H – currency hedged

#      Subject to availability of managed funds on comparable terms of fees and compliance, up to 5% of the portfolio will be directed to share investments following specific Socially Responsible Investment objectives.

Rebalancing the portfolio’s asset allocation within the ranges shown is managed by the Chief Financial Officer after seeking advice from the investment consultant.

7.      Investment Performance Monitoring

7.1.     The principal goals of investment performance monitoring are to:

  • assess the extent to which each Pool’s investment objectives are being achieved;
  • monitor asset allocation exposures against ranges and strategic asset allocation benchmarks;
  • compare the performance of the appointed managers against the performance of other relevant professional managers and market related indices;
  • ascertain the existence of any particular weakness in appointed managers; and
  • allow the Finance Committee to continually assess the ability of each manager to successfully meet each Pool’s objectives for the role allocated to the manager.

7.2.     Returns achieved by the appointed managers will be assessed by the Finance Committee in relation to their stated objectives and the objectives of the Pools.  Returns will also be compared with returns earned by a suitable peer group, such as a group of other professional Fund Managers over three and five year periods.

7.3.     Returns on the each Pool’s assets will be monitored by the Finance Committee in relation to the strategic asset allocation benchmarks included in this Investment Policy.

7.4.     Performance for individual asset classes will be measured against suitable indices such as those indicated in the following table:

 Asset Class  Index
 Australian Shares S&P/ASX  300 Accumulation Index
 Overseas Shares (unhedged) Morgan Stanley Capital International World Index (MSCIW) (ex Aust unhedged) in $A with net dividends reinvested
 Overseas Shares (hedged) Morgan Stanley Capital International World Index (MSCIW) hedged to $A with net dividends
 Unlisted Property Mercer Unlisted Property Funds Index
 Australian Listed Property S&P/ASX Property Trusts Accumulation Index
 Global Listed Property UBS Global Real Estate Investor Index (Hedged)
 Australian Fixed Interest UBSWA Composite Bond Index (All Maturities)
 Overseas Fixed Interest (hedged) Lehman Global Aggregate Index Hedged to $A 
 Cash UBSWA Bank Bill Index

 

7.5.     Manager performance will be monitored at least quarterly.

7.6.     Managers' roles will be reviewed by the Finance Committee on a regular basis.  Factors taken into account in these reviews will include investment style, resources, organisational strength, investment performance relative to objectives, and any other factors considered relevant to the manager's continuing ability to meet its investment objectives.

7.7.     The managers will report in writing at least quarterly in accordance with a format agreed with the Finance Committee.

7.8.     Each manager will be expected to report to the Finance Committee any major shifts in investment strategy which may be implemented, or significant change in the management structure or other characteristic of the manager as soon as is practicable after their occurrence.

7.9.     The Investment Consultant will provide advice at least annually in respect of the performance and continued suitability of externally appointed managers, the adequacy of the returns achieved by the Pools and the continuing suitability of this Investment Policy.

8.      Essential Supporting Documents

8.1.     The University is regulated in its investment activities by the provisions of Schedule 2 of the University of Newcastle Act 1989. Under s16 (1B) (1)(e) of the Act, the Council has the power to

Invest any funds belonging to or vested in the University.

9.      Related Documents

9.1.     Delegation of Authority - Policy 000083

 

Approval AuthorityCouncil
Date Approved30 June 2006
Date Last Amended25 May 2012
Date for Review25 May 2015
Policy SponsorVice-Chancellor
Policy OwnerChief Financial Officer
Policy ContactChief Financial Officer
Amendment History

Minor amendments to policy name, committee name and relocation of Clauses 4.11 & 4.12 (previously Clauses 8.2 & 8.3). Governance and Policy Unit, 6 August 2012.

Amendments to Clauses 1.2, 2.1, 4.1, 6.1.1, 6.1.2, 6.2, 6.3 and 7.4. Approved by Council 25 May 2012 (Doc FC12:016a).

Policy Sponsor added 21 April 2009.