Guidelines for the Investment of the Restricted Funds of The Ecological Society of America
Prepared by
William H. Schlesinger
Vice President for Finance
Approved at the Meeting of the Governing Board,
19-20 May 2000
Washington, D.C.
Introduction and Background
The Restricted Funds of the Ecological Society of America are of three types: Permanently Restricted Funds; Temporarily Restricted Funds and Board-Designated Restricted Funds.
Permanently Restricted Funds derive from gifts or bequests to the Society, in which the donor has specified that the earnings derived from the investment of the gift/bequest may be used by the Society (generally for a specified purpose), but that the principal shall remain as a permanent endowment.
Temporarily Restricted Funds are derived from gifts and bequests to support specified or unspecified activities of the Society, but without the stipulation that the principal shall permanently remain as a permanent endowment. Funds derived from the one-time purchase of Life Memberships in the Society are also classified as Temporarily Restricted Funds, and grants from private foundations are classified as Temporarily-Restricted Funds, since it is anticipated that they will eventually be fully exhausted to complete the project or activity funded by these agencies. In the annual audit of the Society, Federal grants are also listed as Temporarily-Restricted Funds, although normally no funds are actually received by the Society until the project/activity is complete and the Society has billed the agency for services rendered.
Board-Designated Restricted Funds are derived from a special declaration of the Society’s Governing Board to transfer money from unrestricted sources to the Restricted account, where it may be invested to the long-term benefit of the Society or for a specified, special activity of the Society.
The Restricted funds of The Ecological Society of America are invested to support:
- the annual costs of carrying the life members of the Society,
- the costs of awards given by the Society to its members and the recipient's travel expenses to receive them, and
- such other expenses as determined by actions of the Governing Board.
Any investment and brokerage fees for the management of the Restricted Funds are also paid from these funds. At the present time, the annual budget of the Society assumes a spending rate of $35,000/yr from these funds--a conservative value (ca.3.5%) considering the ~$l,000,000 value of our restricted assets.
At its spring l995 meeting, the ESA Governing Board agreed that the Society should invest its Restricted Funds for long-term appreciation, rather than immediate income, and it adopted the following guideline for its investment policy:
"In making investment decisions, the Society will consider environmental sensitivity as a criterion along with such factors as yield,appreciation potential and risk. The Society will seek to avoid investing in companies whose activities demonstrate a callous disregard for the environment, such that investing in them would be embarrassing for the Society. In addition, the Society should invest a portion of its portfolio in companies or funds that are seeking or utilizing environmentally sensitive technologies."
At its Spring 2000 meeting, the Governing Board:
- reaffirmed its support for the existing philosophy (above) as a guide for our investment policy.
- adopted the following as the official Guidelines and Objectives for the financial management of the Restricted Funds.
Financial Objectives and Guidelines for Restricted Funds of the Ecological Society of America
- The value of the ESA Restricted Funds should grow at a rate exceeding inflation by a minimum of 4 to 5% annually, and it should provide returns exceeding (essentially risk-free) Treasury bills by at least 3% annually. This performance will be judged on a rolling 5-year term.
- To provide proper diversification among asset classes, limiting the risk associated with any single security or class of securities, the following target mix of assets should be maintained across the entire portfolio, excluding grants from private foundations:
| Asset Class | Minimum Weight | Target Weight | Maximum Weight |
|---|---|---|---|
| Cash Equivalents | 0 % | 5 % | l0 % |
| Fixed Income | 30 | 35 | 50 |
| Equities | 50 | 60 | 70 |
- Grants from private foundations shall be invested in cash equivalents, but without contributing to the target weightings, as listed above, for the investment of the Society’s Restricted Funds.
Cash Equivalents provide adequate liquidity to meet the annual spending from the Restricted Funds. Allowable investments include:
- Certificates of deposit of less than one-year maturity in amounts less than the maximum insurance provided.
- Commercial paper issued by major U.S. corporations
- Money market funds that invest in high quality securities
- U.S. Treasury bills
Fixed Income Securities act to reduce volatility, to provide current income and to provide diversification of assets. Total returns are expected to exceed inflation by 2 to 3% annually over 3- to 5-year periods. The following criteria pertain:
-the quality of the holdings shall be defined as investment grade, which generally means within the top four ratings of nationally accepted investment advisory services, with an expected average quality of A or better.
- Maturities shall be considered to be short to intermediate term, suggesting a spread between 3 to 7 years. Under certain conditions, as much as 20% of the bond portfolio may exceed ten-year maturities, but the weighted average maturity shall not exceed 7 years.
- With the exception of U.S. government obligations, the debt of any single entity shall not exceed l0% of the total bond portfolio.
- In order to accomplish diversification and cost effectiveness, bond mutual funds may be employed by the investment manager to fulfill the fixed income portion of the portfolio. When bond mutual funds are utilized, the funds should carry no “load” fees, and the average maturity of the portfolio of any bond fund should meet the guidelines (above) for the maturity of bonds held directly by the Society.
Equity Securities provide both long-term capital appreciation and current income, which should exceed the Consumer Price Index (CPI) by 5 to 6% over 3- to 5-year periods. Equities will be expected to produce a cumulative annualized total return, net of fees, that exceeds the Standard and Poors 500 index over 3- to 5-year periods. It is recommended, but not required, that the equity securities meet the following criteria:
equity securities generally shall be rated B or higher by Standard and Poors (or an equivalent, recognized investment rating firm) and shall be companies with a capitalization of at least $500 million.
- at the time of purchase, an equity investment in a single company shall not exceed 5% of the value of the equity portfolio, and no single industry shall exceed 20% of the equity portfolio.
- the Society hopes to invest in companies that are sensitive to environmental issues, as expressed in our investment policy above.
- funds should be invested primarily in, but not limited to, domestic U.S. companies.
- in order to accomplish diversification and cost effectiveness, the equity portfolio may include stock mutual funds, including "growth stock," and "socially responsible" funds as appropriate. All mutual funds should be “no-load,” unless significantly superior performance can be demonstrated by alternative funds.
Process and Responsibility
The following procedures will be followed to ensure the performance of the Society's investments and its investment manager.
- The Investment Policy will be reviewed annually by the Executive Director and the VP for Finance for any necessary revisions.
- Any proposed revisions to the Investment Policy will be circulated to members of the ESA Committee on Finance and Investment for comment before being submitted to the Governing Board for approval.
- The Governing Board will approve one or more investment managers to execute prudent decisions in accord with the ESA's investment policy. The investment manager(s) must have a substantial record of successful performance in the investment of assets of similar funds, be registered with the Securities and Exchange Commission, possess appropriate licensure and certification, and have staff, resources, research support, and motivation to provide effective supervision of the Society's investments. The performance of investment advisory firm(s) will be judged by the rate of return over a 3- to 5-year period.
- The investment manager will operate in a prudent manner that is consistent with the overall objectives and policies of the Society, typical investment practices, and all governing statues.
- The investment manager will select investments to conform with the objectives and policy of the ESA, execute specific transactions, and report these transactions to the ESA Vice Presdient for Finance on a regular basis. The investment manager will make every effort to obtain the lowest commission rate on transactions, consistent with obtaining the best price and execution. Excessive turnover (> 30%/yr) of the portfolio should be avoided.
- On a quarterly basis, the investment manager will provide details of the investments to the Executive Director and the VP for Finance, showing the number of shares, purchase price, market value, unit cost, total cost, current yield, and estimated annual income.
- The investment manager will meet with the VP for Finance at least annually to review the investment results and outlook, as well as the economy and other factors, including environmental sensitivity, that are relevant to fulfilling the Society's future investment objectives.
