Arnone-Lerer SRI Fund

 

Investment Policy Statement (IPS)

 

 

Version 2.40

 

March 4, 2004

Table of Contents

 

1 Background

            1.1 Socially Responsible Investments (SRI)

            1.2 Fund Management

2 Scope

2.1 General

2.2 Governance

3 Fund Objectives

            3.1 Fund Cash Objectives

            3.2 Fund Class Objectives

4 Investment Objectives

4.1 General

4.2 Top-Down Investment Management and Business Cycle Analysis

4.3 The Role of Social Responsibility in Securities Selection

4.4 Security Analysis and Portfolio Analysis

4.5 Taxes, Exclusions and Exemptions

4.6 Time Horizon

4.7 Compliance

5 Investment Guidelines

5.1 Asset Allocation

            5.11 Equity Assets

            5.12 Non-Equity Assets

5.2 Asset Diversification/Rebalancing

            5.21 Market Liquidity or Marketability of Assets

5.3 Restricted Investments

5.4 Shareholder Advocacy

6 Investment Performance/Reporting

            6.1 Input Data

            6.2 Calculation Methodology

            6.3 Reporting

            6.4 Benchmark Issues

7 Investment Professionals

7.1 General

7.2 Selection

7.3 Responsibility

8 Authorized Persons and Advisors

9 Disclaimers and Acknowledgements

9.1 Disclaimers

9.2 Acknowledgement

10 Appendices

            A.  Sample AIMR GIPS Presentation

            B.  Fund Organizational Chart

            C.  Sample of Social Responsibility Screens

            D.  Current Investment Advisors

 

1 Background

 

The Arnone-Lerer Fund is created in memory of Eugene Arnone and Lawrence Lerer[1] by virtue of an endowment from Maria A. Stumpf and Stephen A. Stumpf for the benefit of Investment Management education of Villanova University students and to fund the Center for Responsible Leadership and Governance.  

 

The fund is a Student-Managed Fund (SMF) whose investment decisions incorporate social responsibility.  The choice of an SMF is based on the donors’ commitment to experiential learning.  The choice of social responsibility reflects the donors’ values and concerns for the long-term sustainability of the global economy. 

 

The first student-managed fund was established at Gannon University in 1952.  Since that time the number of universities supporting student-managed funds has increased dramatically.  The overall experience with student-managed funds seems very positive.  As of 2002, there are 104 institutions included on the recently formed Association of Student Managed Investment Programs. The benefits of experiential and cooperative learning that a SMF can provide have been described by Dolan and Stevens (2003).

 

“A SMF provides students with opportunities to supplement a finance curriculum with a real-world learning device that is integrative, experiential, and cooperative. Students in a SMF actually run an investment company, which requires them to draw upon a wide range of finance and core business concepts. A key strength of SMF is the requirement for students to integrate knowledge gained across the business curriculum. The emphasis is on information analysis, security selection, fund management, teamwork, and communication to constituents. Students work in cooperative teams to achieve a common goal. An important advantage of a SMF is that the information technology needed to organize and operate the fund is now readily available. Unlike any other real company that might be run by students, a SMF has a relatively simple production process with a generic product (risk-adjusted return). Nonetheless, the process and decisions involved in a SMF are realistic and provide practical real-time experiences in a dynamic market setting.”

 

A secondary aim of this Investment Fund is to generate monies to afford the aims and activities of the Center for Corporate Governance and Leadership.   Income from the Fund is to be reinvested in the Fund except as noted below.  The funds will be part of the University endowment and custody of the funds will reside with the University’s Financial Affairs office. 

 

The Investment Policy Statement (IPS) for the Arnone-Lerer SRI Fund describes the objectives, guidelines, and mechanics of the investment fund.  In accordance with the mandate of the donor, the Fund will encourage corporate social responsibility by incorporating qualitative factors that measure a firm’s corporate governance, ethics, social and environmental policies into the security selection process.  This will complement the traditional rigorous financial analysis of securities.    

 

Socially Responsible Investing is an evolving concept in modern investment management.  SRI is an investment approach that uses both financial and non-financial criteria to determine portfolio selection and allocation.  Under SRI, investors typically look at a company’s internal operating behavior (such as employment policies and benefits) and external practices and policies (such as effects on the environment and indigenous people), as well as its product line (such as tobacco or defense equipment) to determine whether they should become owners of the firm.  There have been many studies on the costs and benefits to investment management on SRI principles and it is still a moot point as to whether socially responsible investing can outperform an ordinary portfolio.

 

Some studies have found that SRI funds feature lower betas (less volatility) than other funds or relevant benchmarks because there is less exposure to public policy backlash (tobacco), employee lawsuits (firms with poor employment relations) and punitive government legal action (heavily polluting industries or companies).  

 

The donors transferred stocks to the University with a market value of approximately $100,000 to launch the Arnone-Lerer SRI Fund in the Spring of 2004.  According to the donors’ preferences, investments will be executed through Giordano Securities.  The owner and founder of Giordano Securities, Jimmy Giordano, a Villanova alumnus, offered to trade securities on the Fund’s behalf at a reduced or no charge to the Fund or University. 

 

All Fund proceeds are to be retained in the Fund until such time as the Fund’s market value exceeds $200,000 in 2004 dollars.  Disbursements of the portion of the assets in excess of this value can be made at the discretion of the Fund’s Board only to activities sponsored by the Center for Responsible Leadership and Governance.  Disbursements will be made in accordance with University budgetary policy and the University’s policy on authorized signatures, and disbursements will only be made to the University’s general operating account.  Should the Center for Responsible Leadership and Governance no longer exist, the portion of the assets in excess of this amount can be used by the Dean of the College of Commerce & Finance for any College purpose. 

 

The document that follows establishes the philosophy, guidelines, and mechanisms to implement the wishes of the donor and the University in accordance with the goal of creating a unique learning experience for Villanova students based on the opportunities and challenges of socially responsible investing. 

.

2 Scope

 

2.1 General

 

The purpose of this IPS is to outline an investment management philosophy which details the student-managed fund’s objectives, investment guidelines, performance measurement, and reporting guidelines.  The IPS is intended to be sufficiently specific to be meaningful, yet flexible enough to be practical.  The IPS will be reviewed periodically and revised, if necessary, to ensure that it adequately reflects changes related to the capital markets. 

 

The Arnone-Lerer SRI Fund is a student-managed fund (SMF) with a philosophy of investing in securities based on rigorous qualitative and quantitative analysis.  A key component of the qualitative factors is the appraisal of a firm’s degree of social responsibility, with the aim of encouraging corporate behaviors that align with Villanova University’s Augustinian traditions and the donors’ mandate.

 

2.2 Governance

 

This Fund is created by an endowment from Maria A. Stumpf and Stephen A. Stumpf as

a tax-free pool of assets managed under the auspices of Villanova University according to the guidelines laid out in the donors’ mandate. 

 

All investment decisions must be approved by the Fund’s Investment Committee which is comprised of all students currently involved in the management of the fund and the faculty assigned as instructors for the Student-Managed Funds class.  This document may be amended upon approval of the Investment Committee, the Board of Directors for the Fund, the Dean of C&F, and the Financial Affairs Office of Villanova University.

 

A limited power of attorney to trade funds will be granted by the Dean of the College of Commerce & Finance to a faculty member or members in the Finance Department, who will act as the investment advisor and will supervise the day-to-day management of the fund.  The investment advisor may exercise veto power over Investment Committee decisions if the advisor believes the decision violates this Investment Policy.

 

The investment advisor reports to a Board of Directors which is appointed by the Dean, the Finance Department, and the Center for Responsible Leadership and Governance.  The investment advisor and the Board of Directors serve at the pleasure of the Dean of the College of Commerce & Finance, the Chief Financial Officer, and the President of the University.   The Board of Directors is authorized to make deposits and disbursements from the fund in accordance with University budgetary policy and the University’s policy on authorized signatures.

 

 

3 Fund Objectives

 

3.1 Fund Learning Objectives

 

The Fund’s main objective is to provide a learning experience to the students that participate in the Student Managed Funds course.  The class is designed to offer the maximum exposure to both undergraduate and graduate students in the real-time management of assets and the investment management business. 

 

3.2 Fund Financial Objectives

 

The Fund objective is to invest the capital of the fund in accordance with the guidelines described in this document as created by the class and its faculty advisors.  The initial capital will be invested such as to increase its value as measured by its absolute and relative performance according to established benchmarks. 

 

Disbursements of the portion of the assets in excess of $200,000 in 2004 dollars can be made at the discretion of the Fund’s Board only to activities sponsored by the Center for Responsible Leadership and Governance.  The amount distributed will be consistent with the then \current University Endowment spending policy.  (As of Spring 2004, the University employs a 5% spending policy.  The amount distributed is computed as 5% of a three-year moving average of the endowment’s value using calendar year-end market values.)  Should the Center for Responsible Leadership and Governance cease to exist, the portion of the assets in excess of this amount can be used by the Dean of the College of Commerce & Finance for any College purpose. 

           

The Fund objectives can be modified in the future to alter the focus on the investment objectives, as well as the learning experience in terms of income, capital appreciation and risk management allowing for additional portfolios to be established

 

 

4 Investment Objectives

 

4.1 General

 

The portfolio has two main investment objectives: (1) to double the initial fund value of $100,000 to $200,000 in 2004 dollars (the threshold amount above which disbursements can be made) and (2) to continue to grow in order to generate funds to disburse to the Center for Corporate Governance and Leadership.  In executing the investment policy, the Fund will act as a socially responsible investor.      

 

4.2 Top-Down Investment Management and Business Cycle Analysis

The investment style employed by the Fund utilizes the top-down forecasting approach.  Forecasts of the level of macroeconomic activity allow analysts to project industry sales and revenue forecasts for individual companies.  This approach is the traditional academic approach and is recommended by the Association of Investment Management Research (AIMR) because a bottom-up approach is subject to the problem of inconsistent assumptions.

 

A top-down approach along with socially-responsible investing (SRI) consists of the following sequence of events:  business cycle analysis => industry analysis => SRI screening => security analysis => portfolio analysis.[s1] 

 

A related approach is top-down investing where the description of the business cycle dictates which industries should be included in the investment portfolio.  This approach is also known as a sector rotation strategy.  This is not a market-timing approach as the portfolio simply adapts to changes in the business cycle.  The Fund will engage in a sector rotation strategy at the industry analysis.

 

There are five stages of the economic life cycle:  Easeoff, Plunge, Early Revival, Late Revival, and Accelerate.  These stages are classified using different economic indicators and tracking their movement.  The first stage is the Easeoff phase.  In this phase, the Federal Reserve is trying to cool down a rapidly growing economy that is experiencing increasing rates of inflation. The rate of economic growth slows and reaches a peak in economic activity.  Interest rates also peak at this time.  Significant cumulative declines across all economic indicators occur during the ease-off phase.  Specifically, industrial production will begin to decrease, initial unemployment claims will increase, and non-farm payrolls decrease.  Industries that have historically performed well during the ease-off phase of the business cycle include: insurance brokers, telephone, hospital management, banks, and non-bank financials.

 

The Plunge phase is usually a time of recession.  The economy continues to decline, but this is a good time to start buying as things are expected to improve.  The federal funds rate peaks and then begins to decline during this phase.  In addition, the monetary base increases rapidly while other interest rates begin to decline.  Foods, pharmaceuticals, retail food chain, soft drink beverages, and medical products have all historically performed well during the plunge phase.

 

During the Early Revival phase, the business cycle reaches its trough and the recovery from recession begins.  The signs of revival include increasing industrial production, increasing non-farm payrolls, and declines in initial unemployment claims.  Industries that typically perform well include:  brokerage firms, metal containers, shoes, restaurants, and leisure time.

 

In the Late Revival phase of the business cycle, the stock market is characterized by stable returns and low risk.  This is the prime time to invest as the economy is in a stable growth period.  The economy continues to strengthen and inflation begins to slowly rise at this time.  Industries that usually do well during a Revival 2 period include: soft drink beverages, paper containers, newspapers, household products, and diversified chemicals.

 

The last phase of the business cycle is the Accelerate phase.  In the Acceleration, the economy as a whole keeps expanding, but the auto and housing components of GNP begin to decrease.  At the same time, inflation increases rapidly causing the Federal Reserve to intervene and slow down an overheated economy.  Real monetary supply growth begins to decelerate, and turns negative.  Generally, no industry performs well during an accelerate phase.  Therefore, upon entering this stage of the business cycle, the best performance is usually found in short-term fixed income securities. 

 

4.3 The Role of Social Responsibility in Security Selection

 

Two approaches have been identified as appropriate for the Fund, namely, screening and shareholder advocacy.  A combination of both will be employed.

 

4.3.1 Screening

The actual selection of the detailed screens will be made upon recommendation by the socially responsible research team with the final decision being made by the investment committee.  The socially responsible criteria will reflect responsible Catholic stewardship in accordance with Villanova University’s Augustinian principles and the United States Conference of Catholic Bishops principles for investing, as interpreted by the investment committee.   

These policies exist to “protect human life, promote human dignity, reduce arms production, pursue economic justice, protect the environment, and encourage corporate responsibility.”

 

· Exclusion of investment in companies whose activities include direct participation in or support abortion.

· Exclusion of investment in companies that manufacture contraceptives or derive a significant portion of its revenues from the sale of contraceptives.

· Exclusion of investment in companies that engage in research that results in the end of pre-natal life; makes use of tissue derived from abortion or other life ending activities; violates the dignity of a developing person.

· Divest from companies that engage in racial discrimination/gender discrimination.

· Not invest in companies that derive a significant portion of its revenues from product or services intended exclusively to appeal to a prurient interest in sex or incite sexual excitement.

· Discourage nuclear and conventional arms race/avoid investments in firms primarily engaged in military weapons production or develop weapons inconsistent with Catholic teachings on war.

· Not invest in companies that are directly involved in the manufacture, sale, or use of anti-personnel landmines.

 

Screening is employed to filter out those securities that fail on the qualitative factors listed above.  In the process of screening we will at times exclude companies that have failed our social responsibility criteria and/or include securities that may have reason to fail our screen but are chosen on the basis of a “best in class” approach.  Best in class is an approach that chooses to invest in a security with the opportunity for the investor to engage in dialogue to create change by encouraging the company to act in a more socially responsible manner.   

 

4.3.2 Shareholder Advocacy

 

The Fund will execute its socially responsible investment mandate by supplementing security analysis with the active engagement of corporations through the actions of shareholder advocacy. 

 

As a socially responsible investor, the Fund shall monitor the companies in which it is invested for the social and financial performance.  Where the social responsibility team identifies changes in the degree of a firm’s social responsibility in which the Fund has currently chosen to invest based upon its criteria described above, the social responsibility team shall identify the impact of these changes and recommend an appropriate course of action.  The recommendation will be tabled for the final decision of the investment committee.  

 

As a group committed to acting in a socially responsible manner through investing, in accordance with Villanova University’s Augustinian code of ethics, we will actively engage in corporate advocacy if at any time the group sees a potential violation of this responsibility on the part of the company in which we as a group have invested in.  Some of these potential violations may include:

                       

1.) Material misrepresentation of financial statements.

                        2.) Unethical management decisions.

                        3.) Breach of environmental/civil/criminal law.

                       

                        4.) Decisions that have a negative impact on areas of social responsibility

previously identified as critical decision factors by the social responsibility team.

                         

If the investment committee accepts the recommendation of the social responsibility team, the Fund shall then act based on the evidence of the company in question.  The Fund may take one or all of the following actions:

 

                        1.) Divest, thereby completely disengaging involvement.

                        2.) Send a letter to company management expressing our concerns.

                        3.) Vote our proxies in support of resolutions to meet our desired change.

                        4.) Coordinate with other shareholders/lobbyists to enact change.

                        5.) Maintain existing position.

 

These five courses of action are subject to revision at the discretion of the committee at that point in time.

 

Before the investment committee acts, it shall require that the social responsibility team research and present the investment risk and return costs and benefits of the recommendations.  The investment committee shall choose a course of action based on a complete review of the facts presented at the time.  It will be made clear that any act of corporate advocacy is a response by the Fund and not by Villanova University.

 

4.3.3 Implementation of Social Responsibility Screening

 

The Fund may use the services of a third-party vendor of vetting or rating social responsibility.  The selection of the vendor will be made upon recommendation of the social responsibility team and approved by the investment committee.  Using this research, the subset of appropriate securities will be made available for further analysis.  

It is reasonable to assume that securities in the portfolio may not meet the socially responsible criteria from time to time.  If the Fund owns securities of a company whose products, services, or business practices conflict with social responsibility criteria, the portfolio will act to rectify the situation in a timely and prudent manner.

 

4.4 Security Analysis and Portfolio Analysis

 

Because the sector-rotation strategy tends to be an aggressive strategy, a value approach to security analysis may be used as a counter-balance.  Given the appropriate industries, securities that survive the SRI screening will be evaluated for inclusion into the portfolio analysis.  Portfolio analysis consists of mixing and matching various securities into a portfolio in order to maximize expected return and to minimize expected risk.  Modern Portfolio Theory (MPT) will be utilized in the building of the investment portfolio.

 

 

 

 

4.5 Taxes, Exclusions and Exemptions

 

As a Fund within the endowment of an educational institution under the auspices of the Office of Financial Affairs for Villanova University, the SMF is not obligated to pay taxes and neither is it regulated as an investment fund by the Securities and Exchange Commission. 

 

4.6 Time Horizon

 

The Fund was initiated in January, 2004.  The first purchases of securities will be made by the Fund after the establishment of this Investment Policy Statement and its approval by the appropriate authorities.  It is estimated the first trades will be executed sometime in March or April of 2004.  The investment horizon will typically be a semester with the opportunity to extend into the next semester dependent upon the investment committee’s satisfaction that proper management of the assets is possible during any intervening time between one class existing and a new class entering the investment committee structure. 

 

Should the investment committee reasonably decide to exit an existing investment strategy at the end of a semester, it shall identify an appropriate portfolio management vehicle for the intervening period with the objective of minimizing any loss of the investment capital for the period in which no active management is possible. 

 

The Fund’s investment philosophy is aimed at a reasonable time period and not at short-term trading activity. 

 

4.7 Compliance

 

Students and faculty directly involved in the SMF course must comply with the following rules:

 

• A restricted list of securities will be created and maintained throughout the investment time horizon.  The restricted list will include securities that are being reviewed for purchase by the fund.  A security will officially be taken off the restricted list 24 hours after: (a) the security is bought by the fund, or (b) the security has been rejected for purchase by the fund.  Individuals involved with the SMF are not allowed to trade into and/or out of securities on the restricted list 10 days before the security is bought or sold by the Fund.

 

 

 

 

 

 

 

 

 

5 Investment Guidelines

 

5.1 Asset Allocation

 

5.1.1 Equity and Fixed Income Assets

 

The assets held within the Fund will be equities of companies listed on exchanges in the United States.   This list may also include American Depository Receipts (ADRs) of foreign-based corporations that trade on American markets.  The companies must be classified as mid to large cap, currently categorized as firms with a minimum market capitalization of over $1.0 billion. 

 

Investment grade fixed income securities of US companies listed on U.S. exchanges may be invested in at a later stage.

           

5.1.2 Changes in Asset Allocation

 

When the Economic Analysis Team reports that the Accelerate phase of the economic cycle has begun, the Fund’s equity holdings will be liquidated and the Fund will move into short-term commercial paper or United States Treasury Bills.  Purchasing commercial paper will allow the fund to maintain SRI and will maintain the security analysis activity of the fund.

 

5.1.3        Hedging

                         

If during any other economic cycle there is an unexpected amount of volatility or students are unavailable to manage the fund, index options or futures may be used as a temporary hedge.  Due to the Social Responsibility goal of this portfolio, the ideal hedge would involve index options or futures of a socially responsible index.  If these are not available, it will be up to the portfolio group’s discretion as to which index options or futures will be used.

 

Another possible hedge that would be acceptable, although not ideal, would involve options contracts for the individual equities to be used to hedge the portfolio.  The use of options on individual securities must be for defensive purposes only, and cannot be used for speculative purposes, e.g., writing or purchasing naked calls or puts. Using individual contracts or spreads are both acceptable, as long as they fit the above criteria.  This paragraph should be interpreted to mean that the use of options and futures contracts is to be restricted to very conservative strategies.

 

5.2 Asset Diversification/Rebalancing

 

In terms of prudent diversification principles, the investment committee will limit the initial investment in any one security to 5%.  Due to market movements the investment in any one security may move above or below this limit.  The investment committee shall act to rebalance the portfolio back to the 5% maximum limit when any one security reaches the level of 7% of total portfolio value. 

 

The initial investment in securities of the same industry shall be limited to 12.5% of the[s2]  portfolio’s total value. 

 

5.3 Market Liquidity or Marketability of Assets

 

Securities in the portfolio are required to be readily marketable, and thus liquid (with the exception of derivatives used for hedging), measured by the security being immediately available for review by analysts.  Due to the lack of market liquidity that exists within certain securities, if there is an average daily volume of less than 500,000 shares traded for the previous 20 day period, the security is prohibited from being purchased until it reaches this minimum requirement.   In addition, because of larger bid/ask spreads inherent in their trading, stocks that are priced less than $10.00 per share cannot be purchased as an initial holding.  Whenever, a security drops below $10.00 a share, the security will be subject to normal compliance and security analysis reviews.  A share price dropping below $10.00 a share does not necessarily trigger a sell decision.

 

5.4 Restricted Investments

 

Due to the lack of expertise within our class and the limited scope of our investment objectives, the Fund will restrict the classes of securities in which we invest.  The investment committee may choose to extend or limit the restricted classes on the basis of a reasonable belief that these changes will not significantly increase the risk of under-performance of the Fund. 

 

These restrictions fall into the following categories:

 

1. Commodities and Commodity Futures 

2. Private Equity

3. Partnerships

4. Real Estate Property

5. Fixed Income Products including:

a. High Yield Bonds

b. Mortgage Backed Securities

c. Fixed Income Derivatives

6. Convertible Bonds

 

6 Investment Performance/Reporting

 

Our performance reporting guidelines will be in accordance with Association of Investment Management and Research’s (AIMR) Global Investment Performance Standards (GIPS).  The purpose of the GIPS standards is to create performance presentations that allow for greater comparability of returns and increase the transparency of information provided to investors.  The underlying principles of the GIPS standards are fair representation and full disclosure. 

 

6.1 Input Data

 

All data and information necessary to support the Fund’s performance presentation and to perform the required calculations will be captured and maintained.  Portfolio valuations will be based on market values.  Accrual accounting will be used for dividends. 

 

6.2 Calculation Methodology

 

According to GIPS, total return, including realized and unrealized gains plus income, will be used.  Portfolios will be asset weighted using beginning-of-period weightings.  Performance will be calculated after the deduction of all trading expenses. The only trading expenses that the Fund will incur is the indirect expense of the bid/ask spread. 

 

6.3 Reporting

 

In order to comply with these standards, the performance reporting group will provide monthly statements on the performance and value of the portfolio and individual securities as well as a performance report, generated when they are notified by the Economic Analysis group that a change has occurred in the business cycle.  The monthly statements will be used to determine if rebalancing or portfolio revisions are necessary.

 

Twice each year, at the end of the spring and fall semester, each Team will provide consolidated reports to the Board, demonstrating the results of the Fund to date.  Presentations will be made to the Board of Directors for the Fund, the Dean of C&F, and the Financial Affairs Office of Villanova University at least annually, at the end of the fall semester immediately before the transition to the next group of students occurs.  Also, Giordano Securities and/or its chosen custodian will provide monthly statements on the activity in the account and the market value of the investments in the account to the University Controller’s Office, for financial reporting and external audit purposes.

 

The following items will also be reported: 

• The number of portfolios and value of assets in the composite (the aggregate of all investment funds managed by the investment committee) and the percentage of the total assets represented by the composite at the end of each month (period).
• The standard Compliance Statement indicating compliance with GIPS, and the composite creation date.  Performance for periods of less than one year will not be annualized. 
• The total return for the benchmark that reflects the investment strategy or mandate represented by the composite will be presented for the same periods for which the composite return is presented.  If the SMF changes the benchmark that is used for a given composite in the performance presentation, the SMF will disclose both the date and the reasons for the change.  If a custom benchmark or combination of multiple benchmarks is used, the SMF will describe the benchmark creation and rebalancing process. 

 

The GIPS recommends that cumulative returns for composite and benchmarks for all periods be included in performance reporting.  Although this is a recommendation of GIPS and not a standard, we will adopt this as one of our reporting standards to show the cumulative performance of our investment choices to the Board of Directors for the Fund, the Dean of C&F, and the Financial Affairs Office of Villanova University.  GIPS standards also mandate that relevant risk measures be reported along with total return, such as Beta, standard deviation, etc.   

 

6.4 Benchmark Issues

 

The performance of the portfolio will be compared with the Domini 400 Social Index, which is the performance benchmark for our chosen investment categories.  The Fund attempts to achieve its objective by investing in a portfolio of common stocks that approximately parallels the composition of the Domini Index.  The Fund, however, will not replicate the Index. 

 

The Domini 400 Social Index is an index made up of the stocks of 400 companies selected using social and environmental criteria.  It is composed primarily of large-cap U.S. Companies which fits our investment guidelines.  The Domini Index reflects the behavior of a portfolio of stocks in companies that a socially responsible investor might purchase.  It is constructed using the following multiple social screens:  avoidance of alcohol, tobacco, gambling, nuclear power, Adult Entertainment, Firearms, and military weapons.  It also includes evaluations of environmental impact, citizenship, employee relations and diversity.  The Index is composed of approximately 250 companies from the S&P 500 and 150 new companies aimed at providing a broad representation of industries in the Index.  Because our asset allocation plan involves investing in U.S. mid to large cap growth companies, we feel this benchmark is the best choice of comparison. 

 

The performance of our Fund may or may not differ from that of the Domini for several reasons.  For instance, we may have more or less social screens.  The Domini does not screen for companies that are associated with abortion so that is one reason why we expect differences in performance.  The Fund will incur trading expenses in the form of buy/sell spreads which is an expense an Index does not incur.  Furthermore, if the Domini Index changes its composition to a degree that our social responsibility screens create a sufficiently different security selection set, the investment committee shall consider and select a new benchmark by which to measure Fund performance. 

7 Investment Professionals

 

7.1 General

 

Investment Advisor

 

The investment advisor is a faculty member of the Finance Department in C&F and is appointed by the Dean of C&F in consultation with the Director of the Institute for Research in Advanced Financial Technology (IRAFT) and the chairperson of the Finance Department.  The investment advisor has the fiduciary responsibility for the fund and has the power of attorney to trade the account maintained by the fund.  Because of the educational purpose of the fund, the investment advisor is not required to be a Registered Investment Advisor according to the Investment Advisors Act of 1941.

 

Investment Committee

 

The investment committee is comprised of graduate and undergraduate students enrolled in the Student-Managed Investment Fund course offered through the Department of Finance and the faculty assigned as instructors of the course.

 

Custodian

 

The custodian of the fund is Bear Stearns which is employed by Giordano Securities to provide custodial services.

 

Additional Professionals

 

7.2 Selection

 

The investment advisor from time to time may select investment professionals to provide investment advice and services to the Fund, with the approval of the Chief Financial Officer for the University.

 

7.3 Responsibility

 

The investment advisor is responsible for the due diligence in determining the suitability of such advisors.

 

8 Authorized Persons and Advisors

 

Board of Directors

 

The board of directors for the fund will be appointed by the Dean of C&F and will include representatives from the C&F Faculty, IRAFT, the Center for Responsible Leadership and Governance, Villanova Alumni, and the Office of Financial Affairs for Villanova University.

 

 

Executive Director

 

The Executive Director is the Director of the Institute for Research in Advanced Financial Technology (IRAFT) and is appointed by the Dean of C&F.

 

9 Disclaimers and Acknowledgements

 

9.1 Disclaimers

 

The Fund understands that Investment Advisor does not provide tax or fund advice and that the tax and fund consequences of the investment guidelines and parameters contained herein have been reviewed with and approved by the Fund’s own legal, accounting and other advisors.  It is the responsibility of the Fund and its advisors to advise the Board of Directors of any tax or fund considerations, and any changes in its federal, state, and local that might warrant reconsideration or revision of this IPS.

 

9.2 Acknowledgement

 

The Fund acknowledges that the IPS is a policy document that governs the investment management activities of the investment advisor and investment manager.  Changes in the IPS will follow the procedure outlined in Section 2.2.

 

The following references were used in the preparation of the IPS:

 

Dolan, R. and J. Stevens (2003) “Student Managed Funds as a Vehicle for Integrating Finance, Economics, Accounting and Marketing.”  Paper presented to Academy of Business Education Meeting, San Francisco, 2003.

 

Stowe, J., Robinson, T., Pinto, J. and D. McLeavey (2002), Analysis of Equity Investments: Valuation, AIMR, Charlottesville, VA.

 

9.3 Signatures

 

 

 

 

__________________________________

Stephen Stumpf, Dean C&F

 

 

 

 

 

___________________________________

David Nawrocki, Acting Director – Institute

For Research in Advanced Financial Technology

 

 

 

 

___________________________________

Jonathan Doh, Director - Center for Corporate

Governance and Leadership

 

 

 

 

 

 

____________________________________

Ken Valosky, University Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Appendices

 

APPENDIX A

 

SAMPLE AIMR GIPS PRESENTATION

 

XYZ Investment Firm Performance Results: Balanced Composite,

January 1, 1995, through December 31, 1999

 

 

Year	Total Return (%)	Benchmark Return (%)	Number of Portfolios	Composite Dispersion (%)	Total Assets at End of Period (DM millions)	Percentage of Firm Assets	Total Firm Assets
1995	16.0	14.1	26	4.5	165	70	236
1996	2.2	1.8	32	2.0	235	68	346
1997	22.4	24.1	38	5.7	344	65	529
1998	7.1	6.0	45	2.8	445	64	695
1999	8.5	8.0	48	3.1	520	62	839

 

XYZ Investment Firm has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS).

 

Notes:

 

1.        XYZ Investment Firm is a balanced portfolio investment manager that invests solely in German securities. XYZ Investment Firm is defined as an independent investment management firm that is not affiliated with any parent organization.

2.        The benchmark: 30 percent DAX 100; 70 percent EFFAS Bund Index rebalanced monthly. Annualized compound composite return = 11.9 percent; annualized compound benchmark return = 11.4 percent.

3.        Valuations are computed in German marks and from Reuters.

4.        The dispersion of annual returns is measured by the standard deviation across asset-weighted portfolio returns represented within the composite for the full year.

5.        Performance results are presented before management and custodial fees but after all trading commissions. The management fee schedule is attached.

6.        This composite was created in February, 1995. No alteration of composites as presented here has occurred because of changes in personnel or other reasons at any time. A complete list of firm composites and performance results is available upon request.

 

APPENDIX B – Fund Organizational Chart

 

APPENDIX C

 

SAMPLE OF SOCIAL RESPONSIBILITY SCREENS SELECTED FOR CURRENT INVESTMENT HORIZON FROM IDEALWORKS.COM

 

 

 

 

APPENDIX D

 

 

CURRENT INVESTMENT ADVISORS

 

 

 

Dr. David Nawrocki – Dr. Nawrocki is a faculty member in the Finance Department in C&F and is the Acting Director of IRAFT.  Dr. Nawrocki is a Registered Investment Advisor (RIA) with the SEC under the Investment Advisors Act of 1941.  In addition, he is registered as an RIA in the states of California, Illinois, and Pennsylvania.  Dr. Nawrocki earned his Ph.D. at the Pennsylvania State University.

 

 

Dr. David Shaffer - Dr. Shaffer is a faculty member in the Finance Department in C&F.  Dr. Shaffer earned his Ph.D. at the University of Kansas.