Given that Schools and Centers, from time to time, request to invest excess funds in the Associated Investments Fund (AIF), this policy provides a backdrop on the University’s long-term investment strategy executed through the University’s centrally managed and invested AIF, the due diligence required for the investment of unrestricted operating cash in the AIF for the five year lockup period, and the procedures for School/Center direct investment in and liquidation from this fund.
May 2023Responsible Office
The AIF is a pooled investment vehicle in which the many individual endowments, Schools/Centers, and trusts hold shares or units. The purpose of the AIF is to provide stable and perpetual support for the mission and programs of the University. Achieving this objective requires an investment and spending program that supports intergenerational equity. The AIF must provide substantial and stable spending today, but it also must preserve purchasing power to provide comparable resources to future generations. Penn seeks to resolve the tension between these competing needs by investing in a diversified, equity-oriented portfolio and by adhering to a disciplined spending rule that smooths the impact of changes in AIF value on the operating budget.
The University’s endowment spending policy balances the objectives of maximizing budgetary support to endowed programs and maintaining purchasing power of the endowment into perpetuity. The actual payout in any given year is determined by a formula designed to smooth the impact of short-term changes in the endowment’s value on spending distributions. With few exceptions, the University’s spending rule target payout is based on the sum of: (i) 70% of the prior fiscal year distribution adjusted by an inflation factor; and (ii) 30% of the lagged fiscal year-end fair value of the AIF, multiplied by Penn’s target spending rate, which is typically 5%.
Penn builds its investment program around several simple tenets. First, to achieve the high returns necessary to preserve purchasing power after spending, the AIF is invested with a strong equity orientation. Except for fixed income, Penn expects that all asset classes in which it invests can earn equity-like returns over long periods of time. Second, Penn builds a portfolio that is diversified across different fundamental drivers of return. The University focuses on areas with the greatest inefficiencies across asset classes, strategies, and geographies. Finally, Penn capitalizes upon the perpetual nature of the University to invest with a long time horizon, creating a significant advantage relative to the many market participants who must focus on near-term certainty instead of long-term attractiveness when evaluating investments.
As a result, a significant amount of the AIF’s investments are illiquid and involve long term contractual lockups. Large unanticipated outflows from the AIF could pose both liquidity and asset allocation challenges. The AIF investment pool is not an appropriate vehicle for funds with relatively short time horizons, specifically less than 5 years.
This policy provides guidance to Schools and Centers on requesting AIF investments and withdrawals.
In order for the AIF to be invested with a long time horizon, there is an initial five-year lockup period for School and Center investments in the AIF. All appreciation on the investments will be subject to the same five-year lockup period as the initial investment, unless approved by the VP, Finance & Treasurer on an exception basis.
Withdrawals of term endowments are subject to donor agreements and are not subject to this policy.
The procedure for requesting operating cash investments in, or liquidations from, the AIF varies based on the magnitude of the requested AIF investment or liquidation amount. For AIF investment or liquidation requests that are:
Regarding liquidation requests, any exception to the AIF minimum holding period requires approval by the Vice President for Finance and Treasurer. Formal submission of request must indicate the reason the exception should be approved.
When an AIF Investment and Liquidation annual plan or formal request is submitted, Finance & Treasury will assess the request for compatibility with University liquidity needs. If no conflict exists, the School/Center’s request will be approved if requirements are met. The receipt of the School/Center’s plans on a timely basis will allow the University to modify its strategies on liquidity and investment accordingly.
Gift & Investment Services – Tim Engler, firstname.lastname@example.org
Finance & Treasury – Heather Seitz, Director of Cash Management & Treasury Operations, email@example.com
AIF Investment and Liquidation Request Form (for requests $5m+ only)