1607 - Investment and Withdrawal of Unrestricted Endowment

Associated Investments Fund

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.

Overview

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.

Procedures

1. Gift & Investment Services serves as the primary point of contact. Schools/Centers should contact Gift & Investment Services (contacts below) as soon as they begin to contemplate AIF investments or liquidations.

   • • Advance Notice Required: 1 month for less than $1 million, 3 months for $1 million or more.

2. 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.

Contacts & Forms

Gift & Investment Services – Tim Engler, tengler@upenn.edu

Finance & Treasury – Heather Seitz, Director of Cash Management & Treasury Operations, heseitz@upenn.edu
AIF Investment and Liquidation Request Form (for requests $5m+ only)