Investment Policy Statement forAmerican Library Association

Endowment Fund

December 2000

Note: This is an investment policy developed for your review and comment.This document is based on a review of the current policy, the mission statement and the current and projected needs of the association, in conjunction with detailed and in depth discussions among the Endowment Trustees and ALA’s Investment Advisor—Merrill Lynch.

I. Introduction

Purpose of this Policy Statement
Investment Objective

II. Information about the American Library Association Endowment Fund

Mission and Objective
Cash Flow and Liquidity Needs
Tax Status

III. Responsibilities of the Endowment Representatives

Executive Board
Endowment Trustees
Investment Consultant
Ethics and Conflicts of Interest

IV. Responsibilities of the Investment Managers

Fiduciary Responsibilities
Security Selection/Asset Allocation
Proxy Voting

V. Risk Tolerance

Financial Ability
Willingness

VI. Asset Allocation Strategy

Rebalancing Procedures

VII. Performance Objectives

Style Index
Secondary Performance Targets

VIII. Investment Strategy

Selection Criteria for Investment Managers

IX. Investment Guidelines

A. Asset Allocation
B. Permitted Securities

Domestic
International

C. Diversification Requirements

Large/Medium Capitalization
Small/Medium Capitalization
International
Fixed Income
Cash and Equivalents

D. Exclusions

X. Investment Transactions

XI. Meetings and Communications

XII. Performance Evaluation

Guidelines for Corrective Action

XIII. Approval

I. Introduction

Purpose of This Policy Statement

This policy statement outlines the goals and investment objectives for the American Library Association Endowment Fund. This document is intended to provide guidelines for managing the Endowment, and to outline specific investment policies that will govern how those goals are to be achieved. This statement:

Describes an appropriate risk posture for the investment of the Endowment’s assets,
Establishes investment guidelines regarding the selection of investment managers, permissible securities and diversification of assets,
Specifies the criteria for evaluating the performance of the investment managers and of the Endowment as a whole,
Defines the responsibilities of the Trustees, Executive Board, and other parties responsible for the management of the Endowment.

The Trustees believe that the investment policies described in this statement should be dynamic. These policies should reflect the financial needs and circumstances of the American Library Association and the Trustees’ philosophy regarding the investment of assets. These policies will be reviewed annually and revised periodically to ensure they adequately reflect changes related to the American Library Association, the Endowment and the capital markets.

Investment Objective

The Endowment’s assets shall be invested in accordance with sound investment practices that emphasize long-term investment fundamentals. In establishing the investment objectives of the Endowment, the Trustees have taken into account the financial needs and circumstances of the American Library Association, the time horizon available for investment, the nature of the Endowment’s cash flows and liabilities, and other factors that effect their risk tolerance. Consistent with this, the Trustees have determined that the investment of these assets shall be guided by the following underlying principles:

To achieve a positive rate of return over the long-term that would significantly contribute to the cash flow needs of the Endowment for on-going operations, special initiatives and capital projects in support of the American Library Association;
To provide for asset growth at a rate in excess of the rate of inflation, net of expenses;
To diversify the assets in order to reduce the risk of wide swings in market value from year-to-year, or of incurring large losses that could occur from concentrated positions;
To achieve investment results over the long-term that compare favorably with those of other endowments and foundations, professionally managed portfolios and of appropriate market indexes.

It is expected that these objectives can be obtained through a well-diversified portfolio structure in a manner consistent with this investment policy.

This investment policy is intended to be a summary of an investment philosophy that provides guidance for the Trustees and other parties interested in the management of the Endowment. It is understood that there can be no guarantees about the attainment of the goals or investment objectives outlined here.

II. Information about the American Library Association Endowment Fund

American Library Association Endowment Fund
50 East Huron
Chicago, IL 60611
Tel. (312) 280-3215

Primary Contact, Mr. Gregory Calloway, AED Finance

Endowment Value, $13.6 million, (November 2000)

Endowment Year, August 31, 2000

Federal Tax ID #, 36-2166947

Mission and Objectives of the Endowment

The mission of the American Library Association Endowment Fund is to support the development and enhancement of the Associations programs and activities, in addition to fostering and promoting the growth, progress and general welfare of the American Library Association.

All funds owned or controlled by the Trustees, which are classified as “Long Term Investment Funds,” are covered by this policy, and such funds are to be accounted for in the American Library Association’s annual financial reports.

Cash Flows and Liquidity Needs

The Trustees are responsible for monitoring and managing all investments in the Endowment. The assets are to be invested with prudent levels of risk and with the expectation that long-term total returns (yield plus capital appreciation) will preserve or increase the purchasing power of the Endowment’s assets, net of all expenses.

From time-to-time, donations of securities in-lieu of cash may be received by the Endowment. Subject to any constraints or stipulations from donors, and subject to conditions established by donors, the Trustees shall liquidate the securities unless contrary advice is received from the Investment Advisor

Tax Status

The American Library Association s organized as a private not-for-profit corporation under IRS Section 501 (c)(3). As a result, the income and earnings of the Endowment are exempt from State and Federal taxes.

III. Responsibilities of the Endowment Representatives

Executive Board

The Executive Board is the body that has fiduciary responsibility and acts for Council in the establishment and administration of endowment policies and programs. The Board appoints the Endowment Trustees for 3-year staggered terms. The ALA Treasurer serves in a non-voting ex-officio capacity. Specifically, the responsibilities of the Executive Board include:

To determine and approve investment policy, strategies and guidelines.
To exercise fiduciary responsibility for the operation and performance of the Endowment Fund.
To approve the Endowment Fund strategic purpose/objective consistent with overall ALA strategic planning.
To approve the creation of any endowment or scholarship.
To select and appoint all Endowment Trustees.
To approve unrestricted gifts and bequests over $20,000 to be added to the Future Fund.

Endowment Trustees

The Trustees shall have authority to hold, invest, reinvest, disburse, and otherwise deal (manage) with endowment funds in accordance with such directions as may be given them by the Executive Board of the Association.

The Endowment Trustees have responsibility for acting on behalf of the Board within established policies, procedures and guidelines, in the management of the Endowment Fund. Specifically, the responsibilities of the Trustees include:

To hold, invest, reinvest and distribute endowment funds as directed by the Executive Board.
To act as custodian for all receipts from life memberships and gifts/bequests for endowment purposes.
To recommend to the Executive Board operating procedures for the effective management of the Endowment.
To develop, review and recommend investment policy, strategies and guidelines to the Executive Board.
To select individual investment managers.
To report to the Executive Board on the status of the Endowment and its performance.
To communicate, as appropriate, about the Endowment and it’s performance.
That the assets of the Endowment shall be invested in a manner that is consistent with generally accepted standards of fiduciary responsibility.

Investment Consultant

The Investment Consultant retained by the Trustees shall have the following responsibilities:

To assist the Trustees in strategic planning for the Endowment. This includes providing assistance in developing an investment policy, asset allocation strategy, and investment manager structure;
To provide to the Trustees quarterly performance measurement reports on each of the investment managers and to assist the Trustees in interpreting the results;
To act as a liaison between investment managers and the Endowment, and thereby facilitate the communication of important information in the management of the Endowment;
Such other duties as may be mutually agreed to;
The Endowment Trustees shall periodically evaluate the Investment Advisor.

Ethics and Conflicts of Interest

The Trustees and American Library Association staff involved in the investment process are to refrain from personal or other institutional business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Members of the Trustees, American Library Association staff and investment agents are to disclose to the ALA Senior Trustee and Treasurer any material interests in financial institutions that conduct business with the American Library Association. The Trustees, American Library Association staff and investment agents are to further disclose any large personal financial/investment positions that could be related to the performance of the Endowment.

IV. Responsibilities of the Investment Managers

Fiduciary Responsibilities

Each investment manager is expected to manage the Endowment’s assets in a manner consistent with the investment objectives, guidelines, and constraints outlined in this statement and in accordance with applicable laws. This would include discharging their responsibilities with respect to the Endowment consistent with “Prudent Investor” standards, and all other fiduciary responsibility provisions and regulations. Each investment manager shall at all times be registered as an investment advisor under the Investment Advisers Act of 1940 (where applicable), and shall acknowledge in writing that they are a fiduciary with respect to the assets they manage. The Endowment will be managed by experienced investment management firms. All transactions that utilize assets of the Endowment will be undertaken for the sole benefit of the American Library Association. Any laws or regulations specific to the investment of assets of non-profit associations in the State of Massachusetts will be observed.

Security Selection/Asset Allocation

Except as noted below, each investment manager shall have the discretion to determine their portfolio’s individual security selections.

Each investment manager has been delegated responsibility for establishing and maintaining the asset allocation strategy for their individual portfolio. It is expected, however, that each investment manager will utilize a stable asset allocation strategy and not engage in tactical or market-timing asset allocation decisions. The performance of each investment manager is measured versus a fully invested market index, or combination of market indexes, representative of the investment manager’s investment style, asset allocation, and risk level.

Proxy Voting

Each investment manager is responsible for and empowered to exercise all rights, including voting rights, as are acquired through the purchase of securities, where practical. Each investment manager shall vote proxies according to their established Proxy Voting Guidelines. A copy of those guidelines, and/or summary of proxy votes shall be provided to the Trustees upon request.

The Trustees are responsible for voting any proxies received for investments retained in the Endowment and for any other “Trustee Directed” investments. The Senior Trustee shall vote the proxies according to the best long-term interests of the American Library Association.

V. Risk Tolerance

Investment theory and historical capital market return data suggest that, over long periods of time, there is a relationship between the level of risk assumed and the level of return that can be expected in an investment program. In general, higher risk (i.e. volatility of return) is associated with higher return.

Given this relationship between risk and return, a fundamental step in determining the investment policy for the Endowment is the determination of an appropriate risk tolerance. The Trustees examined two important factors that affect their risk tolerance:

Financial Ability to accept risk within the investment program and,

Willingness to accept return volatility.

Positive factors that contribute to a higher risk tolerance are:

The long-term time horizon available for investment of the Endowment’s assets;
Income from fund raising activities and other operations are generally sufficient to satisfy most of the American Library Association’s operating cash flow needs;
The lack of any significant liabilities that must be funded by the Endowment.

Offsetting these factors are:

The low probability of replenishing assets in the event of any large losses that may occur from holding concentrated positions;
The need for some liquidity in the Endowment’s investments to fund on-going operations;
The Endowment represents the bulk of the long-term endowment assets of the American Library Association and large fluctuations in market value from year-to-year can disrupt budgetary planning.

VI. Asset Allocation Strategy

The objective of the Endowment is an overall long-term capital appreciation strategy in line with the return objectives and risk parameters of the Endowment. The mix of assets should be generally maintained as follows (percentages are of the market value of the Endowment):

Asset Class	Minimum	Target Avg.	Maximum
Domestic Large/Medium Capitalization Stocks	45%	50%	55%
Domestic Small/Medium Capitalization Stocks	0%	5%	10%
International Equity	5%	10%	15%
Total Equity	57.5%	65%	72.5%
Investment Grade Fixed Income	27.5%	35%	42.5%
Cash and Cash Equivalents	0%	--	5%

Deviations from this asset mix guideline may be authorized in writing to the investment managers by the Senior Trustee, who may determine if the aggregate deviation does not constitute a material departure from the spirit of the target allocation.

The maximum percentage designated for the “Cash and Cash Equivalents” category is intended to apply after the initial start-up of any one portfolio in the Endowment. The Trustees recognize that this initial start-up period to become fully invested could be as long as three months after the initiation of a portfolio.

Rebalancing Procedures

The allocation to each asset class and to investment styles within assets classes is expected to remain stable over most market cycles.

Since capital appreciation (depreciation) and trading activity in each individually managed portfolio can result in a deviation from the overall asset allocation, the aggregate asset allocation will be monitored and the Trustees shall review the asset allocation and manager structure at least annually. Should an allowable range for the asset classes be violated, the Trustees must meet or conference to decide whether to rebalance the existing assets to the target asset mix. In addition, the Trustees shall review the actual asset allocation at each meeting in order to ensure conformity with the adopted strategic allocation.

To achieve the rebalancing of the Endowment, the Trustees may redirect contributions and disbursements from individual investment managers as appropriate, in addition to shifting assets from one investment manager to another. The Trustees shall coordinate all rebalancing actions with the Investment Consultant and the Investment Managers.

VII. Performance Objectives

In consideration of the long-term investment objectives of the Endowment’s assets and the Trustees’ risk tolerance, the Trustees have adopted an overall investment objective of long-term growth and income. This is a balanced approach that is expected to earn long-term total returns from capital appreciation and growth in income sufficient to outpace the long run inflation rate while providing a substantial and stable source of funds, net of expenses.

The Trustees will monitor the performance of the Endowment Fund on a quarterly basis. The Trustees will evaluate each investment manager’s contribution toward meeting the investment objectives outlined below over a three- to five-year time period and a full market cycle, unless otherwise noted. In the event an investment managers performance falls below its stated benchmark for four successive quarters a written explanation will be required. The request will be made by the Senior Trustee and Investment Advisor.

Style Index: It is desired that this the Merrill Lynch Consults portion of the Endowment earn returns higher than the “market”, as represented by a benchmark index or mix of indexes reflective of the Endowment’s return objectives and risk tolerance. This benchmark or “style index” is to be constructed as follows: 55% Russell 3000 Stock Index/10% Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) International Stock Index (Net)/35% Merrill Lynch Domestic Master Bond Index. The Endowment is expected to exceed the average annual gross return of this benchmark on a risk-adjusted basis over a three- to five-year rolling time period and a full market cycle.

Secondary Performance Targets:

The real net return goal (return after adjusting for inflation) for the Endowment’s assets is Inflation + 6%. Inflation shall be measured by the U.S. All Urban Consumers Price Index (“CPI”).
The Endowment is expected to outpace the style index return and real return target, each measured on a compound average annual return basis after the deduction of investment management fees and annualized over a three- to five-year rolling time period and a full market cycle.
Performance will be compared annually to a peer group universe comprised of other endowments and foundations.

VIII. Investment Strategy

Selection Criteria for Investment Managers

Investment managers retained by the Endowment shall be chosen using the following criteria:

Past performance, considered relative to other investments having similar investment objectives. Consideration shall be given to both consistency of performance and the level of risk taken to achieve results;
The investment style and discipline of the investment manager;
How well the manager’s investment style or approach complements other assets in the Endowment;
Level of experience, personnel turnover, demonstrated commitment to workplace diversity, financial resources, and staffing levels of the investment management firm or fund;
An assessment of the likelihood of future investment success, relative to other opportunities.

The Endowment will utilize a multi-manager structure of complementary investment styles and asset classes to invest the Endowment’s assets.

Should additional contributions and/or market value growth permit, the Trustees may retain additional investment managers to invest the assets of the Endowment. Additional managers would be expected to diversify the Endowment by investment style, asset class, and management structure and thereby enhance the probability of the Endowment achieving its long-term investment objectives.

IX. Investment Guidelines

Investment activity must be consistent within the requirements of this policy and applicable laws.

In addition, the following guidelines will apply:

A. Asset Allocation

Each investment manager has been delegated responsibility for establishing and maintaining the asset allocation strategy for their individual portfolio.

Unless otherwise noted below, under normal market conditions, each investment manager is expected to be invested primarily in equities and/or fixed income securities consistent with their investment style. Except for the initial three months after being retained by the Trustees, or as noted below, each investment manager shall not invest more than 20% of the market value of their portfolio in cash or cash equivalents. During the initial three months of the relationship with the Endowment, the investment manager may hold cash and cash equivalents in larger proportions in order to invest the portfolio on an orderly basis.

B. Permitted Securities

Domestic Securities

The securities purchased shall be registered with the Securities and Exchange Commission, and traded on a recognized U.S. stock exchange or over-the-counter-market.

Equity securities include: common stocks, REITs, and securities convertible into common stock of U.S.-based companies.

Convertible securities include: securities that are convertible into the common stock of U.S. based companies. This would include convertible bonds, convertible preferred stock, and mandatory convertible securities (e.g. PERCs, CHIPs, ELKs).Private placement convertible issues, also known as “144A” convertible securities, may not be purchased. All convertible securities purchased must be U.S. dollar denominated securities. Individual convertible securities should be rated “BBB” (or its equivalent) or higher at the time of purchase by a nationally recognized statistical rating agency. For the purposes of asset allocation, convertible securities shall be considered equities.

Fixed income securities include: Domestic fixed and variable rate bonds and notes issued by the U.S. Government and its Agencies, U.S. corporations, Yankee bonds and notes (bonds or notes issued by non-U.S. based corporations and governments but traded in the U.S.), securitized mortgages (e.g. GNMA’s, FNMA’s, FHLMC’s), collateralized mortgage obligations, asset-backed securities, taxable municipal bonds, and preferred stock. Private placement “144A” issues are prohibited.

International Securities

Allowable international securities are: sponsored and unsponsored American Depositary Receipts (ADR’s) or American Depositary Shares (ADS’s) or other depositary securities of non-U.S. based companies traded in the U.S. and closed-end country funds. Equities of foreign domiciled companies that are traded in the U.S. may also be purchased so long as the securities are registered (or filed) with the Securities and Exchange Commission and traded on a recognized national exchange or over-the-counter market.

C. Diversification Requirements

To minimize the risk of large losses, each investment manager shall maintain adequate diversification in their portfolio. Subject to the constraints outlined in this investment policy or the Merrill Lynch Consults profiles, each investment manager shall have the discretion to determine their portfolio’s individual security selections.

Large/Medium Capitalization U.S. Stock Portfolio

Investments in any one individual equity security should not exceed 5% of the market value of the equity portion of the investment manager’s portfolio;
Holdings of any single issue in each investment manager’s portfolio shall not exceed more than 5% of the market value of the total outstanding common stock of any one company;
The maximum allocation to any single economic sector in a portfolio shall not exceed the greater of 15% of the market value of the equity portion of the investment manager’s portfolio or 200% of the economic sector’s weighting in the S&P 500 Stock Index, or the investment manager’s equity policy index, if different. Economic sector definitions shall be according to the investment manager’s own classifications, which should be provided to the Trustees upon request;
Equities are limited to large and medium capitalization stocks. The minimum market capitalization at the time of purchase should be greater than $1 billion.

Small/Medium Capitalization Equity Portfolio

Investments in any one individual equity security shall not exceed 5% of the market value of the investment manager’s portfolio.
Holdings of any single issue in each investment manager’s portfolio shall not exceed more than 5% of the market value of the total outstanding common stock of any one company.
There are no constraints on the economic sector allocations of the portfolio. The investment manager may concentrate portfolio holdings in a limited number of economic sectors.
Equities are limited to small and medium capitalization stocks. The market capitalization of any one equity security shall be between $100 million and $10 billion at the time of purchase.

International Equity Portfolio

Subject to the usual standards of fiduciary prudence, the investment manager shall have the discretion to determine their portfolio’s country allocations. However, the country allocations and portfolio structure should conform to these guidelines:

The portfolio is expected to be diversified by number of issues, typically holding between 60 and 80 securities. In addition, no single security shall not exceed more than 5% at cost;
Currency hedging is not permitted;
No fewer than three countries represented in the portfolio,
No more than 20% of the market value of the portfolio may be invested in countries not represented in the MSCI EAFE Index plus Canada;
Non-U.S. dollar denominated securities are not permitted;
Investments in securities issued by or convertible into equities of U.S. based companies shall not exceed 10% of the market value of the portfolio;
There are no constraints on the economic sector allocations of the portfolio. The investment manager may concentrate portfolio holdings in a limited number of economic sectors.

Fixed Income Portfolio

Fixed income securities should be investment grade (rated “BBB”* or its equivalent or higher) at the time of purchase by a nationally recognized statistical rating agency. The minimum dollar weighted average quality of the portfolio is “AA”. Asset backed securities, mortgage backed securities, and Collateral Mortgage Obligations (CMO’s) should be rated at least “AAA” (or its equivalent) at the time of purchase by a nationally recognized statistical rating agency.
Unrated bonds may not be purchased.
The maximum effective maturity of any single security should not exceed 40 years. The dollar-weighted average duration of the portfolio should be within +25% of the dollar weighted average duration of the fixed income style index.
The portfolio is expected to be diversified by number of issues, typically holding between 25 and 35 securities. In addition, no single security shall not exceed more than 5% at cost (except securities issued or backed by the US Government or its Agencies);
No more than 30% of the market value of an investment manager’s portfolio may be invested in a single sector of the corporate fixed income market. Sector definitions shall be according to the investment manager’s own classifications, which should be provided to the Endowment Trustees upon request.
Mortgage-backed securities may be purchased on a “when issued” or “TBA” basis (a forward contract transaction for mortgage backed issues that are to be issued in the near term).A short-term investment can back a “when issued” commitment as long as its effective duration does not exceed 180 days. These short-term investments should be considered within the fixed income allocation of the portfolio.
Collateralized mortgage obligations (CMO’s) are limited to securities that are currently paying interest, receiving principal paydowns and do not contain leverage. CMO’s are limited to no more than 10% of the market value of the portfolio.
No more than 20% of the market value of the fixed income portfolio may be invested in zero coupon bonds.
Purchases of mortgage securities whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security and pays no principal (e.g. interest only securities) are prohibited.
Mortgage securities whose payment represents the principal payments on the outstanding principal balance of the underlying mortgage-backed security and pays no interest (e.g. principal only securities) are prohibited.
Purchases of mortgage securities whose payment of interest is determined by an index opposite to the changes in a market index (e.g. inverse floaters) are prohibited.

Cash and Equivalents

It is generally expected that the investment manager will remain fully invested in equity and/or fixed income securities; however, it is recognized that cash reserves may be utilized from time to time to provide liquidity or to implement some types of investment strategies. Cash reserves shall be held in the custodian’s money market fund*, short-term maturity Treasury securities, or high quality money market instruments.

Transactions or unanticipated market actions that cause a deviation from these policy guidelines shall be brought to the attention of the Trustees by the investment manager prior to executing transactions, when practical. Such deviations may only be authorized in writing by the Trustees. Only the Trustees can determine if the deviation constitutes a material departure from the spirit of this policy.

D. Exclusions

The Endowment’s assets in separately managed accounts may not be used for the following purposes:

Short Sales;
Purchases of letter stock, private placements (including 144A securities), or direct payments;
Leveraged transactions;
Mutual Funds;
Commodities transactions;
Puts, calls, straddles, or other option strategies;
Purchases of real estate, oil and gas properties, or other natural resources related properties with the exception of Real Estate Investment Trusts or marketable real estate securities;
Investments in tax-exempt securities;
Investments in non-US dollar denominated securities;
Investments in limited partnerships except for publicly traded Master Limited Partnerships;
Investments in futures, use of margin, or investments in any derivatives not explicitly permitted in this policy statement;
Investments by the investment managers in their own securities, their affiliates, or subsidiaries (excluding money market or other commingled funds as authorized by the Trustees);
Purchases of securities of Merrill Lynch, or of its subsidiaries or affiliates (except for money market or other commingled funds as authorized by the Trustees).

Any other security transaction not specifically authorized in this policy statement, unless approved, in writing, by the Trustees. Requests by investment managers to execute transactions that are not currently authorized in this policy should be made prior to executing such transactions.

X. Investment Transactions

Trading for the Endowment is directed by and is the responsibility of each investment manager to whom the Trustees have granted the discretionary authority to determine (subject to the investment objectives and policies outlined herein) the securities to be bought or sold on behalf of the Endowment, the amount of such securities, and the brokers or dealers to be used in such transactions. The investment manager is generally obligated, absent the Trustees’ direction to the contrary, to effect transactions with or through those brokers or dealers that in the investment manager’s view, are capable of providing best price and execution of client orders.

Consistent with this general obligation, it is anticipated that the investment manager will direct most, if not all transactions to Merrill Lynch both in view of its execution capabilities and because the Consults fees paid by the Endowment cover transaction charges only when transactions are executed through Merrill Lynch.

XI. Meetings and Communications

As a matter of course, each investment manager shall keep the Trustees or their Investment Consultant apprised of any material changes in the investment manager’s outlook, investment policy, and tactics;
A representative of each investment manager shall meet with the Trustees or their Investment Consultant on an annual basis to review and explain their portfolio’s investment results;
A representative of each investment manager shall be available on a reasonable basis for telephone communication when needed;
Any material event that affects the ownership or capital structure of the investment management firm, senior investment, marketing, or administrative personnel changes at the investment management firm or any material event that affects the management of this account must be reported promptly to Trustees or their Investment Consultant. This requirement does not include routine employee stock ownership awards or partnership announcements;
The Investment Consultant will provide written performance reports on a quarterly basis for each separately managed account portfolio and for the composite portfolio of separately managed accounts invested in the Merrill Lynch Consults Service;
The custodian shall provide monthly statements of assets and transactions.

XII. Performance Evaluation

As noted above, the Trustees will monitor the performance of the investment managers and of the composite of these accounts invested on a quarterly basis.

The Trustees will evaluate each investment manager’s success in achieving the investment objectives outlined in this document over at least a three- to five-year time horizon. The Trustees realizes that most investments go through cycles. Therefore, there will be periods of time in which the investment objectives are not met or when some investment managers fail to meet their expected performance targets.

The Endowment’s (and investment manager’s) performance should be reported in terms of rate of return and changes in dollar value. The returns should be compared to appropriate market indexes and peer group universes, for the most recent quarter and for annual and cumulative prior time periods.

The Endowment’s asset allocation in separately managed accounts shall be reported on a quarterly basis.

Risk as measured by volatility, or standard deviation of quarterly returns, shall be evaluated after twelve quarters of performance history have accumulated. An attribution analysis shall also be performed for the separately managed accounts, to evaluate how much of the Endowment’s investment results are due to the investment managers’ investment decisions, as compared to the effect of the financial markets. It is expected that this analysis will use the “style index” as the performance benchmark for evaluating both the returns achieved and the level of risk taken.

Guidelines for Corrective Action

The Trustees recognizes the importance of a long-term focus when evaluating the performance of investment managers. The Trustees understands the potential for short-term periods when the performance of individual managers may deviate significantly from the performance of representative market indexes. The Trustees, however, may require an extra level of scrutiny, which may include termination, of an investment manager based on the following conditions:

Any material event that affects the ownership or capital structure of the investment management firm or the management of this account (such as described in Section XI). Failure on the part of the investment manager to notify the Trustees or the Investment Consultant may be grounds for termination;
Any material client servicing deficiencies, including a failure to communicate in a timely fashion significant changes as outlined in Section XI of this investment policy;
Violation of terms of contract without prior written approval of the Trustees constitutes grounds for termination;
Diversification strategy—as part of its overall asset allocation strategy, the Endowment will utilize a multi-manager structure of complementary investment styles and asset classes to invest the Endowment’ assets. Therefore, it is very important that investment managers remain consistent with the intended investment style at the time the manager was engaged;
The Trustees will not as a rule terminate an investment manager on the basis of short-term performance. If the organization is sound and the firm is adhering to its investment style and approach, the Trustees will allow a sufficient interval of time over which to evaluate performance. The Trustees expects that the Investment Consultant will provide guidance to the Trustees to determine an appropriate length of time. The investment manager’s performance will be viewed in light of the firm’s particular investment style and approach, keeping in mind at all times the Endowment’s diversification strategy as well as the overall quality of the relationship;
The investment manager may be replaced at any time as part of an overall restructuring of the Endowment.

XIII. Approval

It is understood that this investment policy is to be reviewed periodically by the Trustees to determine if any revisions are warranted by changing circumstances including, but not limited to, changes in financial status, risk tolerance, or changes involving the investment managers. Should the Trustees permit a deviation from this policy or implement a change in policy, the circumstances and rationale for the change shall be documented and attached to this investment policy.

Senior Trustee

Date

Source of data: Ibbotson Assoc., Chicago