Library_of_Congress_-_Trust_Fund_Board_-_Investment_Policy.pdf

LIBRARY OF CONGRESS TRUST FUND BOARD – INVESTMENT POLICY (JANUARY 2013)

LIBRARY OF CONGRESS TRUST FUND BOARD

INVESTMENT POLICY

Table of Contents

I. Introduction

II. Investment Objectives

III. Investment Options

A. Department of the Treasury Options

1. Special Issue Non‐Marketable

Treasury Securities

2. Permanent Loan to the U.S.

Treasury

B. Market Options

IV. Investment Policy

A. Investment Determination

1. Time Periods

2. Exceptions

3. Factors

4. Real Rate of Return Methodology

5. Annual Financial Report

B. Management of Investment Options

1. Short‐Term Income Pool and

Permanent Loan Treasury Pool

a. Investments

b. Payout Provisions

2. Short‐Term Investment Pool

b. Investment Objectives

(1) Return

(2) Risk

c. Payout Provisions

3. Growth and Income Pool

b. Investment Objectives

(1) Return

(2) Risk

c. Payout Provisions

d. Asset Allocation

e. Portfolio Rebalancing and Cash Flows

C. Rate of Return

1. Objective

2. Risk

3. Bonds

D. Reasonable Liquidity

E. Prohibited Investment Categories

F. Investment of Gift Funds

V. Roles with Respect to Investments

A. Trust Fund Board

B. Investment Committee

1. Recommendations to the Board

2. Investment Selections

3. Recommendations to the

Librarian of Congress

C. Library of Congress

LIBRARY OF CONGRESS TRUST FUND BOARD

INVESTMENT POLICY

I. INTRODUCTION. The Library of Congress Trust Fund Board (TFB) is authorized by

2 U.S.C. §§ 154‐163 to accept donations, bequests, or devices (cash, securities, real property, etc.) for programs, projects, and activities in support of the Library’s mission.

The Joint Committee on the Library (2 U.S.C. § 156) must also approve acceptance.

Once accepted and approved, a separate fund account is established to maintain accountability for all transactions, and a Library of Congress Fund Manager is appointed to administer the fund’s activities. The fund is administered in accordance with the

Board’s direction and any specific donor stipulations. The Fund Manager and the

Library’s Office of the Chief Financial Officer staff develop annual multi‐year budget spending plans, which are used to make investment determinations that support the accomplishment of the spending plans.

The TFB Investment Committee provides recommendations to the TFB regarding overall investment policy. The Committee acts with delegated authority from the TFB to select investment managers and/or investment funds and to direct the Librarian to implement investment and payout provisions consistent with this Policy.

II. INVESTMENT OBJECTIVES. The overall objectives of the TFB’s investment policy are to support trust fund activities by:

A. Providing a stable, growing stream of payouts (from income and capital appreciation) for current and future expenditures;

B. Providing for the liquidity of investments to make payouts; and

C. Maintaining the “purchasing power” of endowment trust funds.

The Library will encourage donors to include language in the gift instrument that authorizes the TFB to invest the principal in accordance with the Board’s investment policy.

III. INVESTMENT OPTIONS.

A. Department of the Treasury Options. As a Federal government entity, the TFB has several unique Department of the Treasury investment options in addition to those typically available to a private sector trust fund. Specifically, the

Department of the Treasury provides fee‐free investment services for the following two types of securities:

1. Special Issue Non‐Marketable Treasury Securities. In accordance with

2 U.S.C. § 157, the TFB can invest in special issue non‐marketable

Treasury bills, notes, bonds, and overnight certificates of deposit. The interest rates for these securities are based upon the actual average market price for the identical marketable Treasury security. These investments are managed in the “Short‐Term Income Pool.”

2. Permanent Loan to the U.S. Treasury. In accordance with 2 U.S.C. § 158, the TFB can make a loan of up to $10 million to the U.S. Treasury and receive interest on loaned funds at the average rate of the outstanding long‐term marketable obligations of the U.S. less 0.25 percentage points

(minimum rate of 4 percent). Only the principal amount of a trust fund may be loaned to the U.S. Treasury. These investments are managed in the “Permanent Loan Treasury Pool.”

B. Market Options. In addition to these two Department of the Treasury investment options, the Board may make limited investments. 2 U.S.C. § 157 states that the TFB may not make any investments that could not “lawfully be made by a trust company in the District of Columbia, except that it may make any investment directly authorized by the instrument of gift, and may retain any investments accepted by it.” These investments are managed in a “Growth and

Income Pool” and a “Short‐Term Investment Pool.”

IV. INVESTMENT POLICY. To achieve the investment objectives set out above, the following investment policy is adopted:

A. Investment Determination.

1. Time Periods. In general, the Short‐Term Income Pool and the

Permanent Loan Treasury Pool investment options are used for amounts required for expenditure within the next three years (either principal or available investment income), the Short‐Term Investment Pool investments are used for funds required for expenditure one and two years out from the current budget year, and the Growth and Income Pool investments are used for funds not needed for expenditures within the next three years.

2. Exceptions. However, when financial/investment considerations warrant, at the recommendation of the Investment Committee, the

Librarian may also invest up to 50% of the amount needed for expenditure by a fund within the next three years (invested in Treasury options) within the Growth and Income Pool. Based on these criteria, the

Chief Financial Officer, in consultation with the applicable Library trust fund manager, determines the amount of funds that are available for investment in one or more of the three TFB investment options.

3. Factors. This determination is based on the following factors:

a. Specific donor stipulations;

b. The multi‐year spending plans developed for each trust fund; and

c. The goal of maintaining the “purchasing power” of endowment trust funds. (Maintaining “purchasing power” means that the value of the endowment must grow as rapidly as the overall rate of inflation as measured by the consumer price index.)

4. Real Rate of Total Return Methodology. The TFB will use every opportunity to invest in the Growth and Income Pool, using “real rate of return” methodology to maintain the purchasing power of the endowment’s principal.

5. Annual Financial Report. The TFB annual financial report will disclose how each trust fund is invested.

B. Management of Investment Options. The investment options approved by the

TFB are managed as follows:

1. Short‐Term Income Pool and Permanent Loan Treasury Pool.

a. Investments. The Librarian on behalf of the TFB is authorized to operate a Short‐Term Income Pool and a Permanent Loan

Treasury Pool. The short‐term income pool is used to purchase non‐marketable Treasury bills, notes, bonds, and overnight

Treasury certificates of deposits that will mature within three to five years and will be timed to meet projected disbursements. The

Permanent Loan Treasury Pool is used to the maximum extent possible to invest the principal amounts of trust funds requiring predictable income and/or must be invested in the permanent loan

(as stipulated by the donor).

b. Payout Provisions. Unless otherwise stipulated by the donor, principal (when not restricted) and interest as earned by the investments are available for payout. The Library will work with its fund managers to determine the appropriate amount to be withdrawn each period to meet current expenses while ensuring the overall achievement of the fund’s purpose.

2. Short‐Term Investment Pool.

a. Investments. The Librarian, acting on behalf of the TFB, is authorized to operate a Short‐Term Investment Pool of funds which the Librarian may invest in securities approved by the

Investment Committee. The goal of this pool is to allocate funds to low‐risk, highly liquid investments which are required for use one and two years out from the current budget year. Funds may be allocated to the Short‐Term Investment Pool from the Treasury options at the discretion of the Librarian upon the recommendation of the TFB Investment Committee.

b. Investment Objectives.

(1) Return. The return objective for the Short‐Term

Investment Pool will be to achieve returns, net of all expenses, which exceed a market benchmark such as the

Citigroup 3‐month Treasury Bill Index or the Merrill

Lynch 1‐3 Year Treasury Index.

(2) Risk. The fund will remain extremely low‐risk and will be limited to high‐quality, highly‐liquid securities with short maturities.

c. Payout Provisions. Unless otherwise stipulated by the donor, principal (when not restricted) and interest as earned by the investments are available for payout. The Library will work with its fund managers to determine the appropriate amount to be withdrawn each period to meet current expenses while ensuring the overall achievement of the fund’s purpose.

3. Growth and Income Pool.

a. Investments. The Librarian, acting on behalf of the TFB, is authorized to operate a Growth and Income Pool of funds which the Librarian invests in mutual funds and/or with individual investment managers (with assets held by affiliated or non‐ affiliated custodial banks) approved by the Investment

Committee. The goal of this pool is to allocate the maximum amount of funds to growth and income investments at the discretion of the Librarian upon the recommendation of the TFB

Investment Committee.

b. Investment Objectives.

(1) Return. The return objective for the Growth and Income

Pool will be to achieve returns, net of all expenses, over rolling three year periods, greater than the market as defined as the fund’s asset allocation policy applied to the

Russell 3000 for equity securities, and the Barclays Capital

US Aggregate Bond Index for fixed income securities. The minimum average annual return objective for the Growth and Income Pool, measured over rolling three and five‐ year periods shall be to exceed inflation, as measured by the Consumer Price Index – All Items (“CPI”) plus 5.0%.

(2) Risk. The fund should experience no greater risk, as measured by the variability of returns over rolling three and five‐year periods, than that of the “market” as defined above.

c. Payout Provisions. The annual payout rate for the Growth and

Income Pools shall be determined by the Librarian of Congress based upon recommendations from the Investment Committee.

The Investment Committee will consider market conditions when recommending the payout rule. As a guide, the payout percentage should be in a range of 3.5%‐5.0% applied against the market value of each fund, defined as the average market value for the last three years calculated as of June of each year. The

Librarian of Congress may seek a recommendation of the

Investment Committee before making payouts above the amount calculated as available for any individual trust fund invested in the Growth and Income Pool when the Librarian determines that a larger payout is required to meet the purposes of the applicable trust. If a payout will make the trust fund’s value fall below that of the Historic Dollar Value, it should not be made without special considerations.

d. Asset Allocation. The long term target asset allocation for the

Growth and Income Pool is recommended by the Investment

Committee to the TFB for approval to facilitate the achievement of the fund’s long‐term investment objective within reasonable risk parameters. The Trustees acknowledge that the allocation of funds between asset classes may be the single most important determinant of investment performance over the long run. The

Growth and Income Pool’s assets will be allocated within the ranges below.

Maximum Minimum Target

Equities 80 % 40 % 60 %

Fixed Income 60 % 20 % 40 %

Cash Equivalents 10 % 0% 0%

The actual asset allocation, which will fluctuate with market conditions, will be reviewed regularly by the Investment

Committee.

e. Portfolio Rebalancing and Cash Flows. On an annual basis, Investment Manager accounts should be rebalanced to conform with the stated long‐term asset allocation target. This process may result in withdrawing assets from Investment Managers that have performed well in the latest year or adding assets to Investment

Managers who have lagged in the most recent period. New cash flows (or distributions) shall be allocated to (or taken away from) the Investment Managers by the Librarian as directed by the

Investment Committee. As a general rule, cashflows will first be used to rebalance the total fund in accordance with target asset allocation policy.

C. Rate of Return.

1. Objective. The TFB’s investment portfolio shall be designed with the objective of attaining a market rate of return throughout varying budgetary and economic cycles, taking into account investment risk constraints and liquidity needs.

2. Risk. The core of the TFB’s investments should be limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed.

3. Bonds. Bonds are normally not sold prior to maturity with the following exceptions: 1) to minimize loss of principal; 2) to improve the quality, yield, or target duration in the portfolio; or 3) to meet unanticipated liquidity needs of the portfolio. Any such exception must be documented by Library staff and is subject to review by auditors.

D. Reasonable Liquidity. The TFB’s investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated.

This is accomplished by structuring the portfolio so that investments mature concurrent with cash needs to meet anticipated demands. Because all possible cash demands cannot be anticipated, the portfolio will contain certain fixed‐ income securities with active secondary or resale market value.

E. Prohibited Investment Categories. No portion of the TFB’s portfolio shall be invested in the following types of securities:

1. Funds with over 10% of assets in bonds rated lower than BBB or the equivalent of BBB if unrated;

2. Commodities or commodity contracts or any other speculative devices, e.g., speculative derivatives; or

3. Hedge funds or funds that are engaged in short selling as a substantial business practice.

F. Investment of Gift Funds. Gift funds accepted by the Librarian under 2 U.S.C. §

160 may be invested and reinvested in the same manner as trust funds. To ensure the liquidity necessary to fulfill the purposes of the gifts, placing gift funds in the Short‐Term Income Pool and Permanent Loan Treasury Pool is the preferred investment option. At the discretion of the Librarian, however, gift funds may be invested in other pools, provided that such investments ensure reasonable liquidity for the funds consistent with this Policy.

V. ROLES WITH RESPECT TO INVESTMENTS.

A. Trust Fund Board. With respect to investments, the Library of Congress Trust

Fund Board:

1. Approves the overall investment structure and investment methodology;

2. Delegates the selection of investments held in the Growth and Income

Pool and the Short‐Term Investment Pool to the Investment Committee;

3. Approves the withdrawal policy for the Growth and Income Pool;

4. Reviews the performance of investment funds and investment managers;

and

5. Invests and reinvests the Library’s gift funds consistent with the Trust

Fund Board’s approved trust fund investment policy.

B. Investment Committee.

1. The Investment Committee recommends the following to the Trust Fund

Board:

a. Overall investment policy; and,

b. The withdrawal policy for the Growth and Income Pool.

2. The Investment Committee selects investment managers and/or investment funds within parameters set forth in this Policy.

3. The Investment Committee recommends the following to the Librarian of

Congress:

a. The allocation of investments among the approved funds within the Growth and Income Pool;

b. The investment in the Growth and Income Pool of up to 50% of the funds needed for expenditure in the next five years and invested in Treasury options; and,

c. The Growth and Income Pool annual payout rate.

C. Library of Congress. The Library of Congress, through the Office of the Chief

Financial Officer:

1. Determines and manages budget and spending plans for each trust fund activity;

2. Moves money among approved investment options based on a periodic analysis of fund requirements;

3. Implements Trust Fund Board investment decisions and payout policies;

4. Implements investment selections as directed by the Investment

Committee;

5. Upon the recommendation of the Investment Committee, adjusts the allocation among the investments in the Growth and Income Pool and between the Treasury options, Short‐Term Investment Pool, and the

Growth and Income Pool; and

6. Upon the recommendation of the Investment Committee, approves the annual payout rate for the Growth and Income Pool.

Last revised January 7, 2013.

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