Finance and Administration - Board of Trustees - The University of ...

Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - InformationTable 23.3UnrestrictedTemporarilyRestrictedPermanentlyRestrictedTotal3Beginning balance $(3,276,921.52) $1,510,466.08 $22,995,350.86 $21,228,895.42Contributions pooled — — 6,936,038.13 6,936,038.13Investment earnings — — 1,407,744.63 1,407,744.63Market value adjustment 3,009,681.33 — — 3,009,681.33Endowment held at Fidelity — — 437,672.37 437,672.37Contributions not pooled — — (5,500.00) (5,500.00)Disbursements — — (1,323,528.46) (1,323,528.46)Transfer — (1,510,466.08) 1,510,466.08 —Ending balance $ (267,240.19) $ — $ 31,958,243.61 $31,691,003.42The foundation uses the university’s spending policy. Theuniversity calculates its spending policy by taking 4.5% of athree year market average each December 31.The university’s overall, long-term investment objective of theConsolidated Investment Pool (CIP) is to achieve an annualizedtotal return (net of fees and expenses), through appreciation andincome, greater than the rate of inflation (as measured by thebroad, domestic Consumer Price Index) plus any spending, thusprotecting the assets against inflation.The assets are to be managed in a manner that will meetthe long-term investment objective, while at the same timeattempting to limit the volatility in year-to-year spending.The university’s Investment Advisory Committee believes thatinvesting in securities with higher return expectations outweighstheir short-term volatility risk. As a result, the majority of assetswill be invested in equity or equity-like securities. Fixed incomesecurities and other low volatility strategies (e.g. absolute returnhedge funds) will be used to lower the short-term volatility ofthe portfolio and to provide stability, especially during periodsof negative equity markets. Cash is not a strategic asset of theportfolio, but is a residual to the investment process and used tomeet short-term liquidity needs.Disciplined management of the asset allocation is necessaryand desirable. Diversification of investments among assetsthat are not similarly affected by economic, political, or socialdevelopments is highly desirable. The general policy shall beto diversify investments so as to provide a balance that willenhance total return, while avoiding undue risk concentrationsin any single asset or investment category. Actual allocationsat June 30, 2011 (excluding separately invested assets) were asfollows in Table 23.4:Table 23.4U.S. equity 14.8%International equity 19.2%Fixed income 6.8%Private equity 17.4%Natural resources 12.5%Real estate 5.0%Cash 0.8%Other alternative investments 23.5%FAIR VALUE MEASURESThe foundation reports under FASB Accounting StandardsCodification (ASC) Topic 820 which defines fair value,establishes a framework for measuring fair value underaccounting principles generally accepted in the United States,and prescribes disclosures about fair value measurements.FASB ASC Topic 820 establishes a framework for measuringfair value and a three-level hierarchy for fair valuemeasurements based upon the inputs to value the assets andliabilities. The classification of assets and liabilities withinthe hierarchy is based on whether the inputs to the valuationmethodology used for measurement are observable orunobservable. Observable inputs reflect market-derived ormarket-based information obtained from independent sourceswhile unobservable inputs reflect estimates about market databased on the best available information in the circumstances.The three levels are defined as follows:Level 1: Quoted prices (unadjusted) in active markets foridentical assets or liabilities that the foundation has the ability toaccess.Level 2: Significant other observable inputs other than Level1 prices, such as quoted prices for similar assets or liabilitiesin active markets, quoted prices in markets that are not activeand other inputs that are observable or can be corroborated byobservable market data.3264