Fall 2001

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Investment Policy -- Asset Allocation for Libraries

By Richard Strauss, NYSALB Trustee-Treasurer

Fall 2001 issue of Trustee

(Continued from the last issue of Trustee: Click here)

Last time we talked about:

  • Policy Objectives
  • Investment Types
  • Manager Selection Criteria
  • Investment Goals

This time we will detail:

  • Asset Allocation
  • Risk / Reward Criteria
  • Restrictions
  • Implementation Plan
  • Resources Available For Use
  • Policy Review And Change Procedure

Simply put asset allocation is the percentage (%) of each investment type allocated for each fund managed.  For example, short term funds will be 100% in cash equivalents, reserve savings, perhaps, 50% cash equivalent and 50% CDs, and endowment funds may be allocated 50% bond mutual funds and 50% in equity mutual funds.

The allocation for each fund managed is dependent upon the library objectives, investment restrictions, and risk tolerance. The allocation is documented specifically in the investment policy.  Where the allocation is split between multiple investment types a specific timetable needs to be documented for reallocation in order to maintain the original allocation. For example, if the endowment fund is split 50% bond mutual funds and 50% equity mutual funds, reallocation to maintain the 50-50 split may be conducted annually at a specified time of the year.  Again this timetable should be fixed and done on schedule regardless of financial markets.  N.B. Reallocation in a consistent timely manner enables you to sell high and buy low without emotion.

Investment Goals: Consider inflation in your measurements.  The biggest and often most ignored aspect is inflation.  The spending power (or the "real") of yourinvestments can be severally eroded over the long haul by the effects of inflation. Each fund should have a goal or measure.  For example the short-term funds need to preserve the principle and earn current savings or money market rates. Endowments allocated to bonds and equities should be measured over a longer period of time 3 or 5 years for example.  Bonds have a lower yield than equities over the long term.  Your net returns should be measured annually and changes considered in a longer time frame.  The daily fluctuation financial markets need not be a concern of investment policy. Remember the infinite lifetime.

Risk/Reward Criteria: Managing risk can be accomplished in many ways.  A variety of investment types bonds vs. equities is one way to mitigate risk.  Within each category of investment type limits need to be defined. For example, bonds or bond mutual funds should have a rating of AA or better (a measure of the ability of the bond to be repaid) is a way of defining the types of bonds (or bond mutual funds) the board in which the board will invest. Consider U.S. bonds vs. corporate bonds to help manage the risk.

Within equities, value, growth, large companies, small companies, domestic, international are each categories of companies.  How much if any investment in these types of companies (or mutual funds) will be tolerated within the portfolio.  Define clearly which types and a percentage of the holding.  Reallocate periodically to maintain the balance.

Restrictions:  Define clearly the types of investments in which your library will or will not invest.  For example, libraries should not be investing in tax-free or tax exempt securities, since libraries generally are not subject to income taxes.  Many investments have to high a risk to be considered.  Specify which ones will be excluded.

Implementation Plan:  Define the steps, time frames, and individuals responsible for implementing the policy.  The use of an investment or finance committee will greatly speed up the process.

Endowed Resources Available for Use: Specify the amount of your funds are available for use.  Try to avoid the notion of investing and living off the interest.  Invest don't save. Reinvest dividends and interest.  Value the portfolio at a particular time (probably at budget time) and establish a percent of that total to be used for ongoing operations the following year. Obviously this percentage is lower than your goals for the endowment.

Policy Review and Change Procedure:  Define a timeframe in which the Investment Policy should be reviewed or fine-tuned.  Additionally, the change procedure should be difficult but not impossible.  If the investment policy is being changed easily and often then it may not provide the appropriate framework for the long-term goals of the library.

Investment policies are required for every library.  Each board member need not be a financial expert.  With a good policy each board member can be comfortable that the investments are being prudently managed. Above all common sense must prevail.

Some additional reference materials for investing and investments include:

  • "Personal Finance for Dummies"
  • "Mutual Funds for Dummies"
  • "Investing for Dummies"
  • Any of the Mutual Fund and Retirement articles in Consumer Reports (they do one at least once a year)

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