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Business and Financial Policies and Procedures

Investment Strategies

Investment Policy

The University of Illinois System is subject to and complies with Illinois State Statute 760 ILCS. The Board of Trustees and its delegates intend to invest all available System funds in one of the System investment programs. The objective and time horizon of a fund will generally determine the appropriate investment program. The System attempts to pool assets wherever possible in order to generate efficient administration and investment flexibility.

Operating Funds

Definition - These funds are the operating and gift funds available for current use in support of the System's academic programs and support functions. They include student loan funds, agency funds, self-insurance reserves, and auxiliary operating funds. These funds are pooled to provide the System continuity, investment flexibility, and efficient administration. Operating funds with unique requirements that prevent participation in the pool are separately invested. Funds earmarked for construction and funds generated through debt issues are generally invested separately to meet bond covenants and to foster project accountability. Separately-invested funds must meet the permissible investments standards below, but the maturity structure will be guided by projected cash flows.

Investment Objective - Operating funds are invested to preserve the value and safety of the principal, maintain ability to access funds based on forecasted liquidity needs of the System, provide prudent diversification of investments, and maximize the rate of return. Funds expected to be used within one year are invested in money market instruments to ensure they are available. Core operating funds are not intended to be used for short-term liquidity needs. They are invested in longer maturity instruments in order to earn a higher return. These longer maturity investments experience some variation in market value as capital market conditions change. This market value variation is acceptable since these investments are not expected to be used to meet liquidity needs.

Reporting, Review, and Evaluation - The operating funds investment policy is reviewed at least annually by the Board of Trustees. Treasury Operations prepares quarterly investment and performance reports for the Board of Trustees. The System evaluates performance on a net-of-fees basis. The total operating funds portfolio rate of return is compared with a weighted average of returns of broad indices representing the maturity structure of the investment policy allocation. The indices to be used in the weighted average and the ranges within which the weights will fall are displayed below:

Benchmark Allocation Range
Blended Endowment Pool Benchmark 5 - 25%
Barclays Capital Intermediate Aggregate Bond Index 10 - 40%
Barclays Capital One-to Three- Year Government/Credit Index 10 - 40%
90-Day Treasury Bills 5 - 75%

The following guidelines are used to meet the operating funds investment objectives:

  • Allocation of Assets - The University invests its operating funds in the following approximate proportions:
  • Operating Funds Policy Structure

 
  • Permissible Investments Standards - The System's non-core operating funds are invested in fixed-income securities and short term (money market) instruments. Fixed-income securities are investment grade as determined by a national rating agency. Unrated securities are not allowed unless specifically permitted by an individual manager's guidelines. Money market instruments selected are investment grade quality.

The System's core operating funds are invested in the System's endowment pool investment program. Investments in pooled funds (for example, mutual funds, common trust funds, etc.) are permitted provided their investment guidelines do not violate System investment policies and guidelines for operating assets. The University Comptroller and investment managers do not invest non-core operating funds in any security that in their opinion entails a material probability of default.

  • Diversification - The total operating funds portfolio is broadly diversified across securities to reduce the impact of losses in individual investments in a manner that is consistent with fiduciary standards of diversification. This diversification is achieved by employing multiple investment managers and imposing 5% maximum position limits for each manager, with the exception of U.S. government securities.
  • Liquidity - The Assistant Vice President for Treasury Operations is responsible for maintaining adequate cash balances for the liquidity needs of the University. He or she advises the external managers of any anticipated need for cash withdrawals. External managers are to presume no cash withdrawal needs other than those provided to them.
  • Derivative Securities - For the purposes of this policy, a derivative instrument is defined as any contract or investment instrument whose performance, risk characteristics or value is based on any asset, interest rate or index value. Derivatives are permitted to be used for the following purposes:
    • Gain broad bond market exposure in a manner that does not create the effect of leverage in the overall portfolio.
    • Convert financial exposure in a given currency to that of another currency (for example, to hedge Japanese yen exposure back to the U.S. dollar).
    • Adjust the duration of a bond portfolio in a manner that is consistent with the accepted approach of the manager and other policies and guidelines provided to the manager.
    • Make other portfolio adjustments that are consistent with other elements of the University's investment policies and guidelines and that, when viewed from a total portfolio standpoint, do not increase risk or expected volatility of rate-of-return in the portfolio.

All other uses of derivatives are prohibited unless specifically approved by the System's Board of Trustees. Investment managers are expected to have internal risk management programs in place to ensure that derivative-based strategies do not result in magnified risks to the portfolio.

Separately Invested Funds

Definition - Separately-invested funds are under the control of the System and are not part of a pooled investment program. The System separately invests in five primary groups of funds:

  • Agency funds invested for the benefit of related organizations
  • Current funds that cannot participate in the operating funds investment pool due to donor restriction or specific investment objectives that are not consistent with those of the operating funds investment pool
  • Endowment funds for which donors have stated that the fund may not be commingled or for which the gift is non-marketable (Investment Strategies for Endowment Funds)
  • Plant funds that must comply with an underlying bond issue resolution or gift agreement
  • Student loan funds which are invested in student loans

Agency, Current, and Student Loan Funds - The investment objective is to maximize the rate of return on investments consistent with restrictions placed on the account and the following:

  • Ensure that current income should exceed the yield on three-month Treasury bills measured for the same period
  • Invest separately invested funds to preserve the value and safety of the principal involved
  • Maintain liquidity appropriate to the forecasted working capital requirements of the System
  • Provide for prudent diversification

Plant Funds - The investment objective is to invest plant funds under guidelines approved by the Board of Trustees by adoption of the resolution accompanying the underlying bond issue or gift agreement. If there is no resolution, plant funds are invested using the same requirements as for operating funds.

Construction funds are invested to earn current income at the best rate possible with the least amount of risk until the funds are needed for construction or completion of the project. Construction funds related to a debt issue must conform with debt covenant restrictions. Debt service reserves are invested to provide a stable income stream with acceptable principal risk and to conform with debt covenant restrictions.

Related Policies and Procedures

Investment Strategies for Endowment Funds

Additional Resources

Illinois State Statute 760 ILCS

Last Updated: March 17, 2011 | Approved: Senior Associate Vice President for Business and Finance | Effective: November 2010

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