SIU University Guidelines

Section 3.8 Financial Services: Treasury – Investment Guidelines
Issued: July 2005
Replaces: October 2001

The goal is to construct a portfolio that emphasizes safety of principal, maintaining liquidity, and will outperform the Lehman Brothers 1 to 3 Year Government Bond Index, (the “Benchmark”). Active management is expected to provide increased income and total return to Southern Illinois University. These guidelines should be reviewed periodically by Southern Illinois University, its investment consultant and Western Asset Management to assure that the University's objectives are being achieved.

In addition to the guidelines outlined below, the investment manager will adhere to the Southern Illinois University Statement of Investment Policy attached hereto as Exhibit A, the Illinois Public Funds Investment Act, other applicable state laws and applicable federal laws. The guidelines below are intended to summarize these documents and are not intended to supercede them.

Investments may be made in any of the following fixed income securities, individually or in commingled vehicles, subject to credit, diversification and marketability guidelines below. All securities must be authorized investments under the Illinois Public Funds Investment Act including the following:

1. Obligations issued or guaranteed by the U.S. Federal Government, U.S. Federal agencies or U.S. Government-sponsored corporations and agencies. For purposes of this restriction, Federal National Mortgage Association (Fannie Mae) is not considered an agency. As such, investments in Fannie Mae securities are restricted to short-term discount obligations with an original maturity of less than one year.
2. Obligations of U.S. corporations such as debentures, commercial paper, certificates of deposit and bankers acceptances issued by industrial, utility, finance, commercial banking or bank holding company organizations; with a maturity of 180 days or less, rated in the three highest rating classifications by at least two standard rating services, and have at least $500 million in assets.
3. U.S. Agency mortgage-backed securities (MBS); provided weighted average life is equal to or less than 3 years. No “derivative” MBS such as Interest Only (IO), Principal Only (PO), and inverse floaters will be allowed. Mortgage “to be announced” (TBAs) securities, and passthrough Planned Amoritization Class Securities (PACS) are allowed. At no time shall the portfolio to be subjected to leverage.

The average weighted duration of portfolio security holdings shall not vary from that of the Benchmark by more than 20%.

In all categories of investments, emphasis will be on high-quality securities and the weighted average of portfolio holdings will not fall below AA- or its equivalent. Portfolio holdings are subject to the following limitations:

1. Rated Securities: All securities must be rated at least as high as the minimum acceptable rating, noted in the table below, of at least two of the following Nationally Recognized Statistical Rating Organizations (NRSRO).

    

   	Minimum Acceptable Rating for Securities	Minimum Acceptable Rating for Commercial Paper
   Standard & Poor’s	A-	A1
   Moody’s	A3	P1
   Fitch	A-	F1

    

2. Split Rated: Securities rated at or above the foregoing minimum acceptable ratings by two or more NRSRO and below the foregoing minimum acceptable ratings by two or more NRSRO are permissible only if Western Asset Management, based on its independent research, assigns the security the higher rating.
3. Downgrade Securities: Securities which fall below the stated minimum credit requirements subsequent to initial purchase may be held at Western Asset Management but must be approved by University staff. The University’s staff will be notified of all such downgrades in writing.

1. Maturity: Securities must be equal to or less than 3 years to maturity. In the case of MBS, average life will be used as a proxy for maturity.
2. Sector: The portfolio will at all times be diversified among the major market sectors, subject to the following limitations:
1. Maximum 33% in corporates.
3. Issuer: Holdings are subject to the following limitations:
1. Obligations issued or guaranteed by the U.S. government, U.S. agencies or U.S. government-sponsored corporations and agencies are eligible without limit.
2. Obligations of other issuers are subject to a 5% of the market value of the portfolio limit to any single issuer excluding investments in commingled vehicles.

All holding will be of sufficient size and held in issues that are traded actively enough to facilitate transactions at minimum cost and accurate market valuation.

Total portfolio return will be calculated each calendar month and reported at the end of each calendar quarter. The manager will be evaluated on an after-fees basis against the Lehman Brothers 1-3 year Government Bond Index (the "Benchmark").

The manager shall aim to exceed the Lehman Brothers 1 – 3 Year Government Bond Index (the “Benchmark”) by an average of 40 basis points annually over the medium term (3 – 7 years).

Formal management reporting will include:

1. A monthly accounting statement showing portfolio income, holdings and transactions;
2. A quarterly total return computation; and
3. A quarterly market outlook and investment strategy.

The goal is to provide a portfolio that emphasizes safety of principal and total return and provides a modest element of liquidity as necessary. Active management is expected to provide increased income and total return to Southern Illinois University. These guidelines should be reviewed periodically by the Southern Illinois University, its investment consultant and Western Asset Management to assure that the University's objectives are being achieved.

In addition to the guidelines outlined below, the investment manager will adhere to the Southern Illinois University Statement of Investment Policy attached hereto as Exhibit A, the Illinois Public Funds Investment Act, applicable state laws and applicable federal laws. The guidelines below are intended to summarize these documents and are not intended to supercede them.

Investments may be made in any of the following fixed income securities, individually or in commingled vehicles, subject to credit, diversification and marketability guidelines below. All securities must be authorized investments under the Illinois Public Funds Investment Act including the following:

1. Obligations issued or guaranteed by the U.S. Federal Government, U.S. Federal agencies or U.S. government-sponsored corporations and agencies. For purposes of this restriction, Federal National Mortgage Association (Fannie Mae) is not considered an agency. As such, investments in Fannie Mae securities are restricted to short-term discount obligations with an original maturity of less than one year.
2. Obligations of U.S. corporations such as debentures, commercial paper, certificates of deposit and bankers acceptances issued by industrial, utility, finance, commercial banking or bank holding company organizations; with a maturity of 180 days or less, rated in the three highest rating classifications by at least two standard rating services, and have at least $500 million in assets.
3. 3. U.S. Agency mortgage-backed securities (MBS); provided weighted average life is equal to or less than 10 years. No “derivative” MBS such as Interest Only (IO), Principal Only (PO), and inverse floaters will be allowed. Mortgage “to be announced” (TBAs) securities, and passthrough Planned Amoritization Class Securities (PACS) are allowed. At no time shall the portfolio to be subjected to leverage.

The average weighted duration of portfolio security holdings shall not vary from that of the Lehman Brothers Intermediate Government Bond Index (the "Benchmark") by more than 15%.

In all categories of investments, emphasis will be on high-quality securities and the weighted average of portfolio holdings will not fall below AA- or equivalent. Holdings are subject to the following limitations:

1. Rated Securities: All securities must be rated at least as high as the minimum acceptable rating, noted in the table below, of at least two of the following Nationally Recognized Statistical Rating Organizations (NRSRO).

    

   	Minimum Acceptable Rating for Securities	Minimum Acceptable Rating for Commercial Paper
   Standard & Poor’s	A-	A-2
   Moody’s	A-3	P1
   Fitch	A-	F1

    

2. Split Rated: Securities rated at or above the foregoing minimum acceptable ratings by two or more NRSRO and below the foregoing minimum acceptable ratings by two or more NRSRO are permissible only if Western Asset Management, based on its independent research, assigns the security the higher rating.
3. Downgrade Securities: Securities which fall below the stated minimum credit requirements subsequent to initial purchase may be held at Western Asset Management but must be approved by University staff. The University’s staff will be notified of all such downgrades in writing.

Diversification

1. Maturity: Securities must be equal to or less than 10 years to maturity. In the case of MBS, average life will be used as a proxy for maturity.
2. Sector: The portfolio will at all times be diversified among the major market sectors, subject to the following limitations.
1. Maximum 33% in corporates.
3. Issuer: Holdings are subject to the following limitations:
1. Obligations issued or guaranteed by the U.S. government, U.S. agencies or U.S. government-sponsored corporations and agencies are eligible without limit.
2. Obligations of other issuers are subject to a 5% of the market value of the portfolio limit to any single issuer excluding investments in commingled vehicles.

All holdings will be of sufficient size and held in issues that are traded actively enough to facilitate transactions at minimum cost and accurate market valuation.

Total portfolio return will be calculated each calendar month and reported at the end of each calendar quarter. The manager will be evaluated on an after-fees basis against the Lehman Brothers Intermediate Government Bond Index (the "Benchmark").

The manager shall aim to exceed the Lehman Brothers Intermediate Government Bond Index (the "Benchmark") by 50 basis points annually over the medium term (3 – 7 years).

Formal management reporting will include:

1. A monthly accounting statement showing portfolio income, holdings and transactions;
2. A quarterly total return computation; and
3. A quarterly market outlook and investment strategy.

EnnisKnupp STIF Index – An index composed of the average returns and characteristics of six banks’ internally managed commingled short-term investment funds.

Lehman Brothers 1-3 Government Bond Index – A market value-weighted index of U.S. Treasury and agency bonds with maturities between one and three years.

Lehman Brothers Intermediate Government Bond Index – A market value-weighted index of U.S. Treasury and agency bonds with maturities from one to (but not including) ten years.

Lehman Brothers Aggregate Bond Index – A market value-weighted index consisting of government bonds, SEC-registered corporate bonds and mortgage-related and asset-backed securities with at least one year to maturity and an outstanding par value of $150 million or greater. This index is a broad measure of the performance of the investment grade U.S. fixed income market.

Asset-Backed Security – A bond backed or collateralized by a loan or accounts receivable originated by banks, credit card companies or other credit providers.

Maturity – The date at which the underlying principal and final interest payment is due to the bondholder.

Mortgage-Backed Security – A bond backed or collateralized by mortgages. The bondholder receives interest and principal payments that are "passed through" the issuing agency.

P.O. Treasury Strips – Created by separating a Treasury bond into its principal and interest payments. The holder of the P.O. gets cash flow from principal payments only.

Repurchase Agreement – An agreement to sell a bond at a fixed price to a second party tied to an agreement that the first party will buy back the bond at a specific future date. Also called Repos.

Total Rate of Return – Annual return of an investment including price appreciation and interest payments. The price of a bond is influenced not only by the market forces of supply and demand, but also by the movement of interest rates. As interest rates rise, bond prices generally decline, as the yields intrinsically adjust to the level available to an investor in the open market. Periodic income payments, or income, also factor into the total return of a fixed income security. The Total Rate of Return incorporates both realized and unrealized gains and losses.

Yield – The effective annual rate of return a bond earns if it is held to maturity, assuming periodic interest payments can be reinvested at the same interest rate.

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