A distinguishing factor and positive characteristic for investment activities of higher education institutions is that they benefit from being able to allocate substantial portions of their portfolios over a long term investment time horizon devoid of outside demands. This contrasts with for-profit entities which typically maintain equity or net worth that may not be permanent and which may carry demands from the outside. Institutions for higher education also benefit from predictable cash flow cycles. Accordingly, optimization of assets can be achieved by tiering assets based on liquidity needs. Unless institutions conduct regular self-assessments of liquidity levels and asset allocation, many institutions will be at risk of allowing their overall liquid asset positions to grow to unnecessarily high levels, which does not allow for investment income to be optimized.

Indiana University recently completed an extensive assessment of its investment strategy. The goal of this process was to increase total return while maintaining an adequate level of reserves. The University started with a clean sheet of paper and considered all investments allowable under Indiana state statutes. The first step in this process was to conduct cash flow analyses and forecast liquidity needs. Operating funds were then tiered as follows:

  • Tier I – Provide for daily and monthly operating cash
  • Tier II – Reserves to replenish Tier I, if necessary
  • Tier III – Emergency reserves; seeks to maximize total return

The University determined that incremental return could be achieved by both reducing the assets in tiers I and II and adding asset sectors to our investment strategy in tiers II and III. Historical liquidity trends and future liquidity needs were analyzed to determine a reasonable, minimal level of funds to keep in tier I thereby increasing incremental return through reallocation to tiers II & III. Using the historical operating fund low point typically occurring in July as a benchmark, a minimum level for tier I was established. The tier II allocation is only intended as a backstop to tier I and was also minimized, thereby allowing a large reallocation of funds to tier III.

Strategies for incremental return in tiers II & III were then reviewed under the purview of Indiana State Statute and Indiana University’s risk profile. The goal of this analysis was to invest in products with higher potential returns and non-correlated risk. After thorough analyses, the investment strategy for tier II remained unchanged and the tier III investments moved to a Core Plus investment style. Core Plus can be described as active managers whose objective is to add value by tactically allocating significant portions of their portfolios among non-benchmark sectors while maintaining majority exposure to the broad market. An investment manager search for Core Plus managers ensued followed by a transfer of assets to fully fund the new strategy.

The centralization of the investment function allows the University to leverage liquidity across the institution while optimizing investment opportunities. Incremental amounts of interest income will be used to move the President’s strategic plan and mission of the University forward.