INVESTMENT POLICY

OVERVIEW
    The Diocesan Investment Trust (DIT) has been established by the Trustees of Donations to provide the Episcopal Diocese of Massachusetts, Diocesan parishes and affiliated organizations with a professionally managed investment vehicle for “trust” and “agency” account assets[1]. Two investment options are available to participant organizations:  an Income Fund and a Stock Fund.
    The DIT’s Stock and Income funds are managed in accordance with the Financial and Investment Objectives, and Asset Class Guidelines and Restrictions, described below for the exclusive benefit of the participant organizations.    
    This statement of Objectives and Policies is issued for the guidance of fiduciaries, including the investment managers and the Trustees of Donations in the course of their investing the monies of the Income and Stock Funds.  It is consistent with the requirements of the “Prudent Investor Rule,” as interpreted under such laws and statutes of Massachusetts as generally apply to the institutional investment of comparable funds. 
    This statement may be amended from time to time by the Trustees of Donations.

INVESTMENT OBJECTIVE
The Investment Objective of the DIT is prudent capital growth of the assets equal to or exceeding the rate of inflation plus 4% to cover the annual draw on the DIT’s “trust” account assets. In other words, the goal of the DIT is to earn a real total return[2] of 4%, net of all fees and expenses.

 INCOME FUND
The Income Fund has been established to provide a consistent, high level of income over time.  It serves two primary functions in the overall investment program administered by the Trustees of Donations:

1. It is the primary source of current income, in contrast to the growth emphasis of the Stock Fund.

2. It may be used as the fixed income component of a balanced investment program, permitting fund structure, investment risk and overall growth/income emphasis to be adjusted to the specific needs of each participating investment program.

 GUIDELINES AND RESTRICTIONS
  1.  The primary goal of the Fund is to provide a level of current income consistent with what might be produced in the broadly defined investment grade taxable bond markets.
  2.  The Fund is expected to earn, net of fees, above the Citicorp Broad Investment Grade (BIG) Index, and to consistently rank in the top half of the Independent Consultants Cooperative (ICC) Fixed Income Universe. The Trustees are aware that there may be short term deviations from this target and shall evaluate the degree of fulfillment with this and other performance objectives over the time horizon outlined below.
  3.  Normally, results shall be evaluated over a period of three to five years, but shorter-term results will be regularly reviewed and earlier action taken if deemed in the best interest of the Fund.
  4.  Total portfolio risk exposure and risk-adjusted return will be regularly evaluated and compared with other comparable funds.  Overall risk exposure for each portfolio should reasonably be centered in the mid-range (25^th to 75^th percentile) of fixed income specialty funds.  Risk-adjusted returns for actively managed assets are expected to consistently exceed comparable market indices and median competitive manager results.
  5.  The Fund will be comprised mainly by domestic fixed income securities, including U.S. Government and Agency obligations, investment grade corporate bonds, zero coupon bonds, debentures, mortgages, CMOs, commercial paper, CDs, BAs, time deposits, GICs, Eurodollars, and other such instruments as deemed prudent by the investment manager. Up to 15% of the Fund’s total market value may be invested in non-U.S. dollar denominated securities.
  6.  The securities in the Fund are to be managed to ensure appropriate balances in quality and maturities consistent with current market and economic conditions. Short-term investments shall carry a minimum quality rating of A2. The portfolio shall possess an average quality rating of A- or better at all times, but up to 15% of the total Fund may be invested in below investment grade securities (CCC minimum rating).  The Fund may invest in securities rated by only one agency if that rating is BB or lower.
  7.  The manager(s) shall have the flexibility to adjust the maturity structure to take advantage of current and anticipated market conditions and yield curve opportunities, so long as the interest rate sensitivity (defined as duration) of the Fund shall not normally be less than or exceed that of the market by more than 30%.
  8.  Derivative transactions – including the use of futures, options, interest rate swaps, total rate of return swaps, and credit default swaps are explicitly allowed for the purpose of adjusting duration, curve, convexity, interest rate and sector risk in the portfolio consistent with the overall intended risk profile of the portfolio as specified elsewhere in the guidelines.  The use of such instruments must be incorporated in the calculation of total duration, spread, convexity and other portfolio metrics.  The use of such derivatives shall in no way be used to economically leverage the portfolio (relative to its benchmark) outside of the stated guidelines for duration, credit quality, etc.  Liquid assets, or a similar underlying security must cover all short option positions.  The use of derivatives shall in no way violate other guideline limits in the portfolio.  Counter-parties in over-the-counter derivative transactions must have a long-term rating of at least A3/A- or higher.   
  9.  Equity investments, including common stock, warrants and rights are prohibited.  Preferred stock is permitted up to 10% of the Fund.  Use of convertible bonds and 144(a) private placements with or without registration rights is permitted.  Futures and options should normally not be held unless compelling investment rationale exists.
  10. Sufficient marketability should be maintained to accommodate withdrawals from the Fund.  The Trustees will attempt to provide as much lead time as possible to the manager(s) when withdrawals are scheduled or otherwise anticipated.
 
STOCK FUND
The Stock Fund is established to offer an attractive, professionally managed investment vehicle within the equity markets to the participating organizations. The Fund is expected to fluctuate in value over shorter-term horizons, but to provide superior real (after inflation) growth of principal over longer-term horizons. Accordingly, the Fund is appropriate for the investment of assets, which are essentially “permanent” in nature.

 GUIDELINES AND RESTRICTIONS
  1. Full discretion, consistent with the investment policy guidelines described herein, is granted to   the investment managers regarding asset allocation, the selection of securities and the timing of transactions.
  2. Total return, net of fees, including income plus realized and unrealized gains and losses on fund assets, is the primary goal of the Fund.
  3. Total return for the Fund shall consistently rank in the top half of the Independent Consultants Cooperative (ICC) Equity Specialty Fund Universe.  The Trustees are aware that there may be short-term deviations from this and other targets and shall evaluate the degree of fulfillment of the performance objectives over the time horizons outlined below.
  4. Investment managers will be evaluated against managers with similar styles and benchmarks that are applicable, such as the S&P 500 for domestic large stocks, Russell Mid Cap for mid-cap stocks, and MSCI EAFE for international stocks.
  5. Normally, results shall be evaluated over a period of three to five years, but shorter-term results will be regularly reviewed and earlier action taken if deemed in the best interests of the Fund.
  6. Total portfolio risk exposure and risk-adjusted returns shall be regularly evaluated and compared with other comparable funds.  Overall risk exposure for each portfolio should reasonably be centered in the mid-ranged (25^th to 75^th) percentile of equity specialty funds.  Risk-adjusted returns for actively managed assets are expected to consistently exceed comparable market indices and median competitive manager results.
  7. Domestic and international equity securities, such as common stocks, convertibles, warrants and rights are permitted.  In view of the availability of the Income Fund as a vehicle to adjust participant plan structure, the Trustees prefer that the Stock Fund normally be fully invested.  However, the investment managers may vary the equity commitment in each Fund from seventy-five percent (75%) to one hundred percent (100%) of the total market value in anticipation of, or in reaction to, changing market and economic conditions.  The manager of each portion of the Fund should determine that the securities to be purchased are of an investment grade suitable for this account.
  8. Cash equivalent securities should be viewed not only as avenues to meet the liquidity requirement of the Funds but also as alternative investment vehicles. Selection of particular investments should be determined primarily by the safety and liquidity of the investment, and only secondarily by the yield available.  Such securities shall carry the cash equivalent of S&P A1 or A2 ratings, or better.
  9. Sufficient liquidity should be maintained to fund withdrawals from the Fund.  The Trustees will attempt to provide as much lead-time as possible to the managers when withdrawals are scheduled or otherwise anticipated.
 10. Fully covered or protected options are permitted in the interest of reducing price volatility and preserving capital.
 11. While the Trustees are sensitive to excessive turnover, there shall be no specific limitation in this regard, recognizing the importance of providing flexibility to the managers to adjust the asset mix in changing market conditions. Shifts of emphasis among equity and cash equivalent segments of the aggregate asset base are acceptable, and may entail material restructuring in the interests of capital preservation.
  12. Certain securities are ineligible, including:

1. Privately placed or other non-marketable debt.

2. Letter, legend or other so-called restricted stock, other than 144(a) securities

3. Futures contracts; uncovered options or short sales

4. Commodities

5. Securities of any party in interest

6. Agency cross transactions

7. Margin transactions

8. Stock of tobacco companies

 
13. Additional guidelines apply to managers with domestic equity mandates:

1. The investment advisor is permitted to purchase equity securities that settle in U.S. dollars – i.e., common stocks, convertibles, warrants, IPOs, ADRs, and rights. The advisor may purchase exposure to non-U. S. domiciled companies in the ADR market or in local shares. Exposure to non-U.S. domiciled companies may not exceed 15% of a mandate’s total market value; local share purchases may not exceed 5% of that total.

2. Domestic equity managers should not engage in foreign currency trading or foreign currency “cross transactions.”

OTHER  CONSIDERATIONS
It is the intent of the Trustees to review this statement of goals and objectives and restrictions from time to time to effect modifications and revisions, which seems appropriate and desirable.  Toward this end, it is the policy of the Trustees to review these goals and objectives at least once per year and to communicate any material changes thereto to the investment managers.

STANDARD OF INVESTMENT PERFORMANCE
Performance of these Funds will be evaluated on a regular basis by the Trustees with whatever outside assistance they deem appropriate.  Managers will be judged on their ability to meet performance goals while observing investment guidelines.

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