Fiscal Officer Development Series Office of the Treasurer Investments MaryFrances McCourt January 9,2009

 Background  Investment Strategy  Where We Are Today  Implications of Economic Crisis  Recent Activity  Next Steps

Investment Management Priorities  Preservation of Capital  Liquidity  Interest Income

Investment Portfolio  Operating Funds  Liquidity Pool (Tier I): provides for daily and monthly operating cash  Core (Tier II): reserves to replenish Tier I, if necessary  Core Plus (Tier III): emergency reserves; seeks to maximize total return  Construction & Debt Financing  Endowments & Grants

Interest Income  Campus cash balances in general fund accounts earn interest income at average monthly short term rate (approximates 90 day T-bill)  All other interest income is used to fund the President’s office and the President’s strategic initiatives

Investment Strategy (Implemented 12/06)  Start with a clean sheet of paper  Understand university “risk appetite”  Understand investments allowable by Indiana State Statute  Understand liquidity needs of university  Meet liquidity requirements while maximizing investment returns and preserving investment principal  Rebalance as appropriate

New Policy  Securities guidelines  Equity or “equity like” securities are not permitted (Article XI, Section 12 of Indiana Constitution)  Portfolio minimum average rating from “Aa3/ AA” to “A”  Investments in high-yield, non U.S. emerging market and debt securities are permitted (exposure limited to 20% high-yield, 20% non U.S. with combined exposure not to exceed 30%)  Thorough manager selection due diligence  Clearly defined reporting and communication requirements  Formal watch list procedures

Ways to Increase Incremental Return  Reduce assets in Tiers I and II and maximize assets in Tier III  Increase expected return on assets in Tier II  Increase expected return on assets in Tier III

Risk/ Return Chart All proposed Alternatives underwent extensive review. All proposed Alternatives were permissible and achieved the goal of increasing return on the Operating Funds. The risk of all proposed Alternatives is significantly less than that of equities.

Projected Incremental Return  Tier Allocation Decision  Approximate additional allocation of $135M from Tiers I & II to Tier III – projected.2% incremental return  Tier Manager Structure  Tier II – No change; 100% Defensive*  Tier III  Former structure: 100% Defensive*  New structure: 100% Core Plus** – projected.9% incremental return Notes: *Defensive Strategy – invests in low risk products; aimed at minimizing the risk of losing principal; high percentage of investable assets in bonds & cash equivalents. **Core Plus Strategy – combines products/ sectors used in the Core/ Defensive strategy with high-yield, emerging markets and non-dollar bonds; provides opportunity for higher yields in the fixed-income market; higher risk

 Reallocation  Tier I to Tier III$ 200,000  Tier II to Tier III $ 70,000  Manager Structure Alternatives  Tier II – No change  Tier III$3,792,500 Total Year One Projection$4,062,500 Projected Annual Incremental Return

Investment Income - How have we done?  FY 09 Projection: $36.4M; down $3.9M or 9.7%  FY 08 Actual: $40.3M; up $500K or 1.3%  FY 07 Actual: $39.8M; up $10.5M or 35.8%  FY 06 Actual: $29.3M Benchmark = $20M

Investment Income - Why?  Investment balances  FY07: $22M increase in avg liquidity balance (despite $109M reallocation); interest income impact - +$1.0M  FY08: Avg balance up $101M; interest income impact - +$5.2M  Interest rates  FY07: 90 basis point increase in short term avg interest rate; interest income impact - +$2.9M  FY08: 195 basis point decrease in short term avg. rate; interest income impact – ($9.1M)  Implementation of new strategy  FY07: Interest income impact - +$6.6M  FY08: Interest income impact - +$4.9M

Asset Allocation and Manager Structure as of

Implications of Current Economic Crisis: Sept. 19, 2008: Northern Trust announced a collateral deficiency in their securities lending program and posted an approximate $x receivable from Indiana University. Sept. 22, 2008: IU transferred $300M from the Commonfund Short Term Fund to a Government Select Fund at ___________. Sept. 29, 2008: Commonfund Short Term Fund received notice from its trustee, Wachovia Bank N.A., of its decision to initiate the termination of this fund and the orderly liquidation and distribution of assets ($430M initial balance, approx. 69% received with remaining balance of approx. $133M)

Implications of Current Economic Crisis continued: Current assets have been “marked to market” and, therefore, reflect liquidation pricing If we let assets mature, we should capture par value while clipping nice coupons along the way Possible need for self-liquidity to back-stop borrowing may keep portfolio shorter

Operating Funds Investment Performance

Tier I, II and III History $109M Asset Transfer from Tier I to Tier III $109M asset transfer from Tier I to Tier II.

Liquidity Pool Avg. Daily Balance - Update $125M Minimum Balance Rebalance Portfolio? $109M asset transfer to Core Plus Strategy

Recent Activity  Diversification of liquidity pool investments  Government Select Fund A ( )  Government Fund B ( )  Minority/ Women Owned Manager Hired  Manager E (approval up to $150M)  Managers on Watchlist  Manager A (performance issues)  Manager C (impact of recent acquisition)

Next Steps  Thorough analysis of liquidity cycle  Assess cyclically – any changes due to new payment methods/ plans  Understand components of increased cash balances  Forecast spend down cycle  Operating fund processor  Minority investment manager  Investment Policy review  Rebalance? YesNo - Philosophy - Justification - New manager - Recessionary hedge - New sector - Self liquidity commitments - Pro-rata allocation among - Other? existing managers - Opportunity cost