II.3 of the Agreement of 20 November 2003 of the National Council of the National Securities Market Commission (CNMV), approving the Code of Conduct for Non-Profit Organisations for the making of temporary investments, the internal rules for the selection and management of investments approved by the Board of Trustees of the Rafael del Pino Foundation are set out below.
Investment and asset selection policy of the Rafael del Pino Foundation.
- The investment policy and the selection of assets in the portfolio of the Fundación Rafael del Pino ("FRP") shall take into consideration the principles of consistency, liquidity, diversification and capital preservation.
- The portfolio will be structured to generate results that are consistent with the annual funding needs of the different FRP projects. It will also take into account the currencies in which projects are paid for, in order to balance foreign currency income and expenditure and reduce foreign exchange risk.
- The portfolio shall be primarily composed of liquid assets, whether securities or investment funds.
- The portfolio shall be sufficiently diversified in assets whose performance is appropriately de-correlated, thus avoiding risk concentration.
- The principle of capital preservation discourages the use of financial leverage or intraday or very short-term speculative trading, and such trading will generally be avoided.
- The FRP invests with a long-term investment horizon, which allows for an investment strategy of prudent capital growth, with a dominant position in equities as the core asset, as this is the asset that generates the highest long-term returns.
- The prudent growth strategy would correspond to an exposure to global equities of around 50%, which could range from 20%-70% depending on the tactical positioning that market circumstances may advise at any given time. These percentages are in any case subject to review should risk factors make it advisable to do so.
- The total amount of fixed income assets shall not be less than 20% or more than 50% of the Foundation's portfolio. These limits shall not apply to debt issued by the Kingdom of Spain and other European States.
- The credit quality of the fixed income portfolio shall be "Investment Grade" in a range of at least 35% of such fixed income portfolio.
- The portfolio structure will aim for a return that combines capital appreciation and income from dividends or interest.
- The prudent growth strategy will seek to protect the long-term value of capital through proper diversification of investments in three ways:
1) Diversity of asset classes.
2) Geographic diversity, investing with a global approach.
3) Diversity of managers.
- Diversification by asset class is intended to modulate the evolution of performance over the years, protecting it from abrupt changes in value. The following asset classes shall be included:
- Developed Country Listed Equities
- Emerging Markets Listed Equities
- Absolute Return Funds (hedge funds and UCITS funds)
- Investment Grade Fixed Income
- High Yield Fixed Income
- Emerging Markets Fixed Income
- Private Equity (private equity, private debt and real estate funds)
- Commodities (funds, ETCs or other financial structures).
- Currencies
- Geographic diversification will be built around the US, Europe and Japan as the main markets, but including to a lesser extent other developed and emerging markets in the investment universe.
- Manager diversification means that regardless of who manages the investment portfolio, a portion of these investments will be made through third party managers (equity, fixed income and absolute return funds) or with external advice, so that a broad group of specialised and talented professionals help to find the most suitable investment ideas.
- Investments will preferably be made through mutual funds and ETFs, but fixed income or equity securities may also be selected directly if there is sufficient conviction about their expected returns.
- The use of ETFs will seek to reduce management fees in areas where there is no conviction that active management can deliver better returns (e.g. S&P).
- The selection of investment funds will have a preference for UCITS funds, with daily liquidity.
- Investment in so-called alternative management funds will remain below 30% of assets. This includes absolute return funds, private equity funds and commodity funds. Investment in alternatives may involve investment in funds without daily liquidity or even closed-end funds (e.g. private equity). The disadvantage of the higher illiquidity of these assets is considered to be more than offset by their higher return expectations and their de-correlation to the rest of the portfolio.
- Any deviation from the above criteria in terms of product selection will be ad hoc and will be explained in the half-yearly and annual portfolio report.
- The foreign currency position may fluctuate depending on market expectations with the objective of meeting the same proportion of the FRP's expenses in the same currencies.
- No leverage of the portfolio is envisaged, except on an absolutely exceptional and ad hoc basis. In this case, leverage shall be explained in detail and with reasons.
- A tax assessment of all investments will be carried out, avoiding unfavourable or unadvantageous structures or vehicles.
- Risk control of the portfolio is a priority objective and its volatility and Value at Risk will be continuously monitored.
- Risk control reporting to the FRP Executive Committee will be strengthened through independent reports (e.g. from our depositary BNP).
- Free annual portfolio reviews by service providers (Blackrock, UBS etc) will be actively encouraged.
- A benchmarking process will be established on a systematic basis with other funds and portfolios that are comparable in terms of their long-term capital preservation philosophy.
- The investment process shall at all times be subject to the preservation of the good name and reputation of the FRP and its Board of Trustees.
