Learning Objectives:

• Understand the principles of investment management.

• Identify key asset classes and their characteristics.

• Apply portfolio construction and diversification principles.

3.1 Investment Management Principles

Investment management is a core treasury function. Loughborough University’s Corporate Finance MSc covers “cash management” and “investment management” as core topics, preparing students for careers in treasury departments . The GFOA’s Treasury and Investment Management exam covers “best practices and strategies for public investing” .

Key Investment Principles:

• Diversification: The University of Reading’s investment policy states that “The University believes in diversification to mitigate risk so its assets may be invested widely and should be diversified by asset class and security” .

• Risk-Return Trade-off: “The University accepts that longer term investment are subject to a higher degree of risk and that the value of these assets will fluctuate” .

• Asset Allocation: The Investments and Development Committee is responsible for “agreeing a suitable asset allocation for all funds placed with the investment managers” .

• Liquidity Management: “The University will ensure that part of the portfolio is available as a source of emergency liquidity funding” .

3.2 Asset Classes

Cash and Cash Equivalents: Short-term, highly liquid investments. Loughborough University notes that “the bulk of the University’s Investments are in the form of cash deposits with Banks, Building Societies and Money Market Funds” .

Fixed Income (Bonds): Debt securities issued by governments and corporations.

Equities: Ownership shares in companies.

Alternative Investments: Including real estate and private equity. The University of Reading’s investment policy covers “investment property” as a distinct asset class, defined as “residential and commercial properties, or land, which are not in operational use, and are either rented out for a return to a third party and/or held for future development potential” .

3.3 Investment Objectives

The University of Reading’s investment policy outlines clear investment objectives:

Overall Objective: “The University’s overall investment objective is to preserve and grow capital in real terms and to generate returns that support the activities of the University. The University seeks to produce a suitable financial return within an acceptable level of risk, as well as a sustainable level of cash that may be returned to the University regularly to fund its operations, without eroding the long-term value of the Investment Fund” .

Risk Objectives: “The University seeks to manage the risks of permanent loss of capital and/or the erosion of purchasing power via inflation” .

Non-Financial Objectives: “The policy recognises that the pursuit of an optimal financial return is not the sole aim of the University’s investments – rather that they exist to further the University’s academic, commercial and social aims” .

3.4 Portfolio Construction

Portfolio construction involves determining the appropriate mix of asset classes based on investment objectives, risk tolerance, and liquidity requirements. The University of Reading’s policy notes that the Investment Fund allows “a holistic view to be taken across these assets in respect of optimal mix, risk, liquidity, annual returns and long term value appreciation” .

Loughborough University’s investment approach notes that investments are held “with a bank from the University’s list of approved counterparties” and that “the asset allocation of the portfolio chosen is based on a medium risk strategy, designed to increase the value of the portfolio over the longer term” .