A distinguishing factor for higher education institutions is that they have a long-term time horizon for investments. Given the long-term horizon, Indiana University benefits from allocating a portion of its portfolio towards equities. The centralization of the investment function at Indiana University allows to leverage liquidity across the institution while optimizing investment opportunities. Another critical benefit of a university is the predictability of cash flows thanks to stable revenue streams and high fixed costs. Accordingly, asset allocation can be optimized based on a reliable assessment of liquidity needs.

The tier structure allows for meeting liquidity needs and optimizing investment results, considering potential total returns, volatility, and correlations between tiers. Indiana University completes an assessment of its investment strategy at least annually. This process aims at increasing risk-adjusted and total return while maintaining adequate levels of risk and liquidity. The University considers all investments allowable under Indiana state statutes. The first step in this process is to conduct cash flow analyses and forecast liquidity needs. Operating funds are then tiered as follows:

Objective	Tier	Investment Style	Investment Strategy
Liquidity Tiers	I	Operating Cash Active Cash	Provides for operating activity Safety of Principal & Maintenance of Liquidity
	II	Low Duration Fixed Income	Offers a yield advantage over Active Cash, with low-interest rate sensitivity
Total Return Tiers	III	Core Plus	Seeks to outperform the Bloomberg Barclays US Aggregate Bond Index
	IV	Domestic and International Equity Index Funds	Highest potential returns over the long-term

Historical liquidity trends and future liquidity needs are analyzed to determine a reasonable, minimal level of funds to keep in tiers I and II, thereby increasing incremental return through reallocation to tiers III and IV. Minimum levels for tiers I and II were established in the university’s investment policy, using historical operating cash flow cycles. The tier II allocation is intended as a backstop to tier I.

Strategies for incremental return in tiers III and IV 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 high-quality assets with higher potential returns and lower correlations. In particular, tier III has served as a ballast to equity risk.