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Item 13.6 - Attachment 1
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Investment Policy and Strategy
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Council
Investment Policy Statements (IPS)
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28 September 2009
2009
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This
document outlines Parramatta City Council’s policy and strategy for the
investment of assets.
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Document Version 4.0
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Contents 2
General 3
Purpose
of Document 3
Related
Documents 3
Effective
Date 3
Definitions 3
Investment Policy 3
Investment
Funds 3
Investment
Objectives 3
Legislative
Requirements 3
Delegation
of Authority 3
Prudent
Person Standard 3
Ethics
and Conflicts of Interest 3
Authorised
Investments 3
Prohibited
Investments 3
Risk
Management Guidelines 3
Investment
Advisor 3
Accounting 3
Safe
Custody Arrangements 3
Performance
Benchmarks 3
Reporting 3
Review
of Policy 3
Investment Strategy 3
Investment
Management Practices 3
Risk
Management 3
Portfolio
Construction 3
Credit Quality Target & Limits 3
Counterparty Limits 3
Term to Maturity Target 3
Rebalancing TaR 3
Target Asset Allocation 3
Benchmarking
and Monitoring 3
Implementation 3
Authority
to Amend Strategy 3
Authority
to Implement Strategy 3
Attachment
A: Target Maturity Profile & Return Expectations 3
Attachment
B: Approved Investment Types & Benchmarks by Investment Category 3
Attachment
C: Target Asset Allocation (TaA) 3
The purpose of this document is to
establish the framework within which investment principles are to apply to the
investment of Council funds. It details:
§ Council Funds’ covered by this
Investment Policy Statement;
§ Council’s objectives for its investment
portfolio/s;
§ how investments are to be undertaken;
§ the applicable risks to be managed;
§ the strategy adopted by Council to
achieve the investment objectives;
§ any constraints and other prudential
requirements to apply to the investments of Funds having regard to the
applicable legislation and regulations governing Council investment;
§ the manner in which compliance with the
Policy & Strategy will be monitored and reported;
§ the expected level of future returns; and
§ appropriate benchmarks for each
category of investments.
This statement has been prepared to recognise
the legislative requirements and obligations for the investment of Council’s
funds. The legislative requirements are
listed in the Investment Policy adopted by Council from time to time. It is Council’s intention to comply with
investment regulation and nothing in this statement is to override these
obligations.
This document replaces any previous Investment Policy and/or Strategy
document approved by Council.
The effective date of this Investment Statement incorporating both
Policy and Strategy is the 28th September 2009 and will be
reviewed at regular six monthly intervals going forward, being calendar year
end and financial year end.
ADI Authorised Deposit-Taking Institutions (ADI) are corporations that
are authorised under the Banking Act 1959 (Cwth) to take deposits from
customers.
DLG NSW Department of Local Government.
Grandfathered Investments held by Council that were
previously allowed under the Minister’s Order but were Grandfathered when the
NSW State Governement changed the list of Approved Investments as a result of
the Cole enquiry.
IPS The Investment Policy Statement provides the general investment
goals and objectives of Council and describes the strategies that must be employed
to meet these objectives. Specific
information on matters such as asset allocation, risk tolerance, and liquidity
requirements are also included in the IPS.
LGGR Local Government (General) Regulation
2005 (NSW).
RAO Responsible Accounting Officer of a council means a member of the
staff of the council designated by the Chief Executive Officer, or if no such
member has been designated, the Chief Executive Officer. (LGGR, clause 196).
TaA Target Asset Allocation or TaA
is Council’s medium term allocation to different asset types to ensure that the
portfolio is diversified across particular sectors of the investment market.
TaR Target Maturity Profile or TaR
is Council’s short to medium term positioning of the duration of the portfolio
to meet Council’s liquidity and return objectives.
T-Corp New South Wales Treasury Corporation.
NCD Is a short term investment in an underlying security being a
negotiable certificate of deposit (NCD) where the term of the security is
usually for a period of 185 days or less (sometimes up to 2 years). NCDs are
discount securities meaning they are issued and on-sold to investors at a discount
to their face value.
UBSA UBS Australia calculates a
daily index representing the performance of a notional parcel of bills
averaging 45 days.
BBSW The Bank Bill Swap
reference rate (BBSW) is the average of mid-rate bank-bill quote from brokers
on the BBSW Panel. The BBSW is calculated daily. Floating rate securities are
most commonly reset quarterly to the 90-day BBSW.
CFRN A Corporate Floating Rate Note (CFRN) is a medium to long term
fixed interest investment where the coupon is a fixed margin (“coupon margin”)
over a benchmark, also described as a “floating rate”. The benchmark is usually
the BBSW and is reset at regular intervals – most commonly quarterly.
Investment Policy
The
Funds held by Council have historically held value between $70m - $100m and
consist of internal reserves, external reserves and working capital. Investment Objectives
The purpose of this Policy
is to provide a framework for the investment of Parramatta City Council’s funds
at the most favourable rate of interest available to it at the time whilst
having due consideration of risk and security for that investment type and
ensuring that its liquidity requirements are being met.
While exercising the power to invest, consideration is to be
given to the preservation of capital, liquidity, and the return of
investment. Council therefore has three primary
objectives for its investment portfolio:
§ The preservation of the amount
invested;
§ To ensure there
is sufficient liquid funds to meet all reasonably anticipated cash flow
requirements; and
§ To generate income from the investment
that exceeds the 30 day BBSW.
Council’s Investment Strategy
will run in conjunction with its Investment Policy and will outline:
§ Councils
cash flow expectations;
§ Target allocation of investment type,
credit quality, counterparty exposure and term to maturity profile; and
§ Appropriateness of overall investment
types for Council’s portfolio.
All investments are to comply with the following:
§ Local Government Act 1993 - Section
625;
§ Local Government Act 1993 - Order (of
the Minister) dated 31 July 2008;
§ The Trustee Amendment (Discretionary
Investments) Act 1997 – Sections 14A(2), 14C(1) & (2);
§ Local Government General Regulation
2005;
§ Department of Local Government Circulars;
§ Local Government Code of Accounting
Practice and Financial Reporting; and
§ Australian Accounting Standards.
Authority
for implementation of the Investment Policy is delegated by Council to the Chief
Executive Officer in accordance with the Local Government Act 1993.
The Chief
Executive Officer may in turn delegate the day-to-day management of Councils
investment to the RAO or senior staff, subject to regular reviews.
Officers’
delegated authority to manage Council’s investments shall be recorded and
required to acknowledge they have received a copy of this policy and understand
their obligations in this role.
The
investments will be managed with the care, diligence and skill that a prudent
person would exercise. As trustees of
public monies, officers are to manage Council’s investment portfolios to
safeguard the portfolio in accordance with the spirit of this Investment
Policy, and not for speculative purposes.
Officers shall
refrain from personal activities that would conflict with the proper execution
and management of Council’s investment portfolio. This policy requires officers to disclose any
conflict of interest to the Chief Executive Officer.
Independent
advisors are also to declare that they have no actual or perceived conflicts of
interest.
All investments must be denominated in
Australian Dollars. Authorised
Investments are limited to those allowed by the Ministerial Investment Order
and include:
§ Commonwealth / State / Territory Government
securities e.g. bonds;
§ Interest bearing deposits / senior
securities issued by an eligible ADI;
§ Bills of exchange, (< 200 days
duration) guaranteed by an ADI;
§ Debentures issued by NSW Local
Government;
§ Land mortgages (< 60% of land
value);
§ Deposits with Local Government
Investment Services Pty Ltd (“LGIS”);
§ Deposits with T-Corp &/or Investments
in T-Corps Hour Glass Facility; and
§ Investments grandfathered under the
Ministerial Investment Order.
This
investment policy prohibits the following types of investment:
§ Derivative based instruments;
§ Principal only investments or securities that
provide potentially nil or negative cash flow; and
§ Stand alone securities issued that have
underlying futures, options, forwards contracts and swaps of any kind.
This policy
also prohibits the use of leveraging (borrowing to invest) of an investment.
Investments obtained are to be considered in light of the
following key criteria:
§ Counterparty
– The risk that a party to a
transaction will fail to fulfil its obligations. In the context of this document it relates to Council’s
Policy of limiting its exposure to any one ADI based on its credit rating;
§ Diversification
– the requirement to place investments in a broad range of products so as
not to be over exposed to a particular sector of the investment market;
§ Liquidity
Risk – the risk an investor is unable to redeem the investment at a fair
price within a timely period;
§ Market
Risk – the risk that fair value or future cash flows of an investment will
fluctuate due to changes in market prices;
§ Maturity
Risk – the risk relating to the length of term to maturity of the
investment. The longer the term, the
greater the length of exposure and risk to market volatilities; and
§ Preservation
of Capital – the requirement for preventing losses in an investment
portfolio’s total value.
The
Council’s investment advisor must be approved by Council and licensed by the
Australian Securities and Investment Commission. The advisor must be an independent person who
has no actual or potential conflict of interest in relation to investment
products being recommended and is free to choose the most appropriate product
within the terms and conditions of investment policy.
The
independent advisor is required to provide written confirmation that they do
not have any actual or potential conflicts of interest in relation to
investments they are recommending or reviewing, including that they are not
receiving any commissions or other benefits in relation to the investments
being recommended or reviewed.
Council
will comply with appropriate accounting standards in valuing its investments
and quantifying its investment returns.
In addition
to recording investment income according to accounting standards, published
reports may show a break-down of its duly calculated investment returns into
capital gains and losses, and interest.
From time
to time financial assets may be acquired at a discount or premium to their face
value. Discount or premium is to be
taken into account in line with relevant Australian Accounting Standards.
Where necessary, investments may
be held in safe custody on Council’s behalf, as long as the following criteria
are met:
§ Council must retain beneficial
ownership of all investments;
§ Adequate documentation is provided,
verifying the existence of the investments;
§ The Custodian conducts regular
reconciliation of records with relevant registries and/or clearing systems; and
§ The Institution or Custodian recording
and holding the assets will be:
8 Austraclear;
8 An institution with an investment grade Standard and
Poor’s or Moody’s rating; or
8 An institution with adequate insurance, including
professional indemnity insurance and other insurances considered prudent and
appropriate to cover its liabilities under any agreement.
The performance of each
investment will be assessed against the benchmarks listed in the table
below. It is Council’s expectation that
the performance of each investment will be greater than or equal to the
applicable benchmark.
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Investment
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Performance Benchmark
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Time Horizon
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11 am Account, AAA cash
funds, short dated bills, NCDs issued by financial institutions.
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Official (wholesale) Cash
Rate
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3 months
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Defensive Enhanced Cash –
“AA” credit rated cash funds, term deposits.
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UBSA Bank Bill Index +
0.15%
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12 months
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Intermediate Enhanced Cash
– “A” credit rated enhanced cash funds and less volatile low and no buy /
sell spread income funds.
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UBSA Bank Bill Index +
0.25%
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2 years
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Investment
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Performance Benchmark
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Time Horizon
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Income Funds – “A” credit
rated income funds with higher monthly volatility and/or higher buy / sell
spreads.
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UBSA Bank Bill Index +
0.50%
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2 years
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Fixed interest funds
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UBSA Composite Bond Index
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3 to 5 years
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Corporate FRN’s, Bonds,
Mortgage and asset backed securities (senior ADI Debt instruments)
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AAA – BBI + .10%
AA – BBI + .20%
A – BBI + .35%
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2 to 5 Years
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T-Corp Hour Glass Managed
Funds
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CPI + appropriate margin
over rolling 3 year periods (depending upon composite of fund)
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3 to 5 years according to the
T-Corp fund
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Documentary
evidence must be held for each investment and details thereof maintained in an
investment register. The documentary
evidence must provide Council legal title to the investment.
For audit purposes, certificates must be obtained from the
banks/fund managers/custodian confirming the amounts of investment held on
Council’s behalf at 30th June each year.
All investments are to be appropriately recorded in
Council’s financial records and reconciled at least on a monthly basis.
A monthly report
will be provided to Council. The report
will detail the investment portfolio in terms of holdings and impact of changes
in market value since the previous report. The monthly report will also detail the
investment performance against the applicable benchmark, investment income
earned versus budget year to date and confirm compliance of Council’s
investments within legislative and policy limits.
The Investment Policy will be reviewed at least
annually or as required in the event of legislative change. The Investment Policy may also be changed as
a result of other amendments that are to the advantage of that Council and in
the spirit of this policy. Any amendment
to the investment Policy must be by way of Council resolution.
To ensure that Council funds are
prudently invested with care, due diligence and skill, the following investment
management practices will be undertaken with the applicable outcomes and
objectives in mind.
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Risk Area
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Outcomes & Objectives
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Investment
Policy Compliance
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The portfolio
is at all times compliant with Council’s Investment Policy and relevant
regulation.
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Liquidity
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Under this
Investment Strategy, Council shall at all times maintain sufficient funds in
“Working Capital” to meet the anticipated liabilities of Council for the
following 90 days.
In addition,
sufficient capital shall be retained in Short Term Assets to meeting
Council’s funding requirements, net of anticipated borrowings, for the
following 3 to 12 month period.
Medium and
long-term investments will have varying degrees of liquidity. An early exit from these investments may
result in incurring penalties.
Regular
reviews of Council’s allocation to these investments relative to Council’s
underlying investment horizons should minimise the risk of having to exit an
investment in adverse market conditions.
Exposure to medium and long-term investments will be limited to the
proportion of the portfolio identified for these investment horizons.
Grandfathered
investments that are currently illiquid may be held to maturity.
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Security
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Working
Capital Funds, Short Term Funds and Short – Medium Term Funds (as defined in
this document) are to be invested to target capital (principal) security over
their nominated investment horizon to an extremely high probability level. Medium Term Funds and Long Term Funds (as
defined in this document) are to be invested to target capital (principal)
security over their nominated time horizon, and assuming they are held to
maturity, to a high probability level.
This is
achieved through investing in investments of minimal credit risk and matching
term to available investment term.
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Income
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As a minimum
that Council’s requirement for investment income as quantified in operational
budgets is provided for.
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Total Return
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Having
provided for liquidity, security and income needs, total returns on Council
funds are maximised with the view of achieving the stated investment
objective.
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All investments carry a trade-off between
risk, liquidity and return. Further,
risks can either be amplified or reduced when investments are combined within a
portfolio. To address these risks the
following mechanisms are in place:
§ Council’s
Investment Policy is the key risk control document, setting out counterparty
risk limits, minimum credit quality of the portfolio and relevant restrictions
on particular investment types. This
will be complied with at all times.
§ Council
has determined a list of Investment Types that may be used for Council
funds. These are set out in Attachment “B”
headed “Approved Investment Types and Benchmarks by Investment Category”, at the
rear of this document.
§ Council
will establish its target allocation to investment sectors (TaA) and term to
maturity profile (TaR) to ensure that liquidity and income requirements are met
in a well diversified investment portfolio.
§ Council
will receive professional assistance with evaluation and monitoring investments
to ensure they will meet Council needs. The
adviser shall also assist Council to ensure that the commercial terms on which
Council is offered investments by fund managers, issuers and brokers are fair
and reasonable.
§ Council
will receive professional assistance with portfolio construction so that:
8 The overall risk of the portfolio can be appropriately
assessed;
8 The portfolio can be adjusted over time as
circumstances warrant;
8 Regulatory changes are accommodated; and
8 This Investment Strategy can be properly reviewed from
time to time and recommendations made for improvement as required.
The Investment Strategy shall be
developed to support Council’s investment objectives for liquidity, security
and return. The current investment
strategy, inclusive of portfolio percentage and dollar based allocations is set
out in tabular form later on in this document.
Council’s investment portfolio strategy
shall be built around allocation of Council funds into a multidimensional
framework that has regard to three key aspects.
Namely:
i. Credit Quality of the portfolio and the
management of Counterparty exposure;
ii. Allocation of investments within defined
Investment Categories (or asset class) that are included within the approved
investment guidelines; and
iii. Time horizon or maturity profile of the
portfolio.
The framework in which Councils portfolio
is managed for each of these aspects is considered below.
The portfolio
credit guidelines to be adopted will be based on the Standard & Poor’s
(S&P) ratings system criteria. The maximum available limits in each rating
category and the target credit quality weighting for Council’s portfolio shall
be:
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Long Term Credit Ratings
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Short Term Credit Ratings
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Target Credit Quality Weighting
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Maximum Holding
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AAA Category
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A-1+
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15.0%
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100%
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AA Category
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A-2
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35.0%
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80%
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A Category
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A-2
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35.0%
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60%
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BBB Category & unrated ADI’s
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A-3
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15.0%
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40%
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Exposure to individual counterparties/financial
institutions will be restricted by their S&P rating so that single entity
exposure is limited, as detailed in the table below. This table does not apply to any
grandfathered managed fund or structured investment where it is not possible to
identify a single counterparty exposure.
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Individual Institution or
Counterparty Limits
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Long
Term Credit Ratings
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Short
Term Credit Ratings
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Direct Securities Maximum Limit
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AAA Category
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A-1+
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20%
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AA Category
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A-1+
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15%
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A Category
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A-2
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10%
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BBB Category
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A-3
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5%
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Unrated Category
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Unrated
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5%
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Council’s investment portfolio shall
be structured around the time horizon of investment to ensure that liquidity
and income requirements are met.
The Target Maturity Profile (TaR)
will be determined by Council from time to time having regard to the economic
conditions that are prevalent. Attachment
“A” headed “Target Maturity Profile and Return Expectations” outlines the
present TaR adopted by Council. It is
expected that this is a medium term allocation which will be reviewed every six
months with the Council’s investment advisor.
The TaR will be established between
the minimum and maximum allocation range shown in the table below.
The factors and/or information used
by Council to determine the TaR include:
8 Council’s liquidity requirements;
8 The shape of the bank bill swap curve (yield curve);
8 Term deposit spread curve (i.e. the rate financial institutions are
paying above the relevant BBSW rate);
8 Credit spreads; and
8 Macro economic variables.
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Investment
Horizon Description
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Investment Horizon Maturity Date
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Minimum Allocation
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Target Allocation (TaR)
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Maximum Allocation
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Working capital
funds
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0-3 months
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10.0%
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See
Attachment A
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100.0%
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Short term funds
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3-12 months
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10.0%
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See
Attachment A
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100.0%
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Short-Medium term
funds
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1-2 years
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10.0%
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See
Attachment A
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70.0%
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Medium term funds
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2-5 years
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0%
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See
Attachment A
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50.0%
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Long term funds
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5-10 years
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0%
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See
Attachment A
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50.0%
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In setting the TaR, Council is relying upon assumptions of expected
investment returns and market conditions that have been examined with its
investment advisor.
Each investment
category will be re-balanced back to the target allocation weight on a regular
basis. The tolerance range outside of
the target allocation is reflected in the table below.
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Investment Horizon Description
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Tolerance range outside of TaR
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Working
capital funds
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+ 10.0%
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Short
term funds
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+ 10.0%
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Short-Medium
term funds
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+ 7.5%
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Medium
term funds
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+ 7.5%
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Long
term funds
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+ 5.0%
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Council has established guidelines for the allocation of funds
within each investment or asset class category.
These limits which are outlined in the table below have been established
to ensure the portfolio is diversified across a broad range of products so not
to be over exposed to a particular sector of the investment market.
From time to time Council will set its Target Asset Allocation (TaA)
to each investment category which match the list of allowable investments
included in the DLG’s circulars.
The TaA will be determined by Council from time to time having
regard to the economic conditions that are prevalent. Attachment “C” outlines the target weighting
within the term to maturity target of the portfolio. It is expected that this will be reviewed
every six months with Council’s investment advisor.
The TaA will be established between minimum and maximum allocation
ranges shown in the table following.
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Asset
Class
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Minimum Allocation
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Target Asset Allocation (TaA)
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Maximum Allocation
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At Call Accounts
(i.e. Cash)
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5.0%
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See
Attachment “C”
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100.0%
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Commonwealth /
State / Territory Government Bonds
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0.0%
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See
Attachment “C”
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50.0%
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Interest Bearing
Deposits / senior securities – Fixed
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0.0%
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See
Attachment “C”
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100.0%
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Interest Bearing
Deposits / senior securities – Floating
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0.0%
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See
Attachment “C”
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100.0%
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T-Corp Hour Glass
Facility
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0.0%
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See
Attachment “C”
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50.0%
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Grandfathered Investments
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0.0%
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See
Attachment “C”
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50.0%
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In setting the TaA, Council is relying upon assumptions of expected
investment returns and market conditions that have been examined with its
investment advisor.
Each investment in the portfolio is to be
evaluated and monitored against a performance benchmark appropriate to the risk
and time horizon of the investment concerned.
The objective is to ensure that all investments considered can deliver a
level of return commensurate with their risk profile and that they are
competitive with an appropriate peer group of alternative investment
options. During the currency of this
Strategy Document, no assets other than those listed will be eligible.
Compliance of the portfolio with this
Investment Strategy shall be reported to the Chief Executive Officer by the RAO
each quarter.
This Investment Strategy sets out the
intended approach to investments in the market conditions that are expected to
prevail over the medium to long term investment horizon. However, there will be periods, sometimes
sustained, where “normal” market conditions do not apply. For example, periods where short term
interest rates are higher than long term interest rates, or investments of
similar credit quality offer different yields due to liquidity
differences. In these circumstances, the
investment approach taken at a given point in time may vary from strategy via a
“Market Adjusted Portfolio Allocation”.
Where this occurs, it is incumbent on Council’s advisors to explain the
rationale for this variation as part of its recommendations to the Council
executive and/or elected Councilors.
The Chief Executive Officer is authorised
to approve a variation to this policy and/or strategy only if the investment is
to the Council’s advantage or due to revised legislation.
All variations to this policy and/or
strategy are to be reported to Council within 28 days.
Authority
for implementation of the Investment Strategy is delegated by Council to the Chief
Executive Officer in accordance with the Local Government Act 1993.
The Chief
Executive Officer may in turn delegate the day-to-day management of Councils
investment to the Manager Finance and/or the Group Manager Corporate Services, subject
to regular reviews.
Officer’s
delegated authority to manage Council’s investments shall be recorded and
required to acknowledge that they have received a copy of this policy and
understand their obligations in this role.
Chief
Executive Officer
September 2009