|
Item 11.8 - Attachment 1 |
Parramatta City Council Investment Policy
February 2012 |
Investment Policy
February 2012
Policy Number 205
|
Item 11.8 - Attachment 1 |
Parramatta City Council Investment Policy
February 2012 |
|
Item 11.8 - Attachment 1 |
Parramatta City Council Investment Policy
February 2012 |
POLICY
CONTENT
Contents....................................................................................................... 2
Authorisation,
Review, Owner and Implementation.................................. 3
Background.................................................................................................. 4
Objective...................................................................................................... 4
Scope........................................................................................................... 4
Legislative
and Regulatory References.................................................... 4
Related
Strategies, Plans or Policies........................................................ 5
General........................................................................................................ 6
Purpose of Document......................................................................................... 6
Related Documents............................................................................................. 6
Effective Date...................................................................................................... 6
Definitions............................................................................................................ 6
Investment
Policy........................................................................................ 8
Investment Objectives......................................................................................... 8
Delegation of Authority........................................................................................ 8
Prudent Person Standard................................................................................... 9
Ethics and Conflicts of Interest........................................................................... 9
Authorised Investments....................................................................................... 9
Prohibited Investments........................................................................................ 9
Risk Management Guidelines............................................................................ 9
Investment Advisor............................................................................................ 10
Accounting......................................................................................................... 10
Safe Custody Arrangements............................................................................ 10
Credit Quality Target & Limits.......................................................................... 11
Counterparty Limits........................................................................................... 11
Term of Maturity Limits..................................................................................... 11
Performance Benchmarks............................................................................... 12
Reporting............................................................................................................ 13
Review of Policy.............................................. Error! Bookmark not defined.
Authorisation
(Who
authorized this Policy?)
Review
The Parramatta City
Council Investment Policy will be reviewed on an annual basis or when either change’s in
regulation or market conditions necessitate a review.
|
Version |
Date Adopted |
Date Superseded |
|
6.21 |
|
|
|
|
|
|
Owner
Financial Management,
Finance
Background:
A
prudent well-informed and accountable Investment Policy is a key element in
Parramatta City Council achieving its financial management objectives, and
hence delivering the best possible services to the
The
Investment Policy is intended to increase the resources available for Council
to achieve its goals, while at the same time protecting public funds and
assuring the community that their assets are being responsibly managed.
The
Investment Policy has been revised to reflect the increased complexity of the
Investment market, and the increased opportunities it offers for prudent
investment.
Parramatta
City Council’s current investment policy was adopted in September 2009 and
complies with all current legislative and regulatory references.
In
recent months, finance staff in cooperation with CPG Research & Advisory
have worked together to implement an updated and streamlined policy that not
only reflects all legislative developments but also offers the prudent
flexibility needed to maximise returns in a volatile and rapidly changing
market.
Objective:
To provide a framework for the optimum investment of
Parramatta City Council’s funds at the most favourable rate, whilst having due
consideration of risk, liquidity and security for its investments.
Scope:
The Investment Policy
applies to investment decisions made or authorized by Council, council officers
and independent advisers who assist Council with its investment strategy.
The policy also
covers monitoring, reporting and accounting requirements for investments.
All investments are to comply with the following:
§ Local Government Act (1993);
§ Local Government (General) Regulation (2005);
§ Ministerial Investment Order;
§ The Trustee Amendment (Discretionary Investments) Act
(1997) – Section 14;
§ Local Government Code of Accounting Practice and
Financial Reporting;
§ Australian Accounting Standards;
§ Division of Local Government Investment Policy
Guidelines; and
§ Division of Local Government Circulars
Related Strategies, Plans or Policies
The Policy must be
read and implemented in conjunction with the Investment Quarterly Strategy
Review. The Policy establishes the
general principles and risk control framework that guide investment of
Council’s funds. These principles
generally remain the same for the life of the Policy. The Strategy provides the practical detail
for the implementation of the Policy. In
particular the Strategy defines how investments will be allocated over the next
three months. The Strategy is viewed
every three months by Council’s independent investment advisor.
GENERAL
Purpose of Document
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;
§ 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;
§ 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
regulations and directions of the Division of Local Government - where
inconsistent, the Policy is to be read as subject to these.
This document replaces any
previous Investment Policy and/or Strategy document approved by Council.
The effective date of this
Investment Policy is 27th
February 2012 and
will be reviewed at regular annual intervals going forward, or when either
change in regulation or market conditions necessitate a review.
Act Local Government Act, 1993.
ADI Authorised
Deposit-Taking Institutions (ADIs) are corporations that are authorised under
the Banking Act 1959 (Cwth) to take deposits from customers.
Bill of
Exchange A bill of exchange is an
unconditional order in writing, addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on
demand, or at a fixed or determinable future time, a sum certain in money to or
to the order of a specified person, or to bearer.
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.
Council Funds Surplus monies that are invested by
Council in accordance with section 625 of the Act
Debenture A debenture is a document evidencing
an acknowledgement of a debt, which a company has created for the purposes of
raising capital. Debentures are issued
by companies in return for medium and long-term investment of funds by lenders.
DLG NSW
Division of Local Government, Department of Premier and Cabinet.
FRN A Floating Rate Note (FRN) 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.
Grandfathered Investments held by Council that
were previously allowed under the Minister’s Order but were Grandfathered (i.e.
eligible to retain but not add to or restructure existing investments) when the
NSW State Government changed the list of Approved Investments as a result of the
Cole enquiry reflected in the Ministerial Order dated 31/7/2008.
IP The Investment Policy (IP) 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
IP.
LGGR Local Government (General)
Regulation 2005 (NSW).
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 generally discount securities, meaning they are issued
and on-sold to investors at a discount to their face value.
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)
T-Corp New South
Wales Treasury Corporation.
UBSA BBI UBS Australia calculates a daily Bank Bill
Index representing the performance of a notional rolling parcel of bills
averaging 45 days.
The purpose of this Policy is to provide a framework for
the optimum investment of Parramatta City Council’s Funds at the most
favourable rate of interest available to it at the time and maximising returns,
whilst having due consideration of risk, liquidity and security for its
investments.
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
several primary objectives for its investment portfolio:
§ Compliance with legislation, regulations, and the prudent person tests of the Trustee Act and best practice guidelines.
§ 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 performance benchmarks mentioned later in this document.
Council’s Investment Strategy
will run in conjunction with its Investment Policy and will outline:
§ Councils current cash flow expectations and the
implications for deviations from a long-term liquidity profile;
§ Diversification: Target allocation of investment
type, credit quality, counterparty exposure and term to maturity profile;
§ Market conditions and the appropriate responses –
particularly relative positioning within IP limits;
§ Relative return outlook, risk-reward considerations,
assessment of the market cycle and hence constraints on risk; and
§ Appropriateness of overall investment types for
Council’s portfolio.
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 investments to the
Responsible Accounting Officer (RAO) and Treasury and Tax Analyst who must
ensure adequate skill, support and oversight.
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.
§ 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 a NSW Council under Local
Government Act (1993);
§ Deposits with T-Corp &/or Investments in T-Corp
Hour Glass Facility; and
§ Existing investments grandfathered under the
Ministerial Investment Order.
This
investment policy prohibits the following types of investment[1]:
§ 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.
However, nothing in the policy shall prohibit the short-term investment of loan
proceeds where the loan is raised for non-investment purposes and there is a
delay prior to the spending occurring.
Investments obtained are to be considered in light of the
following key criteria:
§ Preservation of Capital – the requirement for preventing losses in an
investment portfolio’s total value.
§ Credit Risk – The
risk that a party or guarantor to a transaction will fail to fulfil its
obligations. In the context of this
document it relates to the risk of loss due to the failure of an
institution/entity with which an investment is held to pay the interest and/or
repay the principal of an investment;
§ 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 runs out of cash, is unable to redeem
investments at a fair price within a timely period, and thereby incurs
additional costs (or in the worst case is unable to execute its spending
plans);
§ Market Risk – the risk that fair value or future cash flows will fluctuate due to
changes in market prices, or benchmark returns will unexpectedly overtake the
investment’s return;
§ 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
§ Rollover Risk – the risk that income will not meet expectations or budgeted
requirement because interest rates are lower than expected in future.
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 realised and
unrealised capital gains and losses, and interest.
Other relevant issues will be considered in line with
relevant Australian Accounting Standards, such as discount or premium,
designation as held-to-maturity or on a fair value basis, and impairment.
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 portfolio credit guidelines to
be adopted will reference the Standard & Poor’s (S&P) ratings system
criteria and format - however, references to the Minister’s Order also
recognised Moody’s and Fitch Ratings and any of the three ratings may be used
where available.
However, the primary control of
credit quality is the prudential supervision and government support and
explicit guarantees of the ADI sector, not ratings.
The maximum
holding limit in each rating category and the target credit quality weighting
for Council’s portfolio shall be:
|
|
Maximum Holding |
|
AAA Category |
100% |
|
AA Category |
100% |
|
A Category |
60% |
|
BBB Category & unrated ADIs |
40% |
Exposure to individual
counterparties/financial institutions will be restricted by their rating so
that single entity exposure is limited, as detailed in the table below. It
excludes any government guaranteed investments.
This table does not apply to
any grandfathered managed fund or structured investment where it is not
possible to identify a single counterparty exposure.
|
Individual Institution or Counterparty Limits |
|
|
|
Limit |
|
AAA Category[2] |
40% |
|
AA Category |
30% |
|
A Category |
15% |
|
BBB Category |
10% |
|
Unrated Category[3] |
5% |
Council’s investment portfolio shall be structured around the time
horizon of investment to ensure that liquidity and income requirements are met.
Once the primary aim of liquidity is met, Council will ordinarily
diversify its maturity profile as this will ordinarily be a low-risk source of
additional return as well as reducing the volatility of Council’s income.
However, Council always retains the flexibility to invest as short as required
by internal requirements or the economic outlook.
The factors and/or information used
by Council to determine minimum allocations to the shorter durations include:
8 Council’s
liquidity requirements to cover both regular payments as well as sufficient
buffer to cover reasonably foreseeable contingencies;
8 Medium term financial plans
and major capex forecasts;
8 Known grants, asset sales or
similar one-off inflows;
8 Seasonal patterns to
Council’s investment balances.
|
Investment Horizon Description |
Investment Horizon - Maturity Date |
Minimum Allocation |
Maximum Allocation |
|
Working capital funds |
0-3 months |
10.0% |
100.0% |
|
Short term funds |
3-12
months |
20.0% |
100.0% |
|
Short-Medium term funds |
1-2 years |
0% |
70.0% |
|
Medium term funds |
2-5 years |
0% |
50.0% |
|
Long term funds |
5-10 years |
0% |
25.0% |
Within these broad ranges, Council
relies upon assumptions of expected investment returns and market conditions
that have been examined with its investment advisor.
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 by sufficient margin
to justify the investment taking into account its risks, liquidity and other
benefits of the investment.
Council will seek information about both current and historical reward
for the investments contemplated in its Strategy document – where insufficient,
it will hold cash and not impose a minimum outperformance obligation as to do
so mandates risk-seeking at times of minimal reward.
It is also expected that Council will take due steps to ensure that any
investment, notwithstanding a yield above the benchmark rate (taking into
account term), is executed at the best pricing reasonably possible.
|
Investment |
Performance Benchmark |
Time Horizon |
|
|
11 am Account, short dated bills, deposits issued
by financial institutions of appropriate term. |
UBSA Bank
Bill Index (BBI) |
3 months
or less |
|
|
Term Deposits of appropriate remaining term, FRN’s
nearing maturity. |
UBSA Bank
Bill Index (BBI) |
3 months
to 12 months |
|
|
Term Deposits with a maturity date between 1 and 2
Years, FRN’s. |
UBSA Bank
Bill Index (BBI) |
1 to 2
years |
|
|
FRN’s, Bonds, Term deposits with a maturity date
between 2 and 5 Years. Grandfathered Income Funds. |
|
2 to 5
Years |
|
|
T-Corp Hour Glass Managed Funds |
Fund’s
Internal Benchmark |
3 Years
(M/T Growth) |
Grandfathered investments (i.e.
managed funds and securities) are allocated to the appropriate horizon based on
expected or average maturity date and should be taken into account when
allocating the rest of the portfolio.
The decision to on when to exit such
investments are based on a range of criteria specific to the investments –
including but not limited to factors such as:
Ø Returns
expected over the remaining term
Ø Fair values
Ø Competing
investment opportunities
Ø Costs of
holding
Ø Liquidity
and transaction costs
Ø Outlook for future investment values
In general, it is expected that
professional advice will be sought before transacting in “grandfathered”
investments.
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. Council may
nominate additional content for reporting.
The Investment Policy will be
reviewed semi-annually and as required in the event of legislative change or as
a result of significantly changed economic/market conditions. 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 Council resolution.
[1]
Prohibited investments are not
limited to the list below and extends to any investment carried out for
speculative purposes.
[2] 100% Commonwealth Government and Government-guaranteed deposits are included in this category, but without any upper limit applying to the government as counterparty.
[3] This category includes unrated ADI’s such as some Credit Unions and Building Societies where falling outside deposit guarantees for at least part of the investment term.