Considerations and Best Practices for Your Trust

Transcription

1 Considerations and Best Practices for Your Trust AFOA SASKATCHEWAN CHAPTER September 29, 2015 presented by Domenic Natale Vice President Aboriginal Trust Services Leanne Flett Kruger Regional Manager Western Canada Aboriginal Services Jack Jamieson Vice President Aboriginal Services 1

2 Afternoon Agenda Investment Planning Community Readiness Establishing Effective Communications Comprehensive Community Planning Getting Your Team Together Investment Basics Understanding Risk and Return Understanding the Financial Affordability of Your Trust Health Break Investment Related Responsibilities Investment Policy and Portfolio Structure Manager Search & Selection Performance Monitoring and Reporting 2

3 Community Readiness Establishing Effective Communication 3

4 Establishing Community Priorities It is beneficial in determining the uses and priorities of new Community wealth by engaging its citizens WHY? Buy-in from the membership regarding Community priorities can serve in creating consensus which can in turn help create harmony Transparency will also serve to create trust in the Community 4

5 Review of the Learning Process Awareness Understanding Acceptance Competency Action Information Education Mental Emotional 5

6 Factors to consider Age Gender Current health statues Marital/family status Income Personal assets Literacy Current events Community culture Residency Personal values Education 6

7 Gaining buy-in Progress requires four pre-conditions: knowing what to do and why knowing how to do it wanting to do it having the resources 7

8 Resistance Overt Memos, meetings, one-on-one, public behaviors More constructive than covert because it can be heard and be addressed Covert Hidden and can go unnoticed until it destroys a change initiative Clandestine unrest from indirect complaining to sabotage Usually the result of low trust and inadequate preparation 8

9 Communication delivery What are the current methods? Face-to-face Print Electronic What are the potential methods? Committees Special Events Surveys and Focus Groups What methods do the members prefer? (do the research...get the support of the go to members) 9

10 Communication Step 1 Sender Message Receiver Step 2 Sender Message Receiver Step 3 Sender Message Receiver 10

11 Awareness to Action Circle 11

12 Community Readiness Comprehensive Community Planning (CCP) 12

13 Establishing Community Readiness and Priorities Comprehensive Community Planning It s Really All About Identifying and Balancing the Needs & Priorities of Today with that of Future Generations 13

14 Comprehensive Community Planning CCP Addresses (but is not limited to): Governance Culture Health Environment Economic Development Social Development Physical Infrastructure Land Use 14

15 Comprehensive Community Planning (CCP) Why is it Important? CCP is more than just a strategic plan developed by leadership CCP involves and engages Chief & Council and Community Members directly in developing a joint vision for the future As CCP is a Community plan involving participation & direction by the Membership, it can increase the probability that the CCP process will sustain itself beyond the term of current leadership CCP provides training and capacity building 15

16 Community Readiness Getting Your Team Together 16

17 Who should be on the Team? Chief and Council CCP Management Team Trust Lawyer (with Aboriginal Trust experience) Corporate Trustee or Administrative Trustee Investment Advisor Aboriginal Tax Specialist Lender (where borrowing is to be a consideration) 17

18 Investment Basics 18

19 Asset Classes: Fixed Income 19

20 Asset Classes: Equities/Stocks (Canadian, U.S., International) 20

21 Risk Comes in Different Shapes and Sizes Default Risk: the risk of not getting your capital back or income payments cease as the issuer has gone broke Volatility Risk: short term changes in value of the portfolio the lower volatility, the higher probability of meeting your expected return Liquidity Risk: the risk that you can t access your money because it is locked-in with a future maturity date Interest Rate Risk: putting all your money in to a single interest bearing deposit that matures at a much lower interest rate Inflation Risk: annual college tuition that cost $750 in 1975 would cost $7,000 in 2014 a 1% Savings account is safe but you re losing your purchasing power to inflation over time 21

22 Managing Risk and Return The potential for higher return generally brings exposure to higher risk or volatility. 22

23 Understanding the Financial Affordability of Your Trust 23

24 Protection and Investment of Trust Capital Starts with identifying & quantifying your Trust s investment objectives 24

25 Understanding Trust Priorities As investors, we generally want to achieve the objectives of the Trust by taking the lowest level of risk possible so it is important to understand the base return requirement necessary in meeting Trust priorities 25

26 Establishing the Required Return on Investment (RROI) Housing? Identified Priorities (Qualitative) (What priorities are to be achieved?) Economic Development? Youth and Elder Support? Preserve the Financial Stability of the First Nation for Future Generations? Purpose Measurable Objectives (Quantified) Fund / $20 million Annual Income Requirement ($) % of Total Assets Housing $400, % Joint Ventures $ 300, % Elder and Youth Programs Total Annual Requirement Inflation & Management Fees Total Annual Required Return $ 100, % $800, % $520, %* $1,320, % * Inflation 2.00% + Management Fees 0.60% 26

27 What Asset Mix is appropriate in meeting the RROI? Traditional Scenario Sample Portfolio 60% in Equities 9.0%) 40% in Bonds 3.0%) 6.60%* * An Active investment Manager can be expected to add value over and above the market return Anticipated Rate of Return must have the ability to achieve the annual Required Rate of Return. 27

28 But what about the risk? Ensure the asset mix selected provides a reasonable balance between the risk tolerance and the required rate of return Associated Risk Of The Sample Portfolio (60% Equity / 40% Bond) Average Annual Risk since 1959 (Volatility / Standard Deviation) Best 12 month return since 1959 (occurred in 1985) Worst 12 month return since 1959 (occurred in 2008) 9.7% 34.1% -14.5% Average 12 month return since % Negative Return Experienced 1 in every 6.1 years 28

29 Risk and Return

30 Other Investment Related Responsibilities 30

31 Investment Strategy Where Do You Start? The Trust Deed says what you can and can t do The Investment Policy documents how you re going to do it 31

32 What is an Investment Policy Statement (IPS) It is a living document that identifies the investment goals & objectives, expectations, strategies, general rules, policies and constraints of the Trust and directs the short, mid and long term investment strategies of the trust. The IPS should be reviewed at least annually or when circumstances change. 32

33 What is the purpose of an Investment Policy Statement The IPS serves as a guiding document in support of the Trust Agreement for: Chief and Council New and existing trustees The Investment Managers Community Members who want clarity around the Trust s long term investment strategies 33

34 The Investment Policy: The Roadmap Objectives and Required ROI Income, Capital and Liquidity Needs Asset allocation targets/ranges Time Horizon Conflict of Interest Guidelines Roles & Responsibilities Monitoring process Manager Review Policy Spending Policy Allowable & Prohibited Investments including Socially Responsible Investing 34

35 Investment Policy Sample Asset Mix Targets and Ranges 35

36 Portfolio Structure Considerations 36

37 Considerations: Portfolio Structure & Risk Segregated Securities versus Pools? Balanced versus Specialist Managers? Multi-Manager / Multi-Style Solution? Independent Financial Advisor Versus Do it Yourself 37

38 Segregated Holdings vs. Pooled Funds 38

39 Balanced Managers vs. Specialists Specialist Managers An investment manager that is viewed as having a proven expertise in a particular asset class or sector within an asset class. Under this structure, a portfolio would typically be made up of multiple managers looking after any given asset class Benefits: the investor is attempting to find the best in class managers and expects superior performance Disadvantages: overall portfolio costs can be higher and rebalancing the portfolio back to the investment policy targets becomes the responsibility of the investor 39

40 Balanced Managers vs. Specialists Balanced Managers An investment manager that manages multiple asset classes for the investor and is viewed as being proficient in all asset classes. Under this structure, a portfolio would typically be made up of one or more managers who each manage bonds, Canadian equities and foreign equities. Benefits: The manager can overweight/underweight certain asset classes based on their outlook on the markets (e.g. tactical allocation). Rebalancing is performed by the manager-generally more timely. Overall costs are generally less expensive as any given manager has more of the portfolio. Disadvantages: Important to find an investment manager that is proficient in the asset classes that you want 40 them to manage.

41 Benefits of a Multi-Manager / Multi-Style Structure Value Investing Value managers look for companies that have fallen out of favour but still have good fundamentals. They buy these stocks at bargain prices that are below the stocks average historic levels or below current levels in their industry groups. Many value investors believe that a majority of value stocks are created due to investors overreacting to negative events. The idea behind value investing is that stocks of good companies will bounce back in time when the true value is recognized by other investors. However this recognition of value may take time to emerge, and in some cases, may never materialize. Growth Investing Growth managers look for high-quality, successful companies that have posted strong performance and are expected to continue to do well, though there are no guarantees. Investors are willing to pay high price-to-earnings multiples for these stocks in expectation of selling them at even higher prices as the companies continue to grow. The risk in buying a given growth stock is that its lofty price could fall sharply on any negative news about the company, particularly if earnings disappoint the market. 41

42 Performance -Value versus Growth Stocks (MSCI EAFE Index) Difference (G) 5.1% (G) 4.2% (V) 8.5% (G) 9.5% (G) 1.0% (G) 1.8% (V) 1.3% (V) 3.2% 42

43 Independent Financial Advisor vs. Do-It-Yourself Independent Financial Advisor An independent Advisor is a person or firm who provides advice to Chief and Council and/or the Trustees on development of an Investment Policy, selection of Investment Managers and on-going performance monitoring. A Financial Advisor should not be involved in management of the actual investments. Benefits: Expertise Independent objectivity Dedicated research capabilities Disadvantages: Added costs 43

44 Do-It-Yourself Independent Financial Advisor vs. Do-It-Yourself Do-It-Yourself refers to any group or person who is not a dedicated investment professional. Benefits: Potential cost savings Disadvantages: Lack of time and expertise Potential loss of opportunity Potential liability Delay in implementation Limited research capabilities 44

45 Investment Manager Search and Selection 45

46 Investment Manager Search & Selection Process It s a Big World Out There! 1. All providers exist for a reason but all are not created equal 2. Diligence is required to understand the scope of providers available, their performance, risk, fees, service and how they fit your criteria 3. Hire managers for their strengths and avoid their weaknesses based on the mandate you require 46 46

47 The Manager Search All Providers Exist for a Reason But Not All Are Appropriate Performance - absolute, benchmarks & peers Is the performance data relevant to the mandate required Risk - not all returns are created equally Discretionary (Institutional) versus non-discretionary (retail) Buy & sell disciplines Dedicated investment style Low professional turnover Research - internal versus external Ownership and compensation relating to the firm s professionals Fees Service & reporting capabilities Low correlation of returns to existing providers 47

48 Performance Measurement and Reporting 48

49 Trustees are not necessarily deemed negligent if the portfolio is underperforming but more so, not being aware when underperformance exists Remaining informed is essential! 49

50 Ongoing Performance Measurement - YOU MUST REMAIN INFORMED! The following 4 levels of reporting are considered key to ongoing performance monitoring (by manager and on a consolidated basis): Absolute returns versus requirements Returns against weighted benchmarks Returns against peer group or like managers Risk-Return analysis (e.g. return received for each unit of risk taken) As fiduciaries, the Trustees are responsible for monitoring the investment performance of Trust property. They are also responsible to report their findings to the beneficiaries. 50

51 Peer Group Analysis Annualized Returns

52 Peer Group Analysis Annual Returns

53 Risk Versus Return (What Return at What Level of Risk?)

54 Course Summary Preparing a Trust Agreement that will meet the goals and objectives of your Community takes time. It should provide: Benefit for Members now and in the future Clarity for Trustees and Beneficiaries Discretion for Trustees where appropriate Transparency & accountability to the Beneficiaries by the Trustees and by Council 54

55 The Road Ahead Prepare Your Community Get your team together Determine the best Trust Model to meet your needs Hire the right professionals Develop policies, procedures, work plans as required Monitor and Evaluate 55

56 Thank You Domenic Natale Vice President Aboriginal Trust Services Leanne Flett Kruger Regional Manager Western Canada Aboriginal Services Jack Jamieson Vice President Aboriginal Services