Roseville Firefighters Relief Association Investment Policy

Transcription

1 Roseville Firefighters Relief Association Investment Policy (As accepted 16-Feb-2010)

2 1. PURPOSE OF STATEMENT This Statement of Investment Objectives and Policies (the Statement ) for the Roseville Firefighter s Relief Association ( Trustees ) Defined Benefit Plan (the Plan ) of the Special Fund (the Fund ) is intended to: A. Define the responsibilities of the Trustees and the providers of investment services to the Plan. B. Establish formal (yet flexible) investment guidelines incorporating prudent asset allocation and realistic total return goals. C. Create standards of investment performance, which are historically achievable, and by which the investment mangers agree to be measured over a reasonable time period. This Statement will be reviewed annually by the Trustees to ensure the relevance of its contents to current capital market conditions and Plan needs. 2. RESPONSIBILITIES-Trustees The trustee shall be fully responsible for the ongoing management and oversight of the Roseville Firefighter s Relief Association Benefit Plan. These responsibilities include those fiduciary and management obligations discussed in appropriate Minnesota Statutes. In addition, the Trustees shall comply with the following procedures: A. Investments will be made for the sole interest and the exclusive purpose of providing an optimal return within the risk constraints described herein. B. The assets must be invested with the care, skill and diligence that a prudent man acting in this capacity would undertake. C. All investments will be made within the guidelines of quality, marketability and diversification mandated by controlling statutes. D. Developing investment objectives, guidelines and performance measurement standards which are consistent with the risk, return, and policy parameters of each investment component of the Plan. E. Evaluating, selecting, an independent investment advisor or a money manager. F. Evaluating, selecting, and granting discretionary control over transactions to Money Managers, pooled funds, mutual funds, or other appropriate investment vehicles. G. Communicating the investment objectives, guidelines and standards (including any material changes that may occur) to the investment managers or responsible representatives of the selected investment components of the Plan. H. Reviewing and evaluating results of each investment component in context with Established Standards of Performance. 1

3 I. Taking whatever corrective action is deemed prudent and appropriate if investment results are below expectations. 3. RESPONSIBILITITES - Money Managers For mutual funds or other commingled funds, the money manager must meet all obligations as established in their respective Fund prospectus or trust documents. For separately managed portfolios, the money managers, in recognition of their roles as fiduciaries of the Plan, must assume the following responsibilities as they pertain to: A. INVESTMENT PROGRAM I. Invest the Plan assets in accordance with the objectives, guidelines, and standards of performance, as herein defined. II. Exercise full discretionary authority as to all buy, hold and sell decisions for each security under management, subject to the guidelines as herein defined. B. COMMUNICATION - The investment managers are expected to provide: I. INITIALLY AND AS NECESSARY THEREAFTER, a. A written statement acknowledging acceptance of the performance standards herein stated. b. A Written statement describing, in brief form, what specific investment program will be undertaken to achieve the objectives and goals herein stated. II. MONTHLY, descriptions of a. Portfolio composition showing asset structure for each major class of security. b. Positions, by individual security, showing both cost and market value (except for commingled assets, in which case, showing the unit position and unit value). c. All principal cash transactions, including all buys and sells in sufficient descriptive detail. d. At the request of the Trustees, participate in a review meeting, the agenda to include: i. A review and reappraisal of the investment program. ii. A commentary on investment results in light of the appropriate standards of performance as stated herein. iii. A synopsis of the key investment decisions made by the manager, the underlying rationale, and how those decisions could affect future results. 2

4 iv. A discussion of the manager s outlook, what specific investment decisions this outlook may trigger and how these decisions could affect future results. v. Recommendations as to changes in these objectives, goals or standards, based upon material and sustained changes in the capital markets. III. ANNUALLY - A copy of the manager s Securities Exchange Commission Registration Form ADV, Part II. IV. UPON REQUEST, a. Copies of all documentation in support of any buy, sell or hold decision. b. Evidence of suitable insurance coverage of the investment manager s fiduciary responsibilities. V. AS A MATTER OF COURSE, a. Notice of material changes in the manager s outlook, policy, and tactics. b. Notice of material changes infirm ownership, organizational structure, financial conditions, senior staffing, and management. c. Notice of involvement in any investment related litigation or regulatory investigation. C. PROXY VOTING The Trustees will obtain a copy of the proxy voting policy of any equity mutual funds used. The President or Treasurer of the Relief Association shall be responsible for voting proxies of all mutual funds. For any separately managed accounts, the Investment Managers are responsible for voting all proxies for the exclusive benefit of the Plan. All proxies will be forwarded to the appropriate Investment Manager, who will designate the proxy issues Routine or non-routine. Routine items are not expected to have a material adverse affect on the price of the security and will not substantially affect the rights or privileges of the security. Routine items will be voted in favor of company manager s recommendation. Non-routine issues include: 1. Acquisition, mergers and spin-offs. 2. Significant changes in the Articles of Incorporation or By-laws, such as antitakeover provisions, poison pills and rights issues. 3

5 3. Increases in authorized shares, common and preferred. 4. Golden Parachutes or other unusual benefits to be contingent upon the merger or acquisition of a particular company. The Money Managers will research all non-routine issues, and vote the Plan s shares according to their fiduciary duty and the legal requirements binding the Plan s proxy votes. The Money Managers will keep summaries of their votes on all non-routine issues, as well as document that all proxies are being voted. These summaries will be sent to the Trustees. D. BROKERAGE The Money Managers will use their best judgment to obtain brokerage services based upon the twin considerations of the best execution and the lowest net cost to the Plan. 4. INVESTMENT OBJECTIVES The primary objective of the Fund is to achieve real growth in the purchasing power of the assets sufficient to pay benefits when they come due. The Fund will therefore be invested to achieve growth of capital through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income. A. Time Horizon Progress of the Fund against its return objectives; will be measured over a 12-month market cycle. B. Return Goal The Fund should earn a total return (income plus net realized and unrealized gains and losses) equal to or greater than that achieved by a customized index reflecting returns of the appropriate component asset class market benchmarks (e.g. Wilshire 5000 EAFE, Lehman Brother Aggregate, etc.) Combined and weighted by the monthly proportions each asset represents in the Plan s total portfolio over the market cycle. C. Volatility The volatility of total portfolio returns should be monitored and controlled. In general, higher-than-market volatility for the Total Plan and each component is permitted only to the extent that commensurate returns in excess of the appropriate market benchmark are generated. D. Asset Allocation I. Allocation Percentages 4

6 It is expected that the Plan will be invested in stocks, bonds, and cash equivalents. The Trustees are responsible for distribution assets according to the following asset class market value weighting guidelines. Investment Minimum Maximum Domestic Equities 15% 60% International Equities 0% 15% Fixed Income 25% 60% Cash 0.5% 60% II. Rebalancing Plan The desired allocation will be maintained using cash flow to rebalancing the split among the asset classes and mutual funds. If these cash flows are not sufficient to bring the split within the acceptable ranges, the Trustees may arbitrarily balance the component weightings to the desired level at its discretion. In extreme capital market environments the Money Manager of any separate accounts may decrease commitment to either stocks or bonds with the expectation that such a move will be justified to Trustees in writing and will result in increase long-term performance for the Fund. E. Asset Guidelines I. EQUITIES a. Diversification No more than 5%of the manager s portfolio at cost and 10% at market value shall be invested in any one company or mutual fund. b. Capitalization (number of common shares outstanding multiplied by the current market price). i. Large Capitalization Mandate The average market capitalization of the equity portfolio will exceed $3 billion ii. Small Capitalization Mandate Only securities of companies with market capitalization above $50 million but below $1.5 billion are permissible. The average market capitalization of the equity portfolio will be below $1.0 billion. c. Permissible Universe i. Common stocks or American Depository Receipts (ADRs) listed on a major U.S. Exchange with credit ratings, which meet or exceed BBB of Standard & Poor s and/or a BBA-1 rating from Moody s. 5

7 ii. Common stocks traded through NASDAQ which meet the credit rating requirements outlined in (a) above. iii. Securities convertible into common stock iv. No-load mutual funds, including international stock funds v. Institutional pooled funds d. Holdings Not Permissible Any category of equity that is not listed above is not permissible for investment without prior written approval of the Trustees. II. FIXED INCOME a. Diversification No more than 10% of an investment manager s bond portfolio at cost shall be invested in the securities of any one issuer. There shall be no such limit upon U.S. government securities or Government National Mortgage Association (GNMA) securities, or collateralized mortgage obligations ( CMO ) that are collateralized entirely by GNMA securities. Securities issued by Federal National Mortgage Association (FNMA) Federal Farm Credit Agency and other securities that not fully guaranteed by the U.S. Government, and rated AAA (as defined by S&P or Moody s), shall be subject to a 25% cost value limitation. Other Agency Securities not rated AAA or not fully guaranteed by the U.S. Government will be governed by the 10% guideline. b. Structural Risk Portfolio holdings consisting of asset-backed or collateralized mortgage obligations will be tested against the Federal Financial Institutional Examination Council (FFIEC) guidelines defining High Risk securities. Under the current guideline, if an immediate and sustained shift in the Treasury yield curve of +\- 300 basis points result in a price sensitivity greater than 17%, an average life over 10 years, or an extension of the expected average life of four years, a security is considered to be High Risk. Asset-backed or collateralized mortgage-backed securities meeting the definition of High Risk are prohibited. Portfolio holding will also be tested against the National Association of Insurance Commissioners (NAIC) Flow Uncertainty Index (FLUX) ratings. No security carrying a FLUX rating greater than 10 will be permitted. c. Quality The average quality rating of bonds in the portfolio shall be at least AA, as defined by either S&P or Moody s. No issue may be held whose rating by either agency is less that Baa without the written consent of the Trustees. All issues 6

8 must be rated by at least one of these rating agencies; both agencies do not need to rate an issue for the issue to be an eligible investment. For split-rated securities, the higher rating will pertain to this guideline. If issues are downgraded so as to violate these guidelines, the Manager will seek either written approval from the Trustees to continue holding the security, or should judiciously liquidate it. d. Duration The average effective duration of the bond portfolio shall not exceed 6 years and no holding may bear an effective duration of more than 30 years. e. Permissible Universe i. Debt securities issued or guaranteed by the U.S. Government its agencies or instrumentality s, or other sovereign investment grade rated issuers. ii. Corporate bonds, debentures and other forms of corporate debt obligations. iii. Insured bank certificates of deposit iv. Mutual funds v. Insurance company pooled funds and guaranteed rate investments f. Holdings not permissible Any category of fixed income security than is not listed above is not permissible for investment without prior written approval of the Trustees. g. Expenses The Trustees will monitor both management fees and administrative expenses, to ensure that expenses are with normal and customary tolerances. III. OTHER ASSETS Investment guidelines and performance standards for new investments in assets not specifically covered above will be set at the time of investment after discussion by the Trustees and other individuals, as appropriate. 5. PERFORMANCE STANDARDS A. BENCHMARK INDICES I. Each component of the Plan must earn a rate of return greater than its corresponding benchmark index. 7

9 Fund Component Domestic Equity Wilshire 5000 International Equity Domestic Bonds Benchmark Index MSCI Europe, Australian, Far East Index (EAFE) Lehman Brothers Aggregate Bond Index II. The Total Plan Policy Index is constructed by selecting appropriate indices (e.g. Wilshire 5000 EAFE, Lehman Brother Aggregate, etc.). Combined and weighted by the monthly proportions each asset represents in the Plan s total portfolio over the market cycle. The total return of the Fund is expected to exceed the total return of the Policy Index. B. RISK-ADJUSTED PERFORMANCE The Sharpe Ratio divides the excess return (portfolio return less risk-free return) by the variance of total return, and will be the measure of risk-adjusted performance. Over a market cycle, the Sharpe Ratios for the total Fund and each component are expected to exceed the Sharpe Ratios for the appropriate comparative indices, including the customized benchmark indices, the Wilshire 5000, MSCIEAFE Index, and the Lehman Brothers Aggregate Bond Index. C. STATISTICAL UNIVERSE OF SIMILAR FUNDS The total returns for the Plan and for each investment component will be compared to the distribution of returns represented by an appropriate statistically valid universe. Over the market cycle (one year), the Total Fund and each component are expected to rank in the top 50% of the appropriate universe. D. AUTOMATIC REVIEW PROCESS Investment performance reviews of all funds will be conducted annually to ascertain progress against the return objectives of each component. The reports cover four basic areas: returns, comparisons of returns to benchmarks, diagnostic risk analyses, and compliance with relevant policies and objectives. Beyond these customary review certain circumstances or material events, as outlined below will trigger automatic formal reviews and where appropriate, reconsideration by the Trustees of the appropriateness of continuing use of the affected manager in the investment structure. None of these circumstances or events shall serve as automatic causes for changing investment manages, but will merely indicate the need for review. I. Disappointing Relative Performance a. Three-year Sharpe Ratio (excess return divided by variance of returns) is below benchmark 8

10 b. Five-year Sharpe Ratio is below benchmark II. Disappointing Risk-Adjusted Performance a. Three-year Sharpe Ratio (excess return divided by variance of returns) is below benchmark b. Five-year Share Ratio is below benchmark III. Fund Management Organization Changes a. Turnover of portfolio manager of other personnel significant to the portfolio management process b. Ownership change c. Involvement in relevant regulatory investigation or litigation IV. Deviation from Investment Methods that built Historical Records a. Aggregate assets in product are insufficient to ensure broad diversification, efficient trading, and economies of scale b. Assets in product grow too large to be managed in manner similar to methods that built historical record. c. Portfolio characteristics do not match stylistic expectations d. Significant increase in fees. V. Relative Performance in Excess of Expectations a. Percentile ranking of portfolio s three-year cumulative return is in the upper quintile (above the 20th percentile) b. Percentile ranking of portfolio s quarterly return versus peer portfolios is in the upper decile (above the 10th percentile) E. CASH AND CASH EQUIVALENTS The cash portion of the Plan shall be invested in checking, bank savings accounts, money market funds, certificate of deposit or emphasizing safety of principal. Money held in cash shall be viewed as essentially riskless. I. Maturity No fund shall have more than one year to expected maturity at the time of purchase. The maximum average expected maturity of the Money Market Funds shall be 1 year. Commercial Paper must mature no more the 270 days from the date of purchase. 9

11 II. Quality Any fund used shall hold securities issued by the U.S. Government or its agencies; commercial paper rated at lease A1/P1"; banker acceptances issued by banks with outstanding commercial paper rated at lease A1/P1". F. COMMINGLED OR MUTUAL FUNDS (State Board of Investment) As the Trustees cannot direct the particular investment policies of any commingled or mutual funds used in the Plan investment structure, the broad guidelines outlined below will govern the selection of appropriate vehicles. I. Aggregate Assets a. Minimum The Trustees will determine for each fund provider a threshold level of aggregate assets (including both the assets in the pool or fund and any separate account assets managed similarly) sufficient to ensure board diversification, efficient trading, and economies of scale in administrative expenses and transaction costs. b. Maximum The Trustees will determine for each fund provider whether the aggregate assets (including both the assets in the pool or fund and any separate account assets manage similarly) have reached a size where they are causing the asset manager too deviate from the portfolio construction methods upon which the performance record was built. 10