Investment Principle for the Long-Term Benefits Fund

Transcription

1 Investment Principle for the Long-Term Benefits Fund (Established on July 16, 2001) (Updated on August 5, 2004) (Updated on December 28, 2005) (Updated on March 29, 2006) (Updated on March 9, 2009) (Updated on June 1, 2009) (Updated on December 27, 2010) (Last updated on December 25, 2013) This principle sets forth basic investment policy regarding the long-term benefits fund ( LTBF ) of the Pension Fund Association for Local Government Officials (the Association ) in accordance with the provisions of Article 16, Paragraph 4, of the Enforcement Order of the Local Public Service Personnel Mutual Aid Association Act, which applies mutatis mutandis to Article 21-4 of the same Order. I Direction of the investment 1. Concept Since the LTBF of the Association is precious resources for funding long-term benefits, it shall be managed by safe and efficient methods from the long-term perspective. 2. Objectives of investment (i) To secure investment returns required for the stable fiscal management of the mutual aid pension of local government officials (ii) To secure the investment return required for providing benefits under Article 38-8, Paragraph 3, of the Local Public Service Personnel Mutual Aid Association Act. 3. Investment target The target of total investment return from the long-term perspective is to exceed the assumed rate of return stipulated by the Minister of Internal Affairs and Communications in actuarial review, which are conducted at least every five years. 1

2 If the investment return of the LTBF falls below the assumed rate, efforts to minimize the deviation shall be made; however, excessive investment risks must not be taken for that purpose. II Asset mix from long-term investment perspective 1. Benchmark portfolio (1) Establishment of a benchmark portfolio In order to achieve the objectives of investment set forth in I-2, a benchmark portfolio is established from the long-term perspective, and efforts shall be made to maintain asset allocation in accordance with the portfolio. (2) Benchmark portfolio The benchmark portfolio shall be as follows. Domestic Domestic Foreign Foreign Short-term Total bonds stocks bonds stocks assets 64.0% 14.0% 10.0% 11.0% 1.0% 100% (Note) (i) Domestic bonds include life insurance (limited to general account), and mandatory investment assets. (ii) Market value, in principle, is used. (iii) Considering fluctuations in market prices, among other factors, the bands of permissible deviations are set as follows: ± 10% for domestic bonds, ± 5% for domestic stocks, ± 5% for foreign bonds, ± 5% for foreign stocks, and + 3% / 1% for short-term assets. 2. Benchmark portfolio management In principle, investment assets are marked to market every month to confirm that they are within the predetermined bands of permissible deviations against the benchmark portfolio. 3. Review of benchmark portfolio The benchmark portfolio will be revised as necessary upon annual validations of assumptions and other factors used at the time of establishing the 2

3 benchmark portfolio. III Administration and management of assets 1. Fund management plan In managing the LTBF, the annual fund management plan at the beginning of each fiscal year and the quarterly asset management plan on a quality basis shall be prepared. The fund management plans shall set forth the following. (1) Outlook for profit/loss and the LTBF (i) Beginning balance of the LTBF (ii) Total revenues (iii) Total expenditures (iv) Profits for the term (v) Closing balance of the LTBF (vi) Investment return (2) Outlook for cash flows (i) Closing balance (ii) Expected revenues a. Paid-in money from associations b. Bond principal and interest c. Interest on deposits d. Other revenues (iii) Expected expenditures a. Pension insurance contributions b. Money transferred to the accounting on administration c. Mandatory investment d. Voluntary investment (iv) Balance brought forward or closing balance (3) Investment policy (i) Mandatory investment a. Acquisition of municipal bonds or bonds issued by Japan Finance Organization for Municipalities b. Deposits with the Fiscal Loan Fund 3

4 (ii) Voluntary investment a. In-house investment b. Trust investment a) Specified money trust, specified comprehensive trust, individually operated designated money trust, individually operated designated comprehensive trust b) Group pure endowment insurance (4) Annual and monthly fund management schedules 2. Mandatory investment (1) Principles In accordance with Article 21-3 of the Enforcement Order of the Local Public Service Personnel Mutual Aid Association Act, the Association strives to invest in municipal bonds or bonds issued by the Japan Finance Organization for Municipalities, as well as making deposits with the Fiscal Loan Fund. (2) Entrustment of asset administration a. The Association may entrust the administration of mandatory investment assets to financial institutions. Institutions entrusted with administration of such assets ( Custodian of Mandatory Investment Assets ) shall be subject to the following requirements. (i) Stipulate in a contract or other similar documents that the Custodian of Mandatory Investment Assets has the obligation to faithfully make best efforts solely for the benefit of the Association, the trustor, with professional care in administrating and managing the Association s assets. (ii) Strictly administer and take custody of the Association s assets, separating them from other trust assets. (iii) Pay utmost care in securities delivery and settlement. (iv) Give sufficient considerations to credit risk, administrative capability, costs and the like when re-entrusting custody services. (v) Submit data and provide explanations regarding the status of assets administration at the end of every month and, on an as-needed basis, necessary data. 4

5 (vi) Observe laws and regulations, contracts and the like, establishing structures to ensure the observance. b. If the Custodian of Mandatory Investment Assets has engaged in any act that violates laws and regulations, contracts, and the like, the Association shall promptly request a report and issue instructions if necessary 3. In-house investment (1) Principles In order to contribute to the secure and efficient management of the LTBF, the Association administers and manages part of the fund in accordance with principles for long-term and short-term (temporary) investments as follows. a. Long-term investment Strive to make favorable investments in public and corporate bonds over the long term, taking into account the following points. (i) Creditworthiness of issuers and market liquidity (ii) Coupon rate, acquisition price, current maturity (iii) Interest outlook b. Short-term (temporary) investment Short-term investments, which should be limited to the minimum amount, are made for the purpose of facilitating efficient allocation of assets for the long-term benefits accounting. Efforts should be made to make favorable investments, with consideration of security and liquidity, investable period, and short-term interest trends (2) Financial institutions The separately established standards shall be observed in selecting partner financial institutions for in-house investments (short-term (temporary) and long-term investments), taking into account risks and other factors. (3) Long-term investment a. Investment asset The following securities denominated in the yen shall be the investment assets. (a) Domestic bonds 5

6 (b) Municipal bonds (c) Bonds issued by juridical persons under special Acts (excluding those listed in (f)) (d) Corporate bonds Bonds rated A or above (including bonds with new share acquisition rights) by external credit assessment institutions ( ECAIs ) listed in Article 2 of the Rating agencies and categories corresponding to ratings by ECAIs stipulated separately by the Commissioner of the Financial Services Agency in accordance with criteria for judging whether the equity capital of a bank is appropriate in light of circumstances such as assets held by the bank under Article 14-2 of the Banking Act (Notice No. 28 of 2007, the Financial Services Agency) (e) Securities or certificates issued by foreign countries or foreign juridical persons Of securities or certificates, those listed in the following (i) through (iii) (i) Yen-denominated bonds (including euro-yen, and the same applies hereinafter) issued by International Bank for Reconstruction and Development, Asian Development Bank, Inter-American Development Bank, African Development Bank, European Bank for Reconstruction and Development, or International Finance Corporation (ii) Yen-denominated bonds issued by foreign governments (including municipal governments), yen-denominated bonds issued by international organizations under treaties (excluding those issued by organizations listed in (i)), or yen-denominated bonds that are equivalent to government guaranteed bonds and rated AA or above by ECAIs (iii) Yen-denominated bonds issued by Japanese companies or locally incorporated foreign subsidiaries of Japanese companies rated A or above by ECAIs (f) Specified bonds Of specified bonds provided for in Article 2, Paragraph 7 of the Act of Securitization of Assets (Act No. 105 of 1998) ( Specified Bonds ), those rated A or above by ECAIs (g) Beneficially securities of loan trust 6

7 b. Administration and management considerations (a) Diversified investment In the case of acquiring bonds other than government bonds, municipal bonds, and bonds issued by juridical persons under special Acts (excluding bank debentures), investments in bonds issued by a single issuer shall not exceed 10% of the in-house investment assets. (b) Response to a credit rate cut of acquired bonds If the ratings by all ECAIs for bonds other than government bonds, municipal bonds, and bonds issued by juridical persons under special Acts fall below the designated rating after acquisition, necessary measures, such as selling, shall be taken, with full consideration given to the credit risk of issuers. In the case of continuing to hold such bonds, they should be checked regularly for credit risk and the like. (c) Structured bonds Structured bonds are included in investment assets if the structure of bonds do not give rise to principal risk, and the total amount of structured bonds of similar structure shall not exceed 10% of the in-house investment assets. (4) Short-term investment Investment assets shall include short-term government bonds, financial bills, deposits, negotiable certificates of deposits, commercial papers (including repurchase agreements) rated A or above by ECAIs, and MMF. (5) Other investments Investments in public and corporate bond investment trusts (excluding MMFs), securities in trust, and the like shall be made with consideration of cancellation fees and other expenses in a comprehensive manner, upon full review of the risks and returns of the investment assets. (6) Entrustment of asset administration a. The Association may entrust the administration of in-house investment assets to financial institutions. b. The provisions of 2, (2) apply mutatis mutandis to the case of entrusting the administration of in-house investment assets to financial 7

8 institutions. In such case, the term mandatory investment assets in the provisions shall be replaced by in-house investment assets. 4. Entrustment of investment management The following items shall be observed with respect to specified money trusts and specified comprehensive trusts under discretionary investment management contracts with investment advisory firms, as well as individually operated designated money trusts and individually operated designated comprehensive trusts by banks engaged in trust services. The Association shall have any organization to which it entrusts management of assets ( Investment Manager ) and administration of assets ( Custodian of Trust Investment Assets ) administer and manage assets in accordance with this Policy. (1) Fiduciary responsibility The Investment Manager and the Custodian of Trust Investment Assets ( Trustee ) shall stipulate in a contract or other similar documents that they have the obligation to faithfully make best efforts with professional care solely for the benefit of the Association who entrusts, in administrating and managing the Association s assets. (2) Exercise of voting rights Shareholders voting rights shall be exercised in a way so that investee companies manage their business to maximize shareholders benefits over the long term. If the Association gives instructions to exercise voting rights individually, the Trustee shall follow the instructions. If individual instructions are not given, the Trustee shall exercise voting rights in accordance with the Guidelines for Exercising Shareholders Voting Rights presented by the Association. The Association shall request that the Trustee report on the status of exercising shareholders voting rights. (3) Instructions on the asset mix that serves as standards for the 8

9 Investment Manager ( Standard Asset Mix ) Instructions on the Standard Asset Mix shall be given in accordance with the characteristics and evaluation of the Investment Manager, taking into consideration the asset structure and the diversification of investment style based on the benchmark portfolio. If it is considered appropriate to change the Standard Asset Mix, instructions on the change shall be given promptly. (4) Matters to be observed Investment assets, investment methods, numerical investment targets, and risk management indicators proposed by the Investment Manager and agreed by the Association, as well as benchmarks designated by the Association ( Benchmarks ) and other investment guidelines regarding the following items, shall be presented; the observation of these shall be managed with the necessary instructions provided. (i) General matters a. Standard Asset Mix The Investment Manager must observe the Standard Asset Mix instructed by the Association. b. Registration of investment style, etc. The Investment Manager must clarify the investment philosophy by asset class and invest style and process based on it, register them with the Association, and observe the registered matters. The Investment Manager shall consult with the Association when making changes to the registered matters. c. Thorough risk management The Investment Manager must vigorously manage risks, while complying with the investment guidelines presented by the Association. d. Establishment of legal compliance frameworks The Investment Manager must observe laws, regulations, contracts, investment guidelines and the like, and establish frameworks to ensure the observance. e. Investment considerations The Investment Manager must consider the following points when investing in securities. (a) In addition to investing upon sufficient investigation and analysis, 9

10 properly diversify investments. With respect to assets denominated in foreign currencies, select countries and currencies, giving full consideration to political and economic stability, as well as settlement systems, trading regulations, tax systems, and other characteristics of the market. (b) When putting individual blocks of shares in the portfolio, liquidity must be fully considered. (c) When acquiring domestic stocks, domestic bonds, (excluding government bonds, municipal bonds, and bonds issued by juridical persons under special Acts), foreign stocks, and foreign bonds (excluding those of Benchmark constituent countries), investments in a single issuer must be capped at 10% of the market value of the asset class. If this cap is exceeded for rational reasons, such as that the market value weighting of individual stocks in Benchmarks has exceeded the cap, this must be reported. (d) Pay utmost attention to market impacts and other similar factors when trading, and make best efforts to avoid incurring unnecessary costs. (e) When placing an order with the parent company or the parent group s or its own group s securities firms and their overseas subsidiaries, they must be registered in advance. (f) When selecting securities firms and other trading partners, pay sufficient consideration to their creditworthiness, among other factors, and report their transaction track record. f. Derivatives transactions With respect to the handling of securities, currency and interest rate futures, forward exchange contracts, index futures or options, or currency or interest rate swaps ( Derivatives Transactions ), the Investment Manager must pay attention to the following points. (a) Derivatives transactions are conducted with the aim of temporary hedging price fluctuation risk in underlying asset such as stocks, bonds, and foreign exchange rates ( selling hedge ) and temporary substituting underlying assets ( buying hedge ). Hedging should not be used for speculative purposes. However, derivatives transactions may be conducted for purposes other than hedging in accordance with the provisions of the investment guidelines 10

11 presented by the Association. (b) With respect to notional principals of derivatives transactions for the purposes of short and long hedging, it should be, in the case of net short hedging, within the underlying assets that are currently held or to be held in the future for certain and, in the case of net long hedging, within the surplus fund currently held or to be held in the future for certain. (ii) Domestic stocks Investment assets shall be stocks listed on domestic securities exchanges and stocks listed on the OTC market. (iv) Domestic bonds a. Investment assets shall be the following yen-denominated bonds. (a) Domestic bonds (including standardized instruments deemed to be domestic bonds under Article 108-2, Paragraph 3, of the Securities and Exchange Act; however, limited to those for hedging purposes, and the same applies hereinafter), municipal bonds and bonds issued by juridical persons under special Acts (excluding those listed in (d)). (b) Corporate bonds rated BBB or above by any of ECAIs. (c) Securities or certificates issued by foreign governments or foreign juridical persons and rated A or above by any of ECAIs. However, in accordance with the provisions of the investment guidelines presented by the Association, those rated BBB or above may be included in the investment asset. (d) Specified Bonds rated A or above by any of ECAIs. b. If ratings by all ECAIs for bonds other than government bonds, municipal bonds and bonds issued by juridical persons under special Acts fall below the ECAI rating designated in a-(b) through a-(d) after acquisition, necessary measures, such as selling, shall be taken with full consideration given to, among other factors, the credit risk of issuers. In the case of continuing to hold such bonds, the total amount of such bonds is capped at 5% of the market value of domestic bond assets, and the holding status must be reported to the Association. (iv) Foreign stocks Investment assets shall be Benchmark constituents and stocks issued by firms of Benchmark constituent countries denominated by the currencies 11

12 of Benchmark constituent countries. However, investments may be made in other issues or depositary receipts and the like in accordance with the investment guidelines presented by the Association. (v) Foreign bonds a. Investment assets shall be bonds denominated by currencies of constituent countries of Benchmarks. However, investments may be made in bonds denominated in currencies of countries that are not constituents of Benchmarks in accordance with the provisions of the investment guidelines presented by the Association. b. Issues rated A or above by any of ECAIs (excluding government bonds of Benchmark constituent countries). However, investments may be made in bonds rated BBB or above in accordance with the provisions of the investment guidelines presented by the Association. c. If ratings by all ECAIs for the bonds stipulated in b above fall below the designated rating under the investment guidelines presented by the Association after acquisition, necessary measures, such as selling, shall be taken with full consideration given to the credit risk of issuers. In the case of continuing to hold such bonds, the total amount of such bonds is capped at 5% of the market value of foreign bond assets, and the holding status must be reported to the Association. (vi) Bonds with new share acquisition rights Bonds with new share acquisition rights shall be treated as substitute assets of domestic stocks or domestic bonds and shall not be treated as separate assets. (vii) Nontraditional assets (alternative investment) Investments in nontraditional assets, such as property derivatives and private equity, shall be reviewed carefully for risk-return characteristics, liquidity, evaluation methods, and the like to determine whether they are appropriate as investment assets based on the results of review, and investment in such assets shall be limited to certain amount of fund so that they will not have any significant impact on the portfolio as a whole. (5) Asset administration considerations The Custodian of Trust Investment Assets shall be subject to the following requirements. (i) Strictly administer and take custody of the Association s assets 12

13 separately from other trust assets. (ii) Pay utmost attention to securities delivery and settlement. (iii) Give sufficient consideration of the credit risk, administrative capability, costs, and the like when re-entrusting custody services. (iv) Submit data and provide explanations regarding the status of assets administration at the end of every month and, on an as-needed basis, necessary data. (v) Observe laws and regulations, contracts, and the like, establishing structures to ensure the observance. (6) Reporting on investment status The Association shall have the Investment Manager submit data quarterly in accordance with the form stipulated separately, conduct interviews on investment performance summary and investment policy, and, if necessary, give investment instructions. In addition, the Association shall have the Investment Manager submit monthly data in accordance with the form stipulated separately, and request it to explain on the investment status, investment operations, and the like on an as-needed basis. (7) Other reports The Association shall promptly request any Trustee that has violated laws and regulations, contract, the investment guidelines, and the like, to report such violation, and give instructions to the Trustee as necessary. 5. Investment in group pure endowment insurance (1) Life insurer selection criteria Life insurers shall be selected from those with total assets of one trillion yen or more, taking into consideration their financial standing, special dividends, and the like in accordance with the selection criteria separately established for partner financial institutions. (2) Setting up group pure endowment insurance and additional funding In the case of investing in pure endowment insurance, individual agreements shall be concluded with life insurance companies selected in accordance with the criteria stipulated in (1), and the investment amount 13

14 and additional funding shall be determined in consideration of their individual total assets, financial position, special dividends, and the like. (3) Insurance policy cancellation In the event of any significant change to the assumed rate of return, financial position of insurance companies, and other investment environments, the whole or part of pure endowment insurance policies may be cancelled in accordance with the provisions of the insurance policy. (4) Separate account rider In the case of adding a separate account rider to a group pure endowment insurance policy, the provisions of section 4 Entrustment of investment management above and V Matters regarding selection and evaluation of Investment Managers shall apply mutatis mutandis. However, (5) of 4 above shall be excluded. IV Evaluation of investment performance Investments of the LTBF shall be evaluated annually in a comprehensively manner based on, in addition to the actual investment return, the asset composition by market value, in principle, taking into consideration the roles of each investment result and method. V Matters regarding selection and evaluation of Investment Managers 1. Selection of Investment Managers Investment Managers shall be selected based on the benchmark portfolio upon conducting interviews on the below points and other details, with consideration given to the diversification of investment styles and the like of the Association as a whole in a comprehensive manner. (i) The Investment Manager s business standing (e.g., capital, financial position, number of employees, customers) is found to be stable. (ii) The Investment Manager s investment philosophy, investment method, investment structure, legal compliance structure, and other qualitative evaluation results are favorable. (iii) The Investment Manager s investment performance is favorable for at least certain period. 14

15 2. Selection of Custodians Custodians of Mandatory Investment Assets, custodians of in-house investment assets, and Custodians of Trust Investment Assets (collectively, Custodian Institution ) shall be selected from financial institutions that are engaged in trust services and meet the following criteria. (i) The Custodian Institution s business standing (e.g., capital, financial position, number of employees, customers) is found to be stable. (ii) The Custodian Institution s asset administration status is favorable. (iii) The Custodian Institution has the structure for complying with laws and regulations. 3. Evaluation of Investment Managers Investment Managers shall be evaluated comprehensively through both qualitative and quantitative assessments. (1) Quantitative assessment In addition to their excess return against Benchmarks and indicators that incorporate the magnitude of risks taken to achieve the excess return, Investment Managers are assessed by other methods appropriate for their investment styles. (2) Qualitative assessment In addition to the investment quality of their portfolios and communication skills, Investment Managers are assessed by other methods appropriate for their investment styles. 4. Evaluation of Custodian Institutions Custodian Institutions shall be evaluated in a timely manner through qualitative assessment with respect to their asset administration status and structures for complying with laws and regulations, and their competence shall be determined. 5. Addition and reduction of entrusted amount Any addition to the entrusted amount or reduction of the amount, including contract cancellation, shall be made based on the evaluation results of V, 3. However, an addition or reduction to the entrusted amount may be made in 15

16 the below cases, prioritizing the policy decisions of the Association, regardless of the evaluation results of the Investment Managers. (i) Adjusting the asset composition of the Association as a whole due to a significant deviation from the benchmark portfolio (ii) Making adjustments upon considering the diversification of investment styles or other similar aspects If any Investment Manager is found to have violated laws and regulations, contracts, the investment guidelines, and the like or a significant investment issue occurs, timely action shall be taken upon considering such options as reducing the entrusted amount (including cancelation of the contract with the Investment Manager) and revising the investment guidelines. VI Duties of persons in charge of investment management In managing the LTBF, it must be especially noted that the fund is precious resources to fund long-term benefits of the Association members, and the fulfillment of fiduciary responsibility (the duty of loyalty and the duty of care) by all persons involved in the management of the LTBF must be ensured with clear accountability. VII Other necessary matters Publication of investment results Investment results must be published annually with respect to investment asset values by investment method and asset class (in principle, market values), valuation gain and loss, and investment returns. [DISCLAIMER] When there are any discrepancies between original Japanese version and English translation version, the original Japanese shall prevail. 16