CERN/PFIC/21.6/Approved Original: English 10 September 2013 ORGANISATION EUROPÉENNE POUR LA RECHERCHE NUCLÉAIRE CERN EUROPEAN ORGANIZATION FOR NUCLEAR RESEARCH PENSION FUND STATEMENT OF INVESTMENT PRINCIPLES AND INVESTMENT POLICY
1 TABLE OF CONTENTS 1 Purpose and Scope 2 2 Definitions 2 3 Roles and Responsibilities 3 4 Investment Return Objective 3 5 Investment Philosophy: Capital Preservation 4 6 Investment Strategy 4 6.1 Natural Strategic Asset Allocation 4 6.2 Dynamic Asset Allocation 4 6.3 Aggregation of capital preservation strategies 5 6.4 Diverse sources of return 5 7 Portfolio Construction 5 8 Risk Monitoring 5 9 Independent Actuarial Source 6 10 Single Global Master Custodian 6 11 Investment Considerations 6 11.1 Time horizon 6 11.2 Active management 6 11.3 Sensitivity to market cycles 7 12 Eligible Investments 7 13 Costs 7 14 Standards of Care 7
2 1. PURPOSE AND SCOPE The purpose of the Statement of Investment Principles and Investment Policy ( SIPIP ) is to outline the principles governing the investment policy of the CERN Pension Fund (the Fund ). The Fund s investment policy and processes, based on the principles set out in this document are detailed in the Investment Guidelines, which shall include provisions on, among others, eligible investments and financial instruments as well as investment restrictions and limits. 2. DEFINITIONS Natural Strategic Asset Allocation (Natural SAA or NSAA): Long term Strategic Asset Allocation, which accounts for, amongst others, the liabilities of the Fund, assumptions related to assets and market risks. Dynamic Asset Allocation (DAA): Asset allocation adopted in response to prevailing market conditions. PFGB: Pension Fund Governing Board. The functions of the PFGB are specified in the Article I 2.05 of the Rules of the Pension Fund. PFIC: Pension Fund Investment Committee. The functions of the PFIC are specified in the Article I 2.10 of the Rules of the Pension Fund. PFMU: Pension Fund Management Unit, in charge of day-to-day management of the Fund and supervised by the CEO (Article I 4.05 of the Rules of the Pension Fund). CEO: Pension Fund Chief Executive Officer. The functions of the CEO are specified in the Article I 2.08 of the Rules of the Pension Fund.
3 3. ROLES AND RESPONSIBILITIES NB: This paragraph summarizes the roles and the responsibilities of the PFGB and PFIC relevant to the scope of this document. The PFGB: Approves the risk limits for investments that the Fund can be exposed to, based on recommendation of the PFIC. Approves the risk measures, based on recommendation of the PFIC. Sets the investment return objectives. The PFIC: Proposes the risk limits taking into account, among others, investment objectives, the liabilities of the Fund, assumptions on demographic development, funding status, expected contributions and CERN s ability to make additional contributions, assumptions on market conditions and inflation, and any other relevant assumptions laid out in the Fund s most recent actuarial study or otherwise available to be taken into consideration. Proposes the risk measures. Approves the Investment Guidelines. The PFIC may delegate to the CEO the implementation of the asset management process. 4. INVESTMENT RETURN OBJECTIVE The Fund s investment return objective is to meet or exceed the actuarial return objective. The investment return objective is approved by the PFGB, on recommendation by PFIC, the Actuary and the CEO. It is reviewed on a regular basis or when deemed necessary.
4 5. INVESTMENT PHILOSOPHY: CAPITAL PRESERVATION The Fund shall adopt a capital preservation investment philosophy. This approach targets positive returns, while limiting the downside risk of the Fund. The capital preservation strategy shall be deployed not only at the overall Fund level, but also within the individual investment sub-strategies that compose the Fund. 6. INVESTMENT STRATEGY Natural Strategic Asset Allocation The Natural Strategic Asset Allocation is the Fund s default asset allocation. It shall be approved by the PFIC and reviewed on a regular basis, or when deemed necessary. The objective of the NSAA is to meet the investment return objective of the Fund, within the risk limits set by the PFGB. Deviations from NSAA are managed through an appropriate process, described in the Investment Guidelines. Dynamic Asset Allocation The Fund shall strive to dynamically adapt its investment exposure (also known as Dynamic Asset Allocation) to prevailing market conditions, with the objective to preserve capital. Consequently, the Fund s actual asset allocation may deviate from NSAA. The Fund s DAA shall be based on a thorough top-down macroeconomic analysis process. Within this process, priority shall be given to risk analysis, with the objective to preserve capital. Risk analysis shall include assessing market risks as well as investment themes and opportunities. The macroeconomic analysis process may lead to investment decisions with the objective to manage the exposure of the Fund to market risks.
5 Aggregation of capital preservation strategies The capital preservation strategy of the Fund shall be implemented through an aggregation of capital preservation sub-strategies. Therefore, the PFMU will focus on the selection and monitoring of external managers with a proven expertise in capital preservation strategies. Diverse sources of return The Fund shall derive its return from a broad range of investment opportunities based on different risk/return characteristics, in order to ensure diversification. 7. PORTFOLIO CONSTRUCTION The Fund s portfolio shall be constructed and managed with the objective of remaining at all times within the risk limits approved by the PFGB, while striving to attain the Fund s investment return objective. The positioning of the portfolio relative to the NSAA may be adjusted, based on, amongst others: top-down macroeconomic analysis; identification of investment opportunities exploiting specific investment themes; diversification requirements at the Fund level; the need to protect parts of the portfolio from potential losses; risk management considerations; liquidity constraints; operational considerations; other relevant considerations determined by the PFIC or the PFGB. 8. RISK MONITORING The appropriate risk measures are proposed by PFIC and approved by PFGB. The Fund s actual risk shall be calculated and reported by an independent source in order to monitor compliance with the risk limits of the Fund.
6 9. INDEPENDENT ACTUARIAL SOURCE Liability considerations shall be in line with the latest Actuarial Study performed by the Fund s independent Actuary. 10. SINGLE GLOBAL MASTER CUSTODIAN To the extent feasible, all assets shall be held through a single global master custodian, which shall provide a transparent and independent reporting of asset positions to the Fund s bodies and to the PFIC. 11. INVESTMENT CONSIDERATIONS The following generally holds when selecting and managing investments: The time horizon should be adapted to the market conditions or to the circumstances of the Fund. Capital preservation strategies require active management. The risk and return of investment strategies are sensitive to market cycles. Time horizon The Fund s investment time horizon shall be adapted to the Fund s actuarial situation. In addition, as the Fund has a low tolerance to downside risk, it shall adapt its asset allocation according to market conditions. Active management Implementing capital preservation strategies requires investment managers to actively manage assets entrusted to them within the agreed upon guidelines to protect the capital and limit potential losses.
7 Such managers are not in the majority, but it shall be the Fund s responsibility to identify and gain access to them. To this purpose, the Fund shall implement a thorough process for the identification, selection, due-diligence, and monitoring of such managers. Sensitivity to market cycles Risk and return of investment strategies are sensitive to market cycles. Therefore, it is the objective of the PFMU to identify the appropriate investment strategy(ies) in addition to the appropriate investment manager. This requires a combination of a thorough top-down macro-economic analysis, a robust portfolio construction process, and the ability to select investment managers able to meet the investment objectives of the Fund. 12. ELIGIBLE INVESTMENTS The Fund may invest in a wide range of asset classes including listed equity, government and non-government debt, currencies, money market instruments, property, commodities, private equity. The Fund may also invest in strategies with absolute return focus. Investments may be undertaken directly (internally), or indirectly (e.g., via funds or investment agreements), in physical assets or derivatives. Any investment restrictions shall be set out in the Investment Guidelines. 13. COSTS The capital preservation strategy will inevitably incur the following costs: hedging costs; opportunity costs; management, including performance fees. 14. STANDARDS OF CARE The PFMU and the members of the Fund bodies and of the PFIC shall abide by the Fund s Code of Conduct (CERN/2824).