FCCC Winter Workshop 2017.pptx Investment Policy Statements · Investment Policy Statements 1 An...

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2016 Florida Local Government Investment Seminar

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Investment Policy Statements

1

An Investment Policy Statement (IPS) is an important component of a

successful investment management program.

It provides the framework for effectively managing, monitoring and

evaluating the investment assets entrusted and describes a prudent

investment process, deemed appropriate by those responsible for oversight

of the assets.

Florida Statute Section 218.415 Governs Local Government Investment

Policies






Investment Policy Statements and Florida Statute

2

Florida Statute Section 218.415

Governs Local Government Investment Policies

Investment activity by a unit of local government must be consistent with a written

investment plan adopted by the governing body, or the respective principal officer of the unit

of local government

If no written investment policy, such activity must be conducted in accordance with

subsection (17) of 218.415

Any unit of local government shall have an investment policy for any public funds in excess

of the amounts needed to meet current expenses

Such policies shall be structured to place the highest priority on the safety of principal and

liquidity of funds.

The optimization of investment returns shall be secondary to the requirements for safety and

liquidity. Each unit of local government shall adopt policies that are commensurate with the

nature and size of the public funds within its custody.






Purpose & Key Considerations

3

Purpose Statement

The purpose of this Investment Policy is to adopt a written investment plan to implement

investment activity for the investment of any public funds in excess of the amounts needed to

meet the Town of XYZ’s current expenses.

OR

The purpose of this Investment Policy is to establish guidelines for investment of surplus

funds in a manner consistent with Chapter 218.415, Florida Statutes.






Delegation of Authority

4

Example – Delegation of Authority

The Finance Director, acting as the Town’s Investment Officer, under the supervision of the

Town Manager, shall be responsible for the implementation of this Investment Policy and for

managing the Town’s investment portfolio within its guidelines.

OR

The responsibility for providing oversight and direction in regard to the management of the

investment program resides with the Clerk of the Circuit Court.

The Board of County Commissioners will appoint an Investment Committee that will serve

in an advisory capacity and report to the Board of County Commissioners.

The Investment Committee will rely on the Clerk of the Circuit Court, the Finance Director

and their staff for support.

The Clerk may employ investment manager(s) to assist in investing, monitoring or advising

on some of the Board’s investment portfolio. Such investment managers must be registered

under the Investment Advisors Act of 1940.






Paying Attention?

5

II Framework






Scope

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(1) SCOPE — The investment policy shall apply to funds under the control of the unit of local

government in excess of those required to meet current expenses. The investment policy shall not

apply to pension funds or funds related to the issuance of debt where there are other existing

policies or indentures in effect for such funds.

Example: This statement of investment policy and guidelines applies to all investments of

XYZ’s pooled cash, which includes cash and investment balances of the

following funds: (list below)

The policies set forth do not apply to the non-pooled cash investments of the

Pension and Deferred Compensation Plans of XYZ, deposits for defeased debt,

or assets under Bond Trust Indenture Agreements.






Investment Objectives

8

(2) INVESTMENT OBJECTIVES — The investment policy shall describe the investment

objectives of the unit of local government. Investment objectives shall include safety of capital,

liquidity of funds, and investment income, in that order.

Example: IN ORDER OF PRIORITY:

1. SAFETY - The primary objective of the County’s investment activities is the

protection of investment capital.

2. LIQUIDITY - The County’s investment strategy will provide sufficient

liquidity such that funds are available to meet reasonably anticipated cash flow

requirements in an orderly manner.

3. INVESTMENT INCOME - In investing public funds, the County will strive

to maximize the return on the portfolio consistent with the quality, safety and

liquidity restrictions. Yield will be the primary source of investment returns.






Performance Measurement

9

(3) PERFORMANCE MEASUREMENT — The investment policy shall specify performance

measures as are appropriate for the nature and size of the public funds within the custody of the

unit of local government.

Example: In order to assist in the evaluation of the portfolio’s performance, benchmarks will

be used, which will allow the Finance Director to compare returns against other

investors in the same markets.

Based on the investment and maturity parameters for each portfolio, specific performance

benchmarks shall be established. The quarterly report shall show performance and will compare

portfolio results to the established benchmarks.

Investment performance of funds designated as short-term and other funds that must maintain a

high degree of liquidity will be compared to the return of 3-month U.S. Treasury Bills.

Investment performance of funds will be compared to appropriate indexes that have a duration

and asset mix that approximates the portfolio such as:

- Bank of America Merrill Lynch 1-3 Year U.S. Treasury Index

- Bloomberg Barclays 1-3 Year Government/Credit Index

- Bloomberg Barclays 1-5 Yr US Government/Credit Index






Prudence & Ethical Standards

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(4) PRUDENCE AND ETHICAL STANDARDS —The investment policy shall describe the

level of prudence and ethical standards to be followed by the unit of local government in carrying

out its investment activities with respect to funds described in this section. The unit of local

government shall adopt the Prudent Person Rule, which states that:

“Investments should be made with judgment and care, under circumstances then prevailing,

which persons of prudence, discretion, and intelligence exercise in the management of their

own affairs, not for speculation, but for investment, considering the probable safety of their

capital as well as the probable income to be derived from the investment.”

Example:

The standard of prudence to be applied by the

investment officer shall be the "Prudent Person" rule

(stated above), which shall be applied the context of

managing the overall portfolio.

In Addition:

Individuals responsible for the investment program

should not engage in personal business activities (e.g.

directing business to favored broker/dealers) that could

conflict with proper execution of the investment

program, or which could impair their ability to make

impartial investment decisions.






Authorized Investments

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(5) LISTING OF AUTHORIZED INVESTMENTS —The investment policy shall list

investments authorized by the governing body of the unit of local government, subject to the

provisions of 218.415 subsection (16).

Investments not listed in the investment policy are prohibited.

If the policy authorizes investments in derivative products, the policy must require that the unit of

local government’s officials responsible for making investment decisions or chief financial officer

have developed sufficient understanding of the derivative products and have the expertise to manage

them.






Authorized Investments - Examples

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(5) AUTHORIZED INVESTMENTS - The investment policy shall list investments authorized

by the governing body of the unit of local government, subject to the provisions of 218.415

subsection (16).

Investments not listed in the investment policy are prohibited.

A. Direct Federal Government Obligations

Investments in this category would include but not be limited to United States Treasury Bills, Notes and

Bonds, and securities issued by the Small Business Administration, Government National Mortgage

Association (Ginnie Mae), Veterans Administration, and Federal Housing Administration.

B. Federal Agencies and Instrumentalities

Investments in this category would include but not be limited to obligations of the Federal Home

Loan Banks System (FHLB) or its distinct banks, Financing Corporation (FICO), the Federal Farm Credit

Bank, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation

(Freddie Mac), Student Loan Marketing Association(Sallie Mae), Financial Assistance Corporation and

Federal Agriculture Mortgage Corporation (Farmer Mac).

C. U.S. Securities and Exchange Commission registered money market funds with the highest credit quality

rating from a nationally recognized rating agency.

D. Interest-bearing time deposits or savings accounts, in a qualified Public Depository as defined in s. 280.02

Florida Statutes.

E. Debt issued by the State of Florida or any political subdivision thereof including pools.






Authorized Investments - Examples (cont’d)

13

F. Securities of, or other interests in, any open-end or closed-end management-type investment company

or investment trust registered under the Investment Company Act of 1940, 15 U.S.C. ss. 80a-1 et seq., as

amended from time to time, provided that the portfolio of such investment company or investment trust is

limited to obligations of the United States Government or any agency or instrumentality thereof and to

repurchase agreements fully collateralized by such United States Government obligations, and provided that

such investment company or investment trust takes delivery of such collateral either directly or through an

authorized custodian.

G. Repurchase Agreements and reverse repurchase agreements collateralized by securities otherwise

authorized in this policy.

H. The Local Government Surplus Funds Trust Fund or any intergovernmental investing pool authorized

pursuant to the Florida Interlocal Cooperation Act as provided in s. 163.01 Florida Statutes.

I. Commercial paper of prime quality of the highest letter and numerical rating as provided for by at least one

nationally recognized rating service






Still Paying Attention?

14






Maturity & Liquidity Requirements

15

(6) MATURITY AND LIQUIDITY REQUIREMENTS — The investment policy shall

require that the investment portfolio is structured in such manner as to provide sufficient liquidity

to pay obligations as they come due. To that end, the investment policy should direct that, to the

extent possible, an attempt will be made to match investment maturities with known cash needs

and anticipated cash-flow requirements.

Example: The portfolio shall be managed in such a manner that funds are available to

meet reasonably anticipated cash flow requirements in an orderly manner.

The Finance Director and other persons performing the investment function will

provide an appropriate mix of maturities to maximize the return on the portfolio

while minimizing investment risk.

Investment of bond reserves, construction funds, and other non-operating funds

shall have a term appropriate to the need for funds, and in accordance with debt

covenants.

A liquidity amount of approximately three months of anticipated disbursements

will be kept in relatively short-term investments such as the Florida Trust Day to

Day Fund, State Investment Pool (SBA), money market accounts and

Repurchase Agreements.






Portfolio Composition

16

(7) PORTFOLIO COMPOSITION — The investment policy shall establish guidelines for

investments and limits on security issues, issuers, and maturities. Such guidelines shall be

commensurate with the nature and size of the public funds within the custody of the unit of local

government.

Assets held shall be diversified to control risk of loss resulting from overconcentration of assets in a specific

maturity, issuer, instrument, or dealer/broker, through which these instruments are bought and sold.

Authorized Investment

Maximum

Allocation

Individual

Issuer

Maximum

Maturity

Money Market Funds (AAA Rated) 80% 25% N/A

U.S. Treasuries 75% N/A 5.5 years

U.S. Government Agencies 50% 25% 5.5 years

Federal Instrumentalities- US Govt Sponsored Agencies 50% 25% 5.5 years

Certificates of Deposit 40% 10% 2 years

Florida Local Gov’t Investment Trust 35% N/A N/A

Intergovernmental Investment Pool 35% 25% N/A

Corporate Obligations or Corporate Notes 25% 5% 5 years

Commercial Paper 25% 5% 270 days

Supranational Agencies 25% 10% 5.5 years

Repurchase Agreements 10% 10% 1 year






Risk & Diversification

17

(8) RISK AND DIVERSIFICATION — The investment policy shall provide for appropriate

diversification of the investment portfolio.

Investments held should be diversified to the extent practicable to control the risk of loss resulting

from overconcentration of assets in a specific maturity, issuer, instrument, dealer, or bank through

which financial instruments are bought and sold.

Diversification strategies within the established guidelines shall be reviewed and revised

periodically, as deemed necessary by the appropriate management staff.






Authorized Investment Institutions

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Example: Banks – Certificates of deposit purchased under the authority of this policy will be

purchased only from Qualified Public Depositories of the State of Florida as

identified by the State Treasurer, in accordance with Chapter 280 of the State

Statutes.

Broker/Dealer Approvals and Limitations

A broker/dealer list will be established by the Finance Director or designee. This list will be presented to the

Investment Committee for approval. This list will be updated as needed and approved by the Investment

Committee.

The approved list of secondary brokers/dealers does not apply to the external investment managers.

(9) AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS — The investment

policy should specify the authorized securities dealers, issuers, and banks from whom the unit of

local government may purchase securities.






Third Party Custodial Agreements

19

Example: The Clerk of the Circuit Court will execute a Third Party Custodial safekeeping

Agreement with a commercial bank’s trust department which is separately chartered

by the United States Government or the State of Florida.

The Third Party Custodial Safekeeping Agreement shall include letters of authority

from the Clerk of the Circuit Court, details as to responsibilities of each party,

notification of security purchases, sales, delivery, repurchase agreements, wire

transfers, safekeeping and transaction costs, procedures in case of wire failure or

other unforeseen mishaps including liability of each party.

(10) THIRD-PARTY CUSTODIAL AGREEMENTS — The investment policy shall provide

appropriate arrangements for the holding of assets of the unit of local government. Securities

should be held with a third party; and all securities purchased by, and all collateral obtained by, the

unit of local government should be properly designated as an asset of the unit of local government.

No withdrawal of securities, in whole or in part, shall be made from safekeeping, except by an

authorized staff member of the unit of local government.

Securities transactions between a broker-dealer and the custodian involving purchase or sale of

securities by transfer of money or securities must be made on a “delivery vs. payment” basis, if

applicable, to ensure that the custodian will have the security or money, as appropriate, in hand at

the conclusion of the transaction.






Master Repurchase Agreement

20

Example: The Clerk of the Circuit Court will require all approved institutions and dealers

transacting repurchase agreements to execute and perform as stated in the Master

Repurchase Agreement. All repurchase agreement transactions will adhere to

requirements of the Master Repurchase Agreement. The agreement shall specify that

the underlying securities have a market value of at least 103% of the principal

balance of the investment. The market value is to be determined on a monthly basis.

(11) MASTER REPURCHASE AGREEMENT — The investment policy shall require all

approved institutions and dealers transacting repurchase agreements to execute and perform as

stated in the Master Repurchase Agreement. All repurchase agreement transactions shall adhere to

the requirements of the Master Repurchase Agreement.






Bid Requirement

21

Example: After the Clerk of the Circuit Court, through the Finance Director, has determined the

approximate maturity date based on the cash flow needs and market conditions and has

analyzed and selected one or more optimal types of investments, a minimum of three

(3) qualified banks and/or dealers will be contacted and asked to provide bids on the

securities in question.

1. Bids will be held in confidence until the highest bid is determined and awarded.

2. Documentation will be retained for all bids, with the winning bid clearly identified.

3. If for any reason the highest interest rate bid was not selected, then the reasons

leading to that decision will be clearly indicated on the bid form.

(12) BID REQUIREMENT — The investment policy shall require that the unit of local

government’s staff determine the approximate maturity date based on cash-flow needs and market

conditions, analyze and select one or more optimal types of investment, and competitively bid the

security in question when feasible and appropriate.

4. If the maturing investment in funds to be invested are from a certificate of deposit,

the present holder of the funds issuer of the CD will be one of the contacts made,

subject to the portfolio diversification requirements in this policy.






Still Awake?

22






Internal Controls

23

Example: Such internal controls may include:

The Clerk of the Circuit Court shall exercise and monitor a set of internal controls to

be conducted through the Finance Director.

Controls are designed to protect the County’s funds and ensure proper accounting

and reporting of the securities transactions.

(13) INTERNAL CONTROLS — The investment policy shall provide for a system of internal

controls and operational procedures.

The unit of local government’s officials responsible for making investment decisions or chief

financial officer shall establish a system of internal controls which shall be in writing and made a

part of the governmental entity’s operational procedures.

The investment policy shall provide for review of such controls by independent auditors as part of

any financial audit periodically required of the unit of local government.

The internal controls should be designed to prevent losses of funds which might arise from fraud,

employee error, misrepresentation by third parties, or imprudent actions by employees of the unit

of local government.






Internal Controls (cont’d)

24

Example: Cont’d

An operational review and performance and reporting evaluation shall be conducted by the Finance Director.

Development of a wire transfer agreement with the custodial bank outlining the various controls and security

provisions for making and receiving wire transfers shall be made.

There is a prohibition of collusion between those making investment decisions and those providing

investment services.

Written dealer confirmation and monthly and/or quarterly custodial account statements shall be maintained.

All daily investment activity will be coordinated and reviewed by the Finance Director. In the absence of the

Finance Director and Clerk of the Circuit Court investment activity must be approved by their designee and

later approved by the Finance Director or Clerk of the Court.

Such internal controls may include:






25






Reporting

26

Example: A portfolio report shall be prepared each quarter by the Finance Director or designated staff

member, and be provided to the Clerk of the Circuit Court and appropriate management

staff. The report will also be made available to the Board of County Commissioners and

Investment Committee.

(14) REPORTING — The investment policy shall provide for appropriate annual or more

frequent reporting of investment activities.

To that end, the governmental entity’s officials responsible for making investment decisions or

chief financial officer shall prepare periodic reports for submission to the legislative and

governing body of the unit of local government, which shall include securities in the portfolio by

class or type, book value, income earned, and market value as of the report date.

Such reports shall be available to the public.

The report shall include a breakdown of the portfolio as well as its overall performance and the current market

pricing at month-end, including the following information:

A. Securities by class/type

B. Book Value

C. Market Value

D. Income Earned

E. Overall Investment Performance (Total Return)






Continuing Education

27

Example: The members of the investment committee will complete no less than 8 hours of

continuing educational opportunities on investment practices each fiscal year.

The members of the investment committee will have sufficient knowledge and

education to invest in any and all of the securities listed as authorized.

(15) CONTINUING EDUCATION — The investment policy shall provide for the continuing

education of the unit of local government’s officials responsible for making investment decisions

or chief financial officer. Such officials must annually complete 8 hours of continuing education in

subjects or courses of study related to investment practices and products.

III Questions and Discussion






Questions and Discussion

29

Elizabeth M. Westvold, CFA, is a senior vice president at Payden &

Rygel. Working in the Boston office as a Portfolio Manager, Beth is

responsible for institutional client needs for East Coast and global

clients, also serving as a liaison to the firm’s London office and the

Metzler/Payden joint venture.

Prior to joining Payden & Rygel, Beth was a managing director in

BlackRock’s global client group, responsible for developing and

maintaining relationships with institutional clients. Prior to joining

BlackRock in 2005, she was a fixed income portfolio manager with

State Street Research & Management Co. and earlier worked in fixed

income strategies for Harvard Management Company.

A member of the Boston Security Analysts Society, Beth holds the

Chartered Financial Analyst designation. Beth is vice president and

investment committee chair of the Trustees of Donations to the

Episcopal Church. She earned an MBA from the Tuck School of

Business at Dartmouth College and a BA, cum laude, in economics

and biology from Middlebury College.

Elizabeth M. Westvold, CFA

Senior Vice President

2011 – Joined Payden & Rygel

Lisa A. Matiash

Associate Vice President

2010 – Joined Payden & Rygel

Lisa Matiash is an associate vice president at Payden & Rygel. Based

in the firm’s Boston office, she works with portfolio managers to

implement investment policy and strategy needs of institutional

clients.

Prior to joining Payden & Rygel, Lisa was Research Coordinator at

hedge fund Kaintuck Capital Management. She held various roles

over seven years within research and trading, and headed the firm’s

marketing efforts. Prior to that Lisa worked within Ernst & Young

LLP’s tax practice, both domestically and abroad.

Lisa Matiash holds the FINRA series 6 and 63 licenses. She earned a

BS in Business Administration from American University in

Washington, D.C. with concentrations in Finance and International

Economics.

LOS ANGELES | BOSTON | LONDON | PARIS

March 1, 2017

Florida Court Clerks & Comptrollers

2017 Winter Conference

Development of an Investment Policy Statement

Elizabeth M. Westvold, CFASenior Vice President

617-807-1996

[email protected]

Lisa MatiashAssociate Vice President

(617) 807-1993

[email protected]

Contents

Purpose & Key Considerations

Framework

Questions and Discussion

I

II

III

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