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INVESTMENT MANAGEMENT AGREEMENT (2) DODGE & COX INVESTMENT MANAGERS SAN FRANCISCO INVESTMENT MANAGEMENT AGREEMENT Dodge & Cox, a California corporation ("we" or "us"), agrees to manage investments for the City of Clearwater Employees' Pension Fund ("you") on the following terms: Our Appointment Our Services Transactions for Your Account pf/wordltmmlagreemen/master/nerisin 1 1. You appoint us to manage an investment account for you effective when we and you have both signed this agreement. We will manage the securities and/or cash for you held in an account by your designated custodian or trustee ("Custodian"). We will confirm to you or your agent the securities and/or cash under management in the account. You or the Custodian for your account will promptly notify us in writing of any increase or reduction in the amount of your account's assets subject to our investment discretion. 2. We will make all decisions to buy, sell or hold securities, cash or other investments for your account in our sole discretion and without first consulting you. You give us full power and authority to carry out these decisions by giving instructions, on your behalf, to brokers and dealers and the Custodian for your account. You also authorize us to provide a copy of this agreement to any broker or dealer with or through which transactions for your account are to be effected as evidence of our authority under this agreement. Your investment objectives and any special instructions or limits that you want us to follow in managing your account are written on Schedule B. You will let us know in writing if you want to change our instructions. You also will let us know if your [mancial circumstances or investment objectives change in a way that should cause us to change how we are managing your account. We acknowledge that we have read and fully understand your investment policy and the limitations and prohibitions regarding investments contained therein. In the event that we should purchase any security in violation of your investment policy and as a result of any sale thereof realize a loss as measured by the initial purchase price of the security, we shall make you whole for any such losses. 3. We will arrange for securities transactions for your account to be executed through brokers or dealers that we believe will provide best execution for you. In choosing a broker or dealer, we will consider the broker or dealer's execution capability, reputation and access to the markets for the securities being traded for you. We will seek competitive commission rates, but not necessarily the lowest rates available. Consistent with obtaining best execution, we also may place transactions for your account to brokers who provide research services to us and who may charge higher commissions than other brokers. These research services may be of use to us in managing assets other than your account. 1 Additions and Withdrawals Investments in Dodge & Cox Mutual Funds Custody of Your Account Assets Reports We Will Provide to You DODGE & COX INVESTMENT MANAGERS SAN FRANCISCO pf/wordltmm/agreemen/master/nerisin I If we decide to purchase or sell the same securities for you and for other clients at about the same time, we may combine your order with orders of other clients to allow us to negotiate better prices or lower commission rates and other transaction charges than we could get for your order alone. If we do this, we will allocate securities to your account in accordance with our established procedures. If we cannot fill all the combined orders at prices or for transaction charges that we believe are desirable, we will allocate the securities we do buy or sell as part of the combined orders by following our order allocation procedures. If you instruct us in writing to use particular brokers or dealers to execute transactions for your account, we will do so, but we will not seek better execution services or prices for you from other brokers or dealers and you may pay higher prices or transaction costs as a result. We also may not be able to seek better execution services for you by combining your orders with other client orders. 4. You may make additions to your accountat any time. You may withdraw account assets upon notice to us, subject to the usual and customary securities settlement procedures. 5. If Schedule B authorizes us to purchase, sell or reinvest in shares of a Dodge & Cox mutual fund ("Dodge & Cox Fund") for your account, you acknowledge that you have received and read the Fund's current prospectus ("prospectus") and are aware of the various management fees and expenses which will be incurred through that investment. Should there be any material change to the prospectus, we will provide you with a new one when available. You have been informed about and understand our advisory relationship with the Dodge & Cox Fund; the Dodge & Cox Fund pays an advisory fee to us in connection with that relationship; and that the advisory fees otherwise payable under this agreement to us will be reduced in accordance with Schedule A by the account's managed investment in the Dodge & Cox Fund. 6. Your account assets will be held by the independent Custodian you have chosen. We will not have custody of any of your assets in your account. You will pay the fees of the Custodian. You give us authority to instruct the Custodian, on your behalf, to purchase, sell, redeem or exchange any security, cash or other investments for your account. You will instruct the Custodian to send you monthly statements showing the assets in and all transactions for your account during the month, and to provide us with copies of those statements. 7. We will provide you written confirmations of transactions and quarterly statements showing the assets in your account, cost, income rate and current market value at quarter end. We shall provide you with monthly and quarterly statements of the status of the Account, including performance figures for the month. In addition, we shall 2 INVESTMENT MANAGERS DODGE & COX Our Fees How We will Value 9. the Investments Confidentiality 10, Our Other 11. Accounts pf/word/tmm/agreemen/master/nerisin I SAN FRANCISCO provide quarterly written reviews of the performance of the Account, presented in person to you semi-annually, using the most recently published performance presentation standards of AIMR, and such other periodic reports or information as you may reasonably request. All performance reports shall be net of all fees and transaction costs and shall be time weighted. 8. The fees you will pay for our services will be a percentage of the market value of the assets in your account on the last trading day of each calendar quarter. Our fee schedule, which may be amended upon written notice to you, is shown on Schedule A. Our fees are payable at the end of each quarter for our services in the prior three months. In any partial quarter, our fees will be prorated based on the number of days that we managed your account. If we buy shares of mutual funds (except any Dodge & Cox Fund) or other pooled cash management funds for you, they will be included in calculating the value of your account when we determine our fees. You should understand that the same assets will also be subject to additional advisory and other fees and expenses (which are described in the prospectuses or similar documents of those funds) paid by the funds but ultimately borne by the investor. Please indicate below how you wish to pay our fees (if left blank, we will assume that the first option is selected): o The Custodian will deduct from your account and pay us our fees each quarter after we submit a bill to the Custodian. We will send you and the Custodian at the same time a bill showing the amount of our fees, the account value on which we based our fees, and how we calculated our fees. You are responsible for verifying fee computations since custodians are not typically asked to perform this task. The Custodian will send you a quarterly statement showing all amounts paid from your account, including our fees. 1&1 You wish to be billed directly by us and will pay our fees within 30 days of receiving our bill. Securities or other investments in your account will be valued in a manner that we believe in good faith reflects their fair market value on the valuation date. Such valuation may include the closing price listed on a national securities exchange or on NASDAQ, pricing services or other sources as we deem appropriate. Except as you otherwise agree or as is required by law, we will keep confidential all information concerning your identity, financial affairs or investments. We manage investments for other clients and may give them advice or take actions for them, for our own accounts, or for accounts of persons related to us, that is different from the advice we give you or actions we take for you. Weare not obligated to buy, sell or recommend for you any security or other investment that we may buy, sell or recommend for any other clients or for our own accounts. 3 Risk Legal Actions Proxy Voting Term of This Agreement INVESTMENT MANAGERS SAN FRANCISCO DODGE & COX 12. 13. 14. 15. pf/word/tmm/agreemen/master/nerisin I Conflicts may arise in the allocation of investment opportunities among accounts that we advise. We will seek to allocate investment opportunities believed appropriate for your account and other accounts advised by us among such accounts equitably and consistent with the best interests of all accounts involved. But, there can be no assurance that a particular investment opportunity that comes to our attention will be allocated in any particular manner. If we obtain material, non-public information about a security or its issuer that we may not lawfully use or disclose, we will not disclose the information to you or use it for your benefit. We cannot guarantee the future performance of your account, promise any specific level of performance or promise that our investment decisions, strategies or overall management of your account will be successful. The investment decisions we will make for you are subject to various market, currency, economic, political and business risks, and will not necessarily be profitable. In managing your account, we will not consider any other securities, cash or other investments you own unless you have told us to do so in your written instructions to us on Schedule B. Except as may otherwise be provided by law, we will not be liable to you for any loss (i) that you may suffer as a result of our good faith decisions or actions where we exercise the degree of care, skill, prudence and diligence that a prudent person acting in a fiduciary capacity would use; (ii) caused by following your instructions; or (iii) caused by the Custodian, any broker or dealer to which we direct transactions for your account or by any other person. Federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith, and this agreement does not waive or limit your rights under those laws. Unless we otherwise agree, we will not be expected or required to take any action other than providing investment-related advice with regard to any legal proceedings, including bankruptcies or class actions, involving securities held or formerly held in your account or the issuers of those securities. We will vote all proxies for securities held for your account. You agree to instruct the Custodian to promptly send us all proxies and related shareholder communications for the securities held in your account. This agreement will continue in effect until we cancel it by giving thirty (30) days prior written notice to you or you giving us ten (10) days prior written notice. Termination of this agreement will not affect (i) the validity of any action we have previously taken; (ii) your or our liabilities or obligations for transactions started before termination; or (iii) your obligation to pay our fees through the date of termination. Upon termination, we will have no obligation to recommend or take any action with regard to the securities, cash or other investments in your account. 4 DODGE & COX Representations 16. Your Death or 17. Disability Non-Assignability 18. Governing Law 19. Notices 20. pflword/tmm/agreemen/master/nerisin I INVESTMENT MANAGERS SAN FRANCISCO By signing this agreement, you represent and confirm (i) that you have full power and authority to enter into this agreement, (ii) that the terms of this agreement do not violate any obligation by which you are bound, whether arising by contract, operation oflaw, or otherwise, (iii) that this agreement has been duly authorized and will be binding upon you in accordance with its terms, and (iv) if this agreement is being signed on behalf of a corporation, partnership, trust or other business or legal entity, you represent that applicable law and governing documents authorize and permit this agreement. If this agreement is entered into by a trustee or other fiduciary, you agree to provide us with copies of the governing instruments authorizing establishment of your account. You undertake to advise us of any material change in your authority or the propriety of maintaining your account. We represent to you that we are registered as an investment adviser under the Investment Advisers Act of 1940 ("Advisers Act") and we are authorized and empowered to enter into this agreement. We agree to maintain our registration under the Adviser's Act during the term of this Agreement. If you are a natural person, your death, disability or incompetency will not automatically terminate or change the terms of this agreement. However, your executor, trustee, guardian, attorney-in-fact or other authorized representative may cancel this agreement by giving written notice to us. This agreement may not be assigned (within the meaning of the Advisers Act) by you or us except in writing signed by both you and us. In any action arising under this Agreement venue shall be in state court in Pinellas County, Florida. Should any action be necessary to enforce the terms of this Agreement, the prevailing party shall be made whole, including any costs and legal fees. However, nothing in this agreement will be construed contrary to the Advisers Act or any rule or order of the Securities and Exchange Commission under the Advisers Act. You may send notices or other information to us in person, by U.S. mail, overnight courier or facsimile transmission (with a hard copy sent by U.S. mail) at the address shown below or another address we give you in writing. We will send reports and notices to you in person, by U.S. mail or overnight courier or by facsimile transmission (with a hard copy sent by U.S. mail) at the address shown below or another address that you give us in writing. - Ifto us: Dodge & Cox One Sansome Street, 35th Floor San Francisco, CA 94104 Attention: Dana M. Emery Telephone: 415.981.1710 Facsimile: 415.986.1192 Copy to: Thomas M. Mistele, General Counsel 5 DODGE & COX Counterparts 21. Miscellaneous 22. Non-Discrimination 23. Prohibition Against 24. Contingent Fees Errors and 25. Omissions Insnrance Audits 26. Disclosure 27. pflword/tmm/agreemen/master/nerisin 1 INVESTMENT MANAGERS SAN FRANCISCO If to you: Finance Director City of Clearwater P.O. Box 4748 Clearwater, FL 33758-4748 Telephone: 727.562.4534 Facsimile: 727.562.4535 This agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. If any provision of this agreement is or becomes inconsistent with any applicable law or rule, the provision will be deemed rescinded or modified to comply with such law or rule. In all other respects this agreement will continue in full force and effect. No term of this agreement may be waived or changed except in writing signed by both you and us. Failure to insist on strict compliance with this agreement or with any of its terms or any continued conduct will not be considered a waiver by either you or us of our rights under the agreement. This agreement contains the entire understanding between you and us regarding your account. We shall not discriminate in our employment practices during the term of this Agreement on the basis of race, creed, color, sex, age, physical handicap, marital status or national origin. We warrant that we have not employed or retained any company or person, other than a bona fide employee working solely for Dodge & Cox, to solicit and secure this Agreement and that it has not paid or agreed to pay any person, company, corporation, individual, or firm other than a bona fide employee working solely for Dodge & Cox, any fee, commission, percentage, gift, or other consideration contingent upon or resulting from the award or making of this Agreement. We shall for the term of this Agreement maintain an errors and omissions insurance policy sufficient to compensate you for any losses resulting from violations of law, misrepresentations, or violation of any fiduciary duty. We shall furnish you with proof of our errors and omissions insurance as well as a blanket fidelity bond, satisfying the requirements of section 412 of ERISA and applicable to you and your agents, servants and employees. It is agreed that upon notice of five (5) business days, you may audit all of our records that relate to this Agreement. Such audit shall be conducted during business hours. We agree to disclose, in writing, within 10 business days, if we become the subject of an investigation by the Securities and Exchange Commission for alleged breach of federal securities laws, any investigation by the U. S. Department of Justice for allegations relating to violation of federal securities 6 DODGE & COX INVESTMENT MANAGERS SAN FRANCISCO laws or related allegations of fraud, or if we are named as the defendant in any civil action alleging fraud, negligence or breach of fiduciary responsibility. Key Personnel 28. Any portfolio manager assigned by us to performance under this Agreement may not be removed by us without notice to you. Disclosure Statement 29. You have received and reviewed a copy of Part II of our Form ADV, as well as a copy of this agreement and our Privacy Notice, at least 48 hours prior to executing this agreement. You have the right to terminate this agreement without penalty within five business days after entering into this agreement. By our signatures, the parties agree to the terms ofthis agreement on thiS~ay of January, 2004. Countersigned: CITY OF CLEARWATER, FLORIDA SEE ATTACHED SIGNATURE PAGE By: Brian Aungst Mayor-Commissioner William B. Horn, II City Manager Approved as to form: Attest: Pension Attorney Cynthia E. Goudeau City Clerk DODGE & COX By: ana M. Emery Senior Vice President 7 pf/word/tmm/agreemenlmaster/nerisin 1 City of Clearwater's signature page for: Investment Management Agreement with Dodge & Cox BOARD OF TRUSTEES OF THE EMPLOYEES' PENSION PLAN OF THE CITY OF CLEARWATER, FLORIDA By: itn~ ~ Chairperson Approved as to form: Attest: . ~-'''' DODGE & COX INVESTMENT MANAGERS SAN FRANCISCO SCHEDULE A INVESTMENT ADVISORY FEES RE: City of Clearwater Employees' Pension Fund Account No. 3882 Date: January.a3.-, 2004 Investment Advisory Fees. Dodge & Cox's annual fees for services provided under this agreement will be as follows: Fixed Income Account Assets Fees First $10 million .40 of 1 % Next $25 million .30 of 1 % Next $25 million .20 of 1% Next $65 million .15 of 1 % Next $575 million .120fl% Thereafter .10 of 1% DODGE & COX INVESTMENT MANAGERS SAN FRANCISCO SCHEDULE B RE: City of Clearwater Employees' Pension Fund Account No. 3882 Date: January -23.-, 2004 Investment Restrictions and Guidelines. The investment restrictions and guidelines to be followed by Dodge & Cox in managing your account are set forth below. Income Account It is our understanding that the attached "Statement of Investment Objectives and Guidelines - City of Clearwater Employees' Pension Fund" adopted January 1, 2003 as interpreted by the attached letter dated December 4, 2003 from Robert B. Thompson to Steve Moskun shall apply to your account. ~ DODGE & COX December 4,2003 Investment Managers Mr. Steve Moskun City of Clearwater, Florida Finance Department P.O. Box 4748 Clearwater, FL 33758-4748 Re: Statement ofInvestment Objectives and Guidelines, City of Clearwater Employees' Pension Fund, adopted 1I2112003-Dodge & Cox confirmation of understanding Dear Steve: This letter confirms our understanding of the following provisions of the above referenced investment policy statement: Page/Reference Investment Guideline Interpretation p. 3, Authorized Investments, "Common stocks, preferred We interpret this guideline to letter H stocks and bonds and other permit investment in cumulative evidence of indebtedness issued capital securities, equipment trust or guaranteed by a corporation certificates, enhanced equipment organized under the laws of the trust certificates, pass-through- United States..." certificates, and REIT debt investments. p. 19, Appendix A, Item llC, 4th "No holding shall be made by a We interpret this guideline to bullet point Fixed Income Manager which exclude U.S. government-related would cause a holding to exceed issues from this restriction (e.g., 15% of the issue outstanding." agency-guaranteed mortgage securities). In addition, for multi- tranched issues (e.g., asset- backed securities), we interpret this guideline to apply at the issue level, not the individual tranche level. p. 19, Appendix A, Item llC, 6th "No more than 10% of an As Dodge & Cox does not bullet point investment manager's portfolio, typically invest in these types of valued at market, shall be investments (instead using the invested in certificates of deposit, custodian's STIF vehicle), we time deposits, bankers interpret this guideline to restrict acceptances, commercial paper, cash investments of any type to or related investments of a single 10% of the portfolio's market issuer financial institution or value. financial institution holding company family." ESTABLISHED 1930 One Sansome Street / 35th Floor / San Francisco, California 94104/415-981-1710 ~ DODGE & COX Investment Man.aQers To acknowledge and accept the above interpretatIons, ple~se sign below and return the letter in the enclosed self-addressed stamped envelope. We have included a second copy for your records. Thank you for your confidence in Dodge & Cox. We look forward to a long and successful relationship with the City of Clearwater. Sincerely, ~\(\ I ; .~ Robert B. Thompson Acknowledged and Accepted: City of Clearwater Employees' Pension Fund By: ~t 7/L- 1-4oy+ HQ.h\; f +On V ,'ce. /VI ....~_o.~ CI/,,3/03 Name: Title: Date: Cc: Dodge & Cox file Janelle R. Sundahl Thomas M. Mistele ESTABLISHED 1930 One Sansome Street / 35th Floor / San Francisco, California 94104/ 415-981-1710 STATEMENT OF INVESTMENT OBJECTNES AND GUIDELINES CITY OF CLEARWATER EMPLOYEES' PENSION FUND Current Adopted 1/21/03 PURPOSE The purpose of this Statement of Investment Objectives and Guidelines is to assist the City of Clearwater Employees' Pension Fund (hereafter referred to as the Fund) in more effectively supervising and monitoring the investment ofthe Fund's assets. In the various sections of this policy document, the Fund defines its investment program by: . stating in a written document the Fund's attitudes, expectations and objectives in the investment of Fund assets. . setting forth an investment "structure" for managing assets. This structure includes various asset classes and investment management styles that, in aggregate, are expected to produce a prudent level of diversification and investment return over time. . providing guidelines for each investment portfolio that control the level of risk assumed in the portfolio and ensure that assets are managed in accordance with stated objectives, . encouraging criteria to monitor and evaluate the performance results achieved by the investment managers. This Statement represents the Fund's current philosophy regarding the investment of Fund assets. In addition, although the Fund shall utilize this Policy Statement in making decisions concerning the Fund, it shall not necessarily be bound solely by its contents. PRUDENCE AND ETHICAL STANDARDS The standard of prudence to be applied by the trustees shall be the "Prudent Person" rule, which states: "Investments shall 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 oftheir capital as well as the probable income derived." The "Prudent Person" rule shall be applied in the context of managing the overall portfolio. The trustees shall also be governed by the fiduciary standard set forth in the Employee Retirement Income Security Act of 1974 at 29U.S.C. s. 1104 (a) (1) (A) - (C). 1 Funding Philosophy The Fund's funding objectives for the Fund is to be as fully funded as possible so that: . the ability to pay all benefits and expense obligations from the Fund when due is ensured; . there will be no principal erosion of contributed funds or the purchasing power thereof. . a "funding cushion" is maintained within the Fund for unexpected developments and for possible future increases in benefit structure and expense levels; . the Fund assets should earn sufficient total rate of return over time to reduce the Fund's dependency on contributions to meet all benefit and expense obligations. Investment results within the Fund are considered to be the major critical element in achieving these funding objectives stated above while reliance on contributions is a secondary element. Liquiditv Posture Liquidity considerations are low in the short-term and intermediate-term resulting in an immaterial impact upon investment policy, objectives and guidelines. Authorized Investments The following is a list of authorized investments: . Invest and reinvest the assets of the pension fund in annuity (including group annuity contracts of the pension investment type) and life insurance contracts of legal reserve life insurance companies licensed to do business in the State of Florida, in amounts sufficient to provide, in whole or in part, benefits to which all of the participants shall be or become entitled under the provisions of the Fund, and pay the initial and subsequent premiums thereon . Invest and reinvest the assets of the pension fund in: a. Time deposits, savings accounts, money market accounts, funds, certificates of deposits, or money market certificates of a national bank, a state bank, or a savings, building and loan association insured by the Federal Deposit Insurance Corporation or collateralized by United States Government Agency securities. 2 . , b. Negotiable direct obligations of, or obligations the principal and interest of which are unconditionally guaranteed by, and which carry the full faith and credit of the United States Government and its agencies. Investments in this category would include but not be limited to the following: 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. c. Fully collateralized United States Agency obligations which carry an implied guarantee and the implied full faith and credit of the United States government. Investments in this category would include but not be limited to the following: obligations of the Federal Home Loan Banks System (FHLB) or its distinct banks and Financing Corporation (FICO). d. Other United States Agency obligations which carry an implied guarantee (Government Sponsored Entities) and the implied full faith and credit of the United States Government. Investments in this category would include but not be limited to the following: obligations ofthe 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). e. Collateralized Mortgage Obligations (CMO) and/or Real Estate Mortgage Investment Conduits (REMIC), rated investment grade or equivalent by Standard and Poor's, Moody's Fitch, or other recognized national rating agencies which are backed by securities otherwise authorized in this ordinance and which are guaranteed as to the timely payment of principal and interest by the U.S. Government or its agencies, f. County bonds containing a pledge of the full faith and credit of the county involved, bonds of the Florida Development Commission, or of any other state agency, which have been approved as to legal and fiscal sufficiency by the state board of administration. g. Obligations of any municipal authority issued pursuant to the laws of this state; provided, however, that for each of the five years next preceding the date of investment, the income of such authority available for fixed charges shall have been not less than one and one-half times its average annual fixed charge requirements over the life of its obligations. h. Common stocks, preferred stocks and bonds and other evidence of indebtedness issued or guaranteed by a corporation organized under the laws of the United States, any state, or organized territory of the United States or the District of Columbia or any non-U.S. corporation, provided: 1. The corporation is listed on anyone or more of the recognized national or international stock exchanges and/or in the case of bonds and mortgage backed 3 securities, traded among dealers and investors in a recognized and agreed upon conventional format; 2. All corporate bonds shall carry an investment grade rating as established either by Standard & Poor's, Moody's, Fitch or other recognized rating agencies; and 3. Not more than five percent of the assets of the pension fund shall be invested in the common stock or capital stock of anyone issuing company nor shall the aggregate investment anyone issuing company exceed five percent of the outstanding capital stock ofthat company; nor shall the non-U.S. investments exceed ten percent of the pension fund's assets at cost; nor shall the aggregate of the investments under this subparagraph at cost exceed sixty-five percent of the pension fund's assets at cost. Illiquid Investments The Fund will not invest in illiquid investments. Illiquid investments being defined as an investment for which there is no generally recognized market or generally accepted pricing mechanism. Once an investment becomes illiquid the money manager will notify the plan of the illiquid investment. Included in that notification will be how the money manager will handle the illiquid investment. Investment Management Structure The Fund has reviewed the investment program for the City of Clearwater Employees' Pension Fund. The result ofthe review is an updated, long-term strategic asset allocation Fund. Initially, four distinct asset classes were considered for inclusion in the portfolio: Domestic Equities InternationallNon US Equities Domestic Fixed Income Cash After a thorough review, a permanent commitment to these four asset classes will be made to ensure diversification at the Fund level. The Fund may consider investments in other asset classes which offer potential enhancement to total return at risks no greater than the exposures under the initially selected asset classes. It is not the intention of the Fund to become involved in day-to-day investment decisions. Therefore, the assets will be allocated to professional investment managers in a manner consistent with the Policy's objectives. Each asset class will have its own investment managers. Diversification of the U.S. Market Equity commitment will be achieved through the employment of managers of complementary investment styles, Growth and Value. In the U.S. Fixed Income market a core bond managers will be utilized to stabilize the fund. In the International Equity market a diversified non-U.S. managers will be hired and achieve diversification. Cash and cash equivalents will be managed either by the Investment Managers or the custodian. In addition the City uses the pooling concept to meet the 4 immediate cash needs of the city and to maximize the interest earnings. The Fund will keep sufficient funds in the City's pooled cash account to meet the current obligations of the Fund. The guidelines for the allocation of assets, at cost, to investment managers are as follows: Lower Limit Upper Limit Cost or Market U.S. Market Equities 40% 65% Cost Growth 10% 35% Cost Value 10% 35% Cost Fixed Income 30% 50.0% Cost International Equity 5.0% 10.0% Cost Because the asset classes do not move in concert, deviations from the normal commitments will occur through normal market activity. The Upper and Lower Limits define the ranges within which market activity will be allowed to shift the allocations. The ranges are designed to allow for a reasonable period of time to elapse before rebalancing the portfolio. When the investments are out of policy the assets will be moved from the over-allocated to the under-allocated in a prudent manor. When in market equilibrium, cash flows will be deployed in a manner that returns the portfolio to its normal commitments. Internal Controls As part of the city's annual financial audit the external CPA firm will review the internal controls of the Fund. The hiring or termination of all money managers, consultants or safekeeping custodians must be made by the trustees. No individual associated with the Fund may authorize any movement of monies or securities with out the approval of the trustees, if required, or by the approval of the Pension Investment Committee if trustee approval is not required. An instance not requiring trustee approval is rebalancing the portfolio. Internal controls will be designed to prevent losses of funds which might arise from fraud, error, and misrepresentation by third parties or imprudent actions by the trustees or city employees. Makeup of The Investment Committee The Pension Investment Committee shall be made up (at a minimum) of the following: Finance Director (Treasurer for the Trustees), Assistant Finance Director, and the Cash & Investments Manager. The Treasurer for the Trustees shall appoint/remove other Finance professionals as needs warrant. One representative for each of the unions will also serve on the Investment Committee. The Financial Director or their designee will chair the committee. The City Treasurer will make a recommendation to the Trustees as to any changes in the makeup of the committee. 5 Continuing Education The annual budget for the pension Fund will include sufficient funding for the trustees and members of the Pension Investment Committee to participate in pension education opportunities. These educational opportunities will include education on the individual's duties and responsibilities as well as investments in general. The chief investment officer will complete no less than 8 hours of continuing educational opportunities on pension investments each fiscal year. Investment Return Objectives In formulating investment return objectives for the Fund objectives for the Fund assets, the Fund placed primary emphasis on the following goals: · Achieve investment performance that exceeds the rate of inflation over time thereby providing a real rate of return. · Achieve investment results of at least the actuarial rate of return. · Achieve investment performance that is materially above average when compared to: Other investment managers Other investment manager peers of related investment style Other public retirement plans Several capital market indices For each actual valuation the Trustees will determine the expected rate of return of the current year, next several years and the long term. Based upon the above and the following the expected annual rate of return for the current year is 7.5%. The expected rate of return for the foreseeable future is also 7.5%. 1. Total Fund Return Objectives The following minimum comparative objectives have been established for the total Fund: . The total fund should rank in the upper fiftieth (50th) percentile compared to a recognized performance measure company's total public plan sponsor database measured over a minimum period of three (3) or maximum five (5) years. . The Fund's overall annualized total return should perform at least at the upper fiftieth (50th) percentile compared to investment style peers of similar type as 6 found in recognized performance measure company's style database for each asset class segment. . The Fund's overall annualized total return (which is defined as all price changes plus all income and/or dividends) should exceed the actuarial assumption over a rolling three or maximum of year period. . The Fund's overall annualized total return should exceed the returns that would have collectively been achieved if the Fund had been fully invested in the appropriate percentage of : Standard & Poor's 500 Stock Index Lehman Brothers Aggregate Bond Index Morgan Stanley Capital International EAFE Index This is a custom benchmark that will be calculated relative to the actual collective asset class mix of the Fund measured over a minimum of three (3) or maximum of five (5) years. 2. Equity Segment Return Objectives A. The following minimum performance goals have been established for the Fund's domestic equity segment: · The domestic equity segment total return should perform at least at the upper fiftieth (50th) percentile compared to the a recognized performance measure company's total U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. · The individual domestic equity managers total return should perform at least at the upper fifth (50th) percentile compared to investment style peers of similar type as found in a recognized performance measure company's total U.S. equity database measured over a minimum period ofthree (3) or maximum of(5) years. · The total domestic equity segment total return should exceed the total return of the Standard & Poor's 500 Stock Index by at least one (1) percentage point per year measured over a minimum period of three (3) or maximum of(5) years. 7 b. The following minimum performance goals have been established for the Fund's international equity segment: · The international equity segment total return should perform at least at the upper fiftieth (50th) percentile compared to recognized performance measure company's total non U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. · The individual international equity managers total return should perform at least at the upper fiftieth (50th) percentile compared to the investment style peers of similar type as found in a recognized performance measure company's total non U.S. equity database measured over a minimum period of three (3) or maximum of (5) years. · The international equity segment total return should exceed the total return of the Morgan Stanley Capital International Europe, Australia, Far East Index (CIEAFE) by at least two (2) percentage points per year over a minimum of three (3) or maximum of(5) years. 3. Fixed Income Segment Return Objectives A. The following minimum performance goals have been established for the Fund's domestic fixed-income segment: · The domestic fixed-income segment total return should perform at least at the upper fiftieth (50th) percentile compared to the recognized performance measure company's total domestic fixed income database measured over a minimum period of three (3) or maximum of(5) years. · The individual domestic fixed income managers total return should perform at least at the upper fiftieth (50th) percentile compared to investment style peers of similar type as found in a recognized performance measure company's total domestic fixed income database measured over a minimum period of three (3) or maximum of (5) years. · The domestic fixed income segment total returns should exceed the total return of the Lehman Brothers Aggregate Bond Index by at 8 least one-half (.5) percentage point per year measured over a minimum period of three (3) or maximum of(5) years, 4. Responsibilities ofthe Third Party Custodian A third party custodian will hold all Fund assets other than commingled accounts. In order to maximize the Fund's return, no money should be allowed to remain idle. Dividends, interest, proceeds from sales, new contributions and all other monies are to be invested or reinvested promptly. If funds are not reinvested, then they will be placed in money market instruments or a money market fund immediately by the designated cash manager working in concert with the custodian. The custodian will be responsible for performing the following functions: · Accept daily instructions from the investment managers; · Advise investment managers daily of changes in cash equivalent balances; · Immediately advise investment managers of additions or withdrawals from account; · Notify investment managers of tenders, rights, fractional shares or other dispositions of holdings; · Resolve any problems that investment managers may have relating to custodial account; · Safekeeping of securities; · Interest and dividend collection; · Daily cash sweep of idle principal and income cash balance; · Process all investment manager transactions on a delivery vs. payment basis; · Collect proceeds from maturing securities; · Provide monthly statements by investment manager account; 9 . No withdrawal of securities, in whole or in part shall be made except by an authorized member of the committee or the committee's designee. RESPONSillILITIES OF INVESTMENT MANAGERS The duties and responsibilities of each of the registered investment advisors retained by the Fund include: 1. Managing the assets under its management in accordance with the policy guidelines and objectives expressed herein, or expressed in a separate written agreement when deviation is deemed prudent and desirable. 2. Exercising full investment discretion within the guidelines and objectives stated herein. Such discretion includes decisions to buy, hold or sell securities in amounts and proportions reflective of the manager's current investment strategy and compatible with investment objectives. 3. Promptly informing the Fund regarding all significant matters pertaining to the investment ofthe fund assets, for example: · changes in investment strategy, portfolio structure and market value of managed assets; · the manager's progress in meeting the investment objectives set forth in this document; and · significant changes in the ownership, affiliations, organizational structure, financial condition, professional personnel staffing and clientele of the investment management organizations. 4. No deviation from guidelines and objectives established in the Statement should occur until after such communication has occurred and the Fund has approved such deviation in writing, 5. The Fund formally delegates full authority to each investment manager for exercising all proxy and related actions of the Fund's investment assets assigned to it. Each manager shall promptly vote all proxies and related actions in a manner consistent with the long-term interests of the Fund and its Participants and Beneficiaries. Each investment manager shall keep detailed records of all said voting of proxies and related actions and will comply with all regulatory obligations 10 related thereto. The Fund shall periodically audit and review each investment manager's policies and actions in this area. 6. Each Investment Manager shall utilize the same due care, skill, prudence and diligence under the circumstances then prevailing that experienced, investment professionals acting in a like capacity, as a fiduciary, and fully familiar with such matters would use in like activities for like Funds with like aims, while maintaining appropriate diversification to avoid the risks of large losses, in accordance and compliance with all applicable laws, rules and regulations from local, state, federal and international political entities as it pertains to fiduciary duties and responsibilities. EVALUATION AND REVIEW On a timely basis, but not less than four times a year, the Fund will review actual investment results achieved by each manager (with a perspective toward a five-year time horizon) to determine whether: · the investment managers performed in adherence to the investment philosophy and policy guidelines set forth herein; and · the investment managers performed satisfactorily when compared with: the objectives set forth in Appendix "A", as a primary consideration, their own previously stated investment style, other investment managers, both in asset class and in style group, other retirement Funds, several different market indices. In addition to reviewing each investment manager's results, the Fund will re-evaluate, from time to time, its progress in achieving the total fund, equity, fixed-income, international, and cash and equivalents segment objectives previously outlined. The periodic re-evaluation also will involve an evaluation of the continued appropriateness of: (1) the manager structure set forth in Appendix "A"; (2) the allocation of assets among the managers; and (3) the investment objectives for the Fund's assets. 11 The Fund may appoint investment consultants to assist in the on-going evaluation process. The consultants selected by the Fund are expected to be familiar with the investment practices of other similar retirement plans and will be responsible for suggesting appropriate changes in the Fund's investment program over time. Filing of Investment Policy Upon adoption by the trustees, the investment policy shall be promptly filed with the Department of Management Services, the City Clerk, and the consulting actuary. The effective date of changes to the Investment policy will be 31 days after the filing date with the city. 12 APPENDIX A: FUND SEGMENT AND INDNIDUAL MANAGER GUIDELINES 13 CITY OF CLEARWATER EMPLOYEES PENSION FUND INVESTMENT STRUCTURE J anuarv. 2003 Investment Manager Target Allocation Domestic Equity Specialist Manager Value Orientation 10% - 40% Domestic Equity Specialist Manager Growth Orientation 10%-40% International Equity Specialist Manager 5% -10% Domestic Fixed Income Specialist Manager Core Fixed Income Orientation 30% - 50% 14 APPENDIX A: FUND SEGMENT AND INDIVIDUAL MANAGER GUIDELINES 1. Manager Structure The Fund will retain investment managers that specialize in the use of particular asset classes. The targeted distribution of Fund assets among specialist managers will be as illustrated on the previous page. The Fund believes that the established structure: · is consistent with the practices of other similar-sized retirement funds; and · offers an appropriate "blend" of investment styles that will produce a sufficient level of diversification and investment return over time. 2. Cash Flow Allocation The allocation of assets is consistent with the Fund's desire to diversify its investment management program. The Fund intends to review on a periodic basis the allocation of assets among its investment managers. To the extent that it is practically possible, it is expected that any cash flow will be allocated to or taken from the managers in the same proportions that each manager's assets represent to total fund assets in the target asset allocation outlined previously. 3. Trustee Utilization Restrictions All domestic Fund assets, in any form, shall be solely and exclusively: (a) settled at, (b) held in custody at, and (c) safe-kept only at custodians designated by the Fund at its sole discretion. International Fund assets may be held in commingled accounts provided that all of the normal protection of the Fund's assets is provided for. 4. Transaction Agent Assignment Restrictions Assignment of specific brokerage firms, dealers, financial institutions, and other transaction execution agents to all investment managers shall be the sole responsibility of the Fund. From time to time, the Fund at its sole discretion may specify certain transaction agents that investment transactions shall be executed through. 5. Short Selling and Related Restrictions There shall be no: short selling, non-collateralized and/or non-delivered repurchase agreements, use of financial futures or options, non-marketable direct investments in equity 15 or debt private placements or lease-backs or any other specialized investment activity without the prior written consent of the Fund. 6, Liquidity and Marketability Restrictions Liquidity and marketability frequently are perceived to be a function of the quality and the market capitalization of each security holding. From the Fund's perspective, liquidity and marketability also may be a function of a manager's aggregate holdings in a particular security. The Plan believes that an investment manager should not buy or hold a security for the Funds portfolio if the aggregate holdings among all of that manager's other accounts in that same security would restrict the manager's ability to expeditiously liquidate the position at any time. From a total Fund perspective, the Fund believes the collective holdings among all Fund managers accounts in that same security would restrict all managers collective ability to expeditiously liquidate their respective positions in that same security. Therefore, the Fund retains the sole right to limit any manager's holding of any security in the Fund at any time in order to prevent the potential for said Fund's collective liquidation and market risk. 7. Usage of Custodian STIF on all Idle Cash Restrictions Any idle cash not invested by the investment managers shall be invested daily via an automatic sweep STIF managed by the Custodian or by others in behalf of each investment manager. It is the Fund's objective to have no idle cash at any time in any manager's portfolios. 8. Usage of Cross Asset Segment Investment Guideline Restrictions When a manager's holdings include Fund assets outside of their primary assigned asset segment assignment (e.g. a primary domestic equity manager also holds some cash equivalents or fixed income securities as well as equities) the guidelines stated therein for the non primary asset segment shall fully apply to the manager, in addition to the primary asset assigned segment guidelines. 9. Diversification Restrictions Except for criteria noted elsewhere in this Policy and in specific written contracts with each manager, the appropriate and reasonable diversification of securities by such factors as geography, region, sovereign risk, native currency, quality, coupon, country risk, maturity, 16 industry, duration, and sector IS within the full discretion and responsibility of the investment managers. 10. Other Obiectives. Guidelines and Restrictions Forthcoming The Fund will develop additional objectives, guidelines and restrictions in the future on other areas as it deems appropriate. 11. Fund Segment Guidelines Following are guidelines and objectives established for the fund segments and for each investment manager retained by the Fund. Individual manager guidelines are designed to be consistent, in aggregate, with the total fund asset allocation guidelines and investment objectives set forth in the Statement of Investment Obiectives and Guidelines. llA. Equity Segment Each equity manager is expected to adhere to the following guidelines: · Equity holdings in anyone company (including common and preferred stock, convertible securities and debt) should not exceed 10% of the market value ofthe manager's portion ofthe Fund without the consent ofthe Fund. · Equity holdings in anyone industry (as defined by Standard & Poor's) should not exceed 50% of the market value of the manager's portion of the Fund. · Cash equivalents and fixed income positions should not exceed twenty percent (20%) of the manager's portion of the Fund assets. A manager may invest in fixed income securities (i.e. securities with more than two years to maturity) if projected returns on such securities are perceived to be competitive with potential equity returns. However, fixed income securities should not represent more than twenty-five percent (25%) of a manager's portfolio without the prior written consent of the Fund. · No purchase shall be made by an investment manager which would cause a holding to exceed 5% of the issue outstanding. 17 liB. International Equity Segment Each international equity manager IS expected to adhere to the following mInImUm guidelines: · Equity holdings in anyone company and all of its subsidiaries and affiliates (including equities, convertible securities and debt) should not exceed ten percent (10%) of the market value of the manager's portion of the Fund portfolio without the prior written consent ofthe Fund. · Equity holdings in anyone industry should not exceed fifty percent (50%) of the market value of the manager's portion of the Fund portfolio. Equity holdings in anyone sector (e.g., consumer cyclical, energy, technology, etc.) should not exceed fifty (50%) of the market value of the manager's portfolio without the prior written consent of the Fund. · Cash equivalents and fixed income positions should not exceed fifty percent (50%) of the manager's portion ofthe Fund assets. A manager may invest in fixed income securities (i.e. securities with more than two years to maturity) if projected returns on such securities are perceived to be competitive with potential equity returns. · The manager may enter into foreign exchange contracts on currency provided that: (a) such contracts have a maturity of one year or less, and (b) use of such contracts is limited solely and exclusively to hedging currency exposure existing within the manager's portfolio. The intent is to dampen portfolio volatility and prevent currency loss. There shall be no direct foreign currency speculation or any related investment activity. · The manager may purchase or sell currency on a spot basis to accommodate specific securities settlements. 11 C. Fixed Income Segment Each fixed income manager is expected to adhere to the following guidelines: . All Fixed Income Securities held in each portfolio should have a Moody's, or Standard & Poor's quality rating of no less than Investment Grade from any of these rating services. (For an issue, which is split-rated, the lower quality designation will govern. Once a security falls below investment grade the money manager will notify the plan of the downgrade as soon as 18 practical. Included in that notification will be how the money manager will handle the below investment grade security. · The diversification of securities by maturity, quality, sector, coupon and geography is the responsibility ofthe manager. · The exposure of each manager's portfolio to any single security other than a security backed by the full faith and credit of the U.S. Government or any of its instrumentalities should be limited to 10% of the manager's portion of the Fund measured at market value. · No purchase shall be made by a Fixed Income Manager which would cause a holding to exceed 15% of the issue outstanding. · There shall be no use of options, financial futures, derivatives or other specialized investment activity without the prior written approval of the Fund. · Not more than 10% of an investment manager's portfolio, valued at market, shall be invested in certificates of deposit, time deposits, bankers acceptances, commercial paper, or related investments of a single issuer financial institution or financial institution holding company family. liD. Cash and Equivalents Segment Although investment managers will be retained for their expertise in a certain investment segment, it is expected that from time-to-time each will have some cash and equivalents in their portfolios as a result of discretionary asset allocation decisions. Any idle cash not invested by the investment managers shall be invested daily via an automatic sweep STIF managed by the custodian. It is the Fund's objective to have no idle cash at any time in any manager's portfolio. llE. Pooled Vehicles To the extent that the Fund invests a portion ofthe Fund's assets in commingled vehicles or institutional mutual funds, then the investment guidelines of the Fund's prospectus will be adopted as this fund's guidelines. IIF. Master Repurchase Agreement 19 The money managers and safekeeping custodian will use a master repurchase agreement whenever appropriate. All repurchase agreements transactions shall adhere to the requirements of the master repurchase agreement. 20 12. Individual Manager Descriptions and Five-Year Expectations All expectations are minimums. All investment managers shall exceed the stated expectations. Investment Manager Percentile Percentile Expectation Expectation Relative To Relative To Other Managers Style Peers Domestic Equity Specialist Manager 50th 50th Value Orientation Domestic Equity Specialist Manager 50th 50th Growth Orientation International Equity 50th 50th Specialist Manager Domestic Fixed Income Specialist Manager 50th 50th Core Fixed Income Orientation Cash and Equivalents and 50th 50th STIP Portfolios In addition, each domestic equity and fixed income manager is expected to achieve positive risk-adjusted (alpha) performance over a three (3) or maximum of (5) year periods. 13. Reporting Requirements: Consultant Reporting The Pension Fund's Consultant will provide quarterly reports to the Pension Fund which, at a minimum, will review the following information about each Investment Manager and the Total Fund: · Overview of the most recent quarter and year-to-date investment indicators · Total Fund asset allocation · Comparison oftotal Fund return versus the customized benchmark · Performance results by individual Manager and Total Fund compared to appropriate benchmarks. 21 Investment Reporting: . On not less that an annual basis the Trustees will receive a report showing a list of all of the securities held by investment manager. This report will be provided by the safekeeping custodians and shall include the portfolio by class or type, book value, income earned, and market value as of the date of the report. This report will be filed with the city. Proxy Voting: . On not less that a quarterly basis, money manager will report to the Plan their proxy voting during the last period. Review ofPolicv This Statement of Investment Policy must be reviewed annually by the Pension Investment Committee with a recommendation to revise or confirm to the Trustees. Meeting Agenda At each meeting, the written and oral presentations shall cover the following points: . A report of performance for past periods. Standard time periods for each report will be last quarter, last year, year to date, latest twelve (12) months, two years, three years, etc., and since inception and by calendar year. Returns should be annualized and calculated on a time-weighted basis for the total portfolio. All returns should include price change plus income and/or dividends. . Discussion of the rationale for performance results by relating them specifically to investment strategy and tactical decisions implemented during the current review period. . Discussion of the investment manager's specific strategy for the portfolio over the next six to twelve months with specific reference to asset allocation and sector weighting, as appropriate. 22 · Supporting discussion of the next period's strategy with reference to investment manager's capital market and economic assumptions, if applicable. Ten (12) copies of the written summary should be received by the Fund at least five (5) business days prior to the meeting. The. Fund is interested in fostering an effective working relationship with its investment managers through a discipline of good communication. The establishment of Objectives, Performance Standards, Policies and Guidelines, and Reporting Requirements is intended to provide the Fund with a good foundation from which to understand specific management styles and strategies, evaluate results and oversee progress toward overall investment objectives. The Fund shall be using a third party consultant selected, hired and directed by the Fund to: (1) assist in appraising performance, (2) to provide performance comparison data with other retirement plans, several capital market indices, and to other investment managers, (3) assist in evaluating manager style discipline and peer comparisons, (4) assist in strategic funding and management of the Fund, and (5) other factors the Fund deems appropriate. Investment managers are required to support and assist the consultant with their fullest cooperation. 23