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INVESTMENT POLICY STATEMENT - AUGUST 2005 Clearwater Police Supplemental Pension Plan Investment Policy Statement August, 2005 Investment Policv Statement , The City of Clearwater Police Supplemental Pension Trust Fund lthe "Plan"l is a defined contribution plan, which was established to provide retirement benefits to participants in accordance with the benefit structure adopted by the Board of Trustees lthe "Board"l. The Plan is maintained to invest contributions and reinvest income and investment proceeds for the exclusive b.enefit of plan participants and beneficiaries. Assets of the Plan shall be invested to ensure that principal is preserved, both in real and nominal terms. This policy statement is issued for the guidance of fiduciaries, including investment managers and the Board. in the course of investing the retirement funds of the City of Clearwater and is consistent with the provisions of the "prudent man rule" under ERISA or other such federal laws as may now and in the future apply to investments of the Plans. The Board, in performing its investment duties, shall comply with the fiduciary standards set forth in the Employees Retirement Income Security Act of 1974 at 29 U.S.C. s. 1104Iall1lIAl-IC). In case of conflict with other provisions of law authorizing, investments, the investment and fiduciary standards set forth in this section shall prevail. This policy statement's purpose is to determine the Plan's projected financial needs; express the Board's position regarding the asset mix of the Plan. Policy guidelines will be amended from time to time by the Board both upon its own initiative and upon consideration of the advice and recommendations of the investment manager and Plan professionals, including the Plan's investment consultant. Investment of the assets of the Plan must be consistent with this written investment policy adopted by the Board. The policy will be structured to maximize the financial return to the Plan with risks incumbent in each investment and will be structured to establish and maintain an appropriate diversification of the Plan's assets. The Board shall establish a system of internal controls and be made a part of the Board's operational procedures. As part of any financial audit periodically required by the City of Clearwater, the independent certified public accountant will review the Plan's system of internal controls. The internal controls should be designed to prevent losses of funds which might arise from fraud. error. misrepresentation by third parties, or imprudent actions by the Board or employees of The City of Clearwater. The Board shall establish a policy for continuing education of its members relating to the investments of the Plan and Board's responsibilities. ./ . INTRODUCTION This statement of investment goals and objectives is set forth in keeping with the fiduciary requirements under existing federal laws. Its purpose is to express the Board's position regarding the asset mix of the Plans, set forth an appropriate set of objectives for the Plan's assets and define policies and restrictions within which the Investment Managers may formulate and execute their investment decisions. OTHER CONSIDERATIONS To reduce volatility of year-to-year changes in investment return. To diversify investments to the extent practicable to control the risk of loss resulting from over concentration 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 Board. To maintain an investment posture that if flexible, within guidelines, to the ever-changing economic environment as well as to the volatile capital and securities markets. Invest only in marketable securities. No illegal investments shall be made. Assets for which a fair market value is not provided shall be excluded from the assets used in the determination of annual funding cost. INVESTMENT FUND MANAGER PORTFOLIO MANAGER CHARACTERISTICS The Board recognizes that a professional Investment Manager should be retained. In order to facilitate that selection process, the following criteria and standards are adopted: 1. Have employed essentially the same portfolio managers for the past five years. 2. Have consistently maintained the same investment philosophy for the past five years. 3. Show three and five year composite performance in the top quartile of a nationally recognized rating service. 4. Have maintained an equity portfolio (without cashl standard deviation no more than twenty percent (20%1 higher than the market. 5. Present performance monitor report from an identified account showing three and five year results above the 25th percentile using the Fund's asset allocation. /" 6. Actively manage both fixed income and equity portfolios. 7. Demonstrate to the Board satisfaction past results of changing asset allocation in concert with changing markets. 2 8. Total management and custodian fees of less than one percent 11%1. 9. Provide a minimum of three references from similar size, asset allocation and objective funds. 10. Provide the name of all public sector clients who have left the firm in the past twelve months. 11. Withdrawal penalties are not imposed. 12. Allow the Board the right of termination, without cause, of the manager's contract upon thirty days notice. 13. Provide the Board a minimum of ninety days notice ofthe investment manager's intent to terminate this agreement. OBJECTIVES AND POLICIES The Investment Manager will manage a pool of assets on a fully discretionary basis within the context of the policies of this section. Asset Mix The asset mix shall be the responsibility of the Investment Manager subject to the following guidelines: Minimum Target Maximum Representative Asset Class Weight Weight Weight Index Equities 40% 55% 65% S&P 500 lat cost 1 Fixed Income 25% 35% 60% LBGC Cash & Equivalents 0% 10% 15% 91 Day T-Bills Small Cap 0% 0% 5% Russell 2000 Foreign 0% 0% 10% EAFE 3 / INCOME DISTRIBUTION There are no specific requirements for current income distributions. INVESTMENT GUIDELINES The investment guidelines, which follow, should be adhered to in managing the Plan assets. Any changes in these investment guidelines will be communicated to the investment managers by the Board in writing. If all guidelines are not met, no additional investment may be made in the investment category, which does not meet the guidelines. EQUITY POLICIES AND RESTRICTIONS 1. Common stocks and preferred stocks issued by a corporation organized under the laws of the United States, any state, or organized territory of the United States or the District otColumbia may be selected. Up to ten percent of the total portfolio at cost may be invested in foreign securities. 2. A corporation's stock may be selected provided it is listed on any one or more of the recognized national stock exchanges lincluding the NASDAQl. 3. Certain securities and investments are ineligible for inclusion by the investment managers in their pool of assets: al private placement bl unregistered or restricted stock cl option contracts dl futures contracts el uncovered shor:t positions fl margin transactions gl commodities hI warrants 4. A stock position of the equity portfolio at cost may not exceed the individual stock weighting of the S&P 500 by more than 2 percentage points without written approval from the Trustees 5. A sector position of the equity portfolio at cost may not exceed the S&P 500 sector weighting by more than 10 percentage points without written approval from the Trustees. 6. The Investment Manager will pursue securities transactions on a best execution efforts basis through the Blind Principal Bidding trading approach. The Investment Manager stands behind this approach as being in the best financial interest of the Plan. 7. Investments in commingled stock funds which meet the criteria listed above are permitted. 8. The Investment Manager will have full discretion over turnover and allocation of equity holdings among selected securities and industry groups, within the limits described above. 9. All investments should have sufficient liquidity to pay obligations as they come due. 10. If the Fund's equity policies are exceeded, the Investment Manager will bring the Plan into compliance as soon as economically feasible. 4 FIXED INCOME POLICIES AND RESTRICTIONS 1. Fixed income securities are to be selected and managed to ensure appropriate balances in qualities and maturities consistent with current money market and economic conditions. "Active" bond management is encouraged. as deemed appropriate by the investment managers. Selection of a particular investment should be determined primarily by the safety and liquidity of the investment and only secondarily by the yield available. 2. Fixed income securities include U.S. Government and agency obligations. in A rated or higher corporate bonds. debentures and preferred stocks. Bonds and othe~ 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 may be selected provided the corporation meets the standards set forth in section 185.06111Ibl. Florida Statutes. as the same may be amended from time to time. 3. Investments in privately placed or other non-marketable debt are not permitted. 4. Speculating in fixed income or interest rate futures is not permitted. 5. The duration of the fixed income portfolio may not exceed 125% of the duration of the Lehman Brothers Government/Corporate Bond Index subject to quarterly review. No issues. Treasury or Corporate Bonds. may be purchased with more than 15 years to maturity. Also. no issue of mortgages would be made with a duration in excess of a 15 year Treasury. An attempt will also be made to match investment maturities with known cash needs and anticipate cash-flow requirements. 6. Preferred stocks must be rated A or better by Moody's or Standard & Poor's at the time of purchase. 7. Investments in securities of a single issuer with the exception of the U.S. Government and its agencies may not exceed five percent of the fixed income portfolio's value at cost. 8. If the fixed income security is downgraded below A after purchase. the Investment Manager will dispose of the security as soon as it is economically feasible to do so. 9. Investments in commingled funds which meet the criteria listed above are permitted. 10. All investments should have sufficient liquidity to pay obligations as they come due. ./ 5 CASH POLICIES AND RESTRICTIONS 1. Cash equivalents should not be viewed only as avenues to meet the liquidity requirements of the Plan. Selection of a particular investment should be determined primarily by the safety and liquidity of the investment and only secondarily by the yield available. 2. Cash and equivalents include money market funds, commercial paper, repurchase agreements, Treasury Bills, certificates of deposits and bankers acceptances, which mature within one year. ( 3. Commercial paper must be rated A-1 or P-1 by Standard & Poor's and Moody's respectively. If an issue receives a split rating, the lower rating will apply. 4. Bankers acceptances and certificates of deposits should only be purchased from larger, well capitalized domestic banks. All securities must be dollar denominated. 5. Investments in securities of a single issuer with the exception of the U.S. Government and its agencies may not exceed five percent of the value of the portfolio at cost. 6. Foreign investments are not permitted. 7. If the cash or cash equivalent security is downgraded below A-1 or P-1 after the purchase, the Investment Manager will dispose of the security as soon as it is economically feasible to do so. OTHER ASSETS 1. All approved institutions and dealers transacting repurchase agreements must execute and perform as stated in the master repurchase agreement and shall adhere to the requirements of the master repurchase agreement. 2. Investments not listed in the investment policy are prohibited. Unless otherwise authorized by law or ordinance, the investment of the assets of any local retirement system or plan covered by this part shall be subject to the limitations and conditions set forth in s.215.47 (1). (2). 131, 141, 151, 161, (71, 181, 1101, and 1161. INVESTMENT OBJECTIVES AND MEASUREMENT STANDARDS 1. The Board shall retain a monitoring service to evaluate and report on a quarterly basis the rate of return and relative performance of the fund. 2. The Board will meet quarterly with the monitoring service's representative to review the performance report. /' 3. Assets managed by the investment managers shall be invested to ensure that principal is preserved, both in real and. nominal terms. 4. For the fund, the total rate of return should equal or exceed the actuarial earnings assumption and should equal or exceed the Consumer Price Index plus 3.5% over rolling three year period. 6 5. Total return, including income and changes in market value, should be competitive with the experience of other balanced funds, consistently rank in the top half of the Wilshire Cooperative Public Fund Universe each calendar year. Over rolling three year periods, the returns should rank in the top third of the Wilshire Cooperative Public Fund Universe. 6. Over the rolling three year periods, the Total Fund will be compared to an unmanaged composite of the market indices wei.ghted in direct proportion to the Fund's actual percentage investment in equities, fixed income and cash equivalents. 7. The fixed income portfolio return will be compared to the Lehman Brothers Government Corporate Index. Over rolling three year periods fixed income returns are expected to exceed this index net of all costs. 8. The cash portfolio return will be compared to the Salomon Brothers 91-day U.S. Treasury Bill Index. Over rolling three year periods cash returns are expected to meet this index net of all costs. 9. Performance of this fund will be evaluated on a quarterly basis. The evaluation will focus on the extent to which the Investment Manager has complied with the Plans' guidelines and the extent to which the overall performance of the Plan achieves or exceeds the targeted goals. 10. Based on the target asset allocation, the Board has determined that the total expected annual rate of return is 8% for the current year, for each of the next several years, and for the long term thereafter. This determination must be filed promptly with the Department of Management Services and with the Plan's sponsor. CRITERIA FOR INVESTMENT MANAGER REVIEW The Board wishes to adopt standards by which judgments of the ongoing performance of a portfolio manager may be made. With this in mind, the following are adopted: If at any time, anyone of the following is breached, the portfolio manager will be warned of the Board's serious concern for the Fund's continued safety and performance. 1. Four consecutive quarters of the total Fund performance below the 75th percentile in manager performance rankings. 2. Standard deviation for the Fund in excess of 120% of the market. 3. Loss by the manager of any senior investment personnel. 4. Any change in basic investment philosophy by the manager. 5. Failure to attain a 60% vote of confidence by the Board of Trustees. /' 7 Valuation of Illiquid Investments The valuation of illiquid investments for which a generally recognized market is not available or for which there is no consistent or generally accepted pricing mechanism shall be determined during each actuarial valuation. For each actuarial evaluation, the Board must verify the determination of the fair market value for those investments and ascertain the determination complies with all applicable state and federal requirements. The Board shall disclose to the Department of Management Services and the City of Clearwater each such investment for which the fair market value is not provided. MEETINGS On a timely basis, but not less than four times a year, the Committee will meet to focus on: 1. Manager's adherence to the Plan's guidelines. 2. Material changes in the manager's organization. investment philosophy and/or personnel; and 3. Comparisons of the manager's results to its investment objectives. The Plan Sponsor will review the costs associated with the Plans annually. Costs to be reviewed include: 1. Asset Management Fees: The active management of the fund. THIRD PARTY CUSTODIAL AGREEMENT The Plan's securities should be held with a third party, and all securities purchased by, and all collateral obtained by, the Board should be properly designated as an asset of the Board. No withdrawal of securities. in whole or in part, shall be made from safekeeping except by an authorized member of the Board or the Board's designee. 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 "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. REPORTING On an annual basis, the consultant shall prepare a report on the City of Clearwater investment activities. The Board will present these reports to City Council of the City of Clearwater. The reports shall include a listing of all of the Plan's investments 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. / 8 FILING OF INVESTMENT POLICY Upon adoption by the Board, the investment policy shall be promptly filed with the Department of Management Services and the City of Clearwater. The effective date of the policy shall be 31 calendar days from filing with the City of Clearwater. / 9 ADOPTION The foregoing Investment Policy Statement was unanimously adopted by the Trustees of the City of Clearwater Supplemental Pension Trust Fund on ~3 day of Seprem bl?~ .2005. Chairman A~~~.g~~1 v.fJ INV~%& }Vm1'VntJiJ/1-L) la. Q'-d.-3-0S Date tj /"7-? ) 0 c;;- , Date 10