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STATEMENT OF INVESTMENT POLICY STATEMENT OF INVESTMENT POLICY FOR THE CITY OF CLEARWATER FIREFIGHTERS' SUPPLEMENTAL TRUST FUND Adopted: S' . 1 '-t . b~ Introduction The Board of Trustees of the Qty of Clearwater Firefighters' Supplemental Trust Fund has established this Statement of Investment Policy. This policy has been identified by the Board as having the greatest expected investment return, and the resulting positive impact on asset values, funded status, and benefits, without exceeding a prudent level of risk. The Board determined this policy after evaluating the implications of increased investment return versus increased variability of return for a number of potential investment policies with varying commitments to stocks and bonds. This Statement of Investment Policy Is intended to comolement the investment guidelines provided In all applicable State Statutes and local ordinances. The purpose of this Statement is to: 1) Provide the investment manager a more accurate understanding of the Trustees' investment objectives and, 2) Indicate the criteria by which the investment manager's performance will be evaluated. RECEIVED JUN 22 2005 RECEIVED JUN 1 7."2005 Finance Department OFFICIAL 1;IECOi~DS AND lEGiSLATIVE SR\fCS DEPT INVESTMENT MANAGER RESPONSIBILITIES 1) Within the guidelines and restrictions set forth herein, it is the intention of the Board to give the investment manager full investment discretion, with respect to assets under its management. The investment manager shall discharge its responsibilities in the same manner as it would if the Fund were governed by the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Although the Fund Trustees acknowledge that ERISA does not apply to a governmental fund, it hereby imposes the fiduciary provisions of ERISA upon the investment manager whose performance shall conform to the statutory provisions, rules, regulations, interpretations and case law of ERISA. The investment manager shall acknowledge, in writing, that it is a named fiduciary of the Fund. 2) The investment manager is expected to provide any reasonable information requested by the Board of Trustees. At a minimum, each manager shall provide a quarterly report detailing their investment activity, the portfolio's current value, and any changes in investment philosophy or strategy. The Firm's investment manager is expected to meet with the Board of Trustees at least once per year. A designated representative will meet with the Board of Trustees, as requested. 3) Unless otherwise provided by the Custodian, the investment manager will monitor portfolio activity to minimize uninvested. cash balances. 4) The investment manager shall be responsible only for those assets under its management. 5) It will be the responsibility of the investment manager to review the monthly valuations provided by the Custodian and to note, in writing, any significant discrepancies from the valuations provided in their own reports. Administrative 1) The Board of Trustees relies on its consultants and profesSionals to proVide continuing education on pension and investment issues. The Board of Trustees also recognize state and regional conferences as a source of continuing education. The Trustees are encouraged to attend conferences, sq,ools, and other functions periodically in order to fulfill this requirement. 2) The investment policy is to be promptly filed with the Department of Management Services, plan sponsor and consulting actuary. The effective date of the investment policy and any amendment thereto shall be the 31st calendar day following the filing date with the plan sponsor. Changes to the investment policy will go into effect the latter of 31 days after filing with the City or the adoption of the ordinance allowing the changes. 2 GENERAL OBJECTIVES The primary investment objective of the City of ClealWater Firefighters' Supplemental Trust Fund is the preservation of invested capital. The secondary objective is to achieve moderate long- term real growth of the assets while minimizing the volatility of returns. To achieve these objectives, the Board seeks to create a conservative, well-diversified and balanced portfolio of high quality equity, fixed income and money market securities. The Board has determined that one or more outside investment managers shall be retained to assure that all investments are managed in both a prudent and professional manner and in compliance with the stated investment guidelines. INVESTMENT OBJECTIVES Investment objectives are intended to proVide quantifiable benchmarks to measure and evaluate portfolio return and risk. Most investment styles require a full market cycle to allow an investment manager to demonstrate his abilities. A full market cycle is generally defined as a three to five year time period. As a result, performance objectives will be measured over three to five year periods. Monitoring shorter periods may be used to determine the trend of performance premiums or deficiencies. The specific investment objectives of the Oty of OealWater Firefighters' Supplemental Trust Fund are as follows: Primary Objective: To earn an average rate of return over the long term (3 to 5 years) which exceeds the return of a Target Index. The Target Index for the Oty of ClealWater Rrefighters' Supplemental Trust Fund is defined as a 40% investment in the S&P 500 Stock Index, a 10% investment in the Europe Austrailasia and Far East (EAFE) Stock Index, and a 50% investment in the Merrill Lynch Master Bond Index. In addition, it is expected that the total rate of return earned by the Fund and the returns earned by the stock and bond portions of the portfolio will each rank above average when compared to a representative universe of other, similarly managed portfolios. Secondary Objectives: To earn an average annual return over the long term which exceeds the Consumer Price Index (CPI) by 3.0%. Volatility: The volatility of the Fund's total returns is expected to be similar to that of the Target Index and will be evaluated accordingly. The above invesbnent objectives have been established for the entire City of Clearwater Firefighters' Supplemental Trust Fund. The specific invesbnent objectives for each investment manager will be outlined in addenda to this overall Statement of Investment Policy. 3 INVESTMENT GUIDELINES The Board of Trustees has established the following target asset allocation for the entire Clearwater Firefighters' Supplemental Trust Fund investment account: Target Allocation (at market) Equity securities 50% Fixed income securities 50% Cash Equivalents 0% To implement this strategy, the Board has chosen to hire one or more professional investment managers. Specific assignments and additional guidelines for each investment manager will be outlined in addenda to this overall Statement of Investment Policy. The following gUidelines and restrictions apply to all Fund investments. In accordance with the policies established by the Board of Trustees, the assets of the Clearwater Firefighters' Supplemental Trust Fund shall be invested in a diversified portfolio of fully negotiable, equity, fixed income, and money market securities, provided they meet the follOWing criteria: EQUITY SECURITIES: 1) Investments in equity securities shall be limited to no more than 600/0 (at cost) of the Fund's total asset value. 2) All equity investments shall be limited to fully and easily negotiable equity securities. 3) No more than 5% at cost value of an investment manager's equity portfolio may be invested in the shares of a single corporate issuer. 4) No more than 10% at cost value of the plan's total assets may be invested in foreign equity securities, commingled or mutual funds. Direct investment in foreign companies is limited to those traded on a national exchange and lor American Depository Receipts (ADRs). 5) Investment in equity securities whose market capitalization is less than $2 billion dollars shall be limited to 25% of the total equity portfolio. 6) Investment in those corporations whose stock has been publicly traded for less than one year are limited to 15% of the equity portfolio. 7) Equities may be managed through the purchase of open-ended, no-load mutual funds or commingled funds. Equity funds purchased by investment advisors are expected to adhere to the guidelines herein. The board implicitly accepts the policy of a mutual fund or commingled fund when it makes a direct investment. 4 ; -' ." .. CASH EQUIVALENT SECURITIES: 1) The investment manager may invest only in the following short term investment vehicles: a) The money market or STIF provided by the Plan's custodian. b) Direct obligations of the United States Government with a maturity of one year or less. c) Commercial Paper with a maturity of 270 days or less that is rated A-l by Standard & Poor's or P-l by Moody's. c) Bankers Acceptances issued by the largest 50 banks in the United States (in terms of total assets). MUTUAL FUNDS I COMMINGLED FUNDS: The Board of Trustees recognizes and accepts that commingled and mutual fund investments will be dictated by the investment policies and gUidelines of those funds and that no additional constraints may be imposed on them. The decision to invest Fund assets in any commingled or mutual fund will only be made by the Board of Trustees after a thorough review of the policies and/or prospectuses of those funds and after it has been determined that those policies are appropriate and consistent with the investment objectives of the City of Clearwater Rrefighters" Supplemental Trust Fund. REVIEW OF POLICY It is the intention of the Board of Trustees of the Oty of Oearwater Firefighters' Supplemental Trust Fund to review this Statement of Investment Policy and its addenda periodically to amend it to reflect any changes in philosophy or objectives. However, if at any time the investment manager believes that the specific objectives defined herein cannot be met or that these guidelines unnecessarily constrict performance, the Board shall be so notified in writi.ng. Adopted S':1 \.{ , 0 r- 9r~ t J/o/n.r' ~ Chairman, Board of Tr City of Clearwater Fire ters' Supplemental Trust Fund C,_ dccs\~ """o.a......,__ 6