Investment Policies: Policies with a Purpose
Investment Policies: Policies with a Purpose
www.gpafixedincome.com 503-248-9973
Government Portfolio Advisors
Good investment policies are more than just a plan…
Use to Enhance Communication
Gather Information
Define your purpose
Write & Re-write
Policies with a Purpose
Improve as things evolve
4
Government Portfolio Advisors
Step One: Define your purpose and goals
1.1 Define the purpose of the assets
ASK WHY?
1.2 Identify the beneficial owner(s) of the assets 1.3 Consider stakeholders (aka interested parties) 1.4 Evaluate risk tolerance and profile of your entity
Policies with a Purpose
5
Government Portfolio Advisors
Step 1.1 | Define the purpose of the assets
What is the money for? When are you going to spend it? Do you plan to spend or reinvest the earnings?
Policies with a Purpose
6
Government Portfolio Advisors
Step 1.2 | Identify the beneficial owners
Who is going to benefit by prudent investment management? Why does knowing matter? •
Identify who will be most interested in the outcomes
•
Anticipate concerns
Policies with a Purpose
7
Government Portfolio Advisors
Step 1.3 | Owners and Stakeholders
Stakeholders are interested parties belonging to a system or organization where all participants are seen as having an interest in achieving success.
Policies with a Purpose
8
Government Portfolio Advisors
Step 1.3 | Consider all stakeholders Who are stakeholders beyond beneficial owners? • Authoritative Bodies • Bond Holders (Creditors) • Oversight Committees • Elected Officials • Internal Staff • Outside service providers
Policies with a Purpose
9
Government Portfolio Advisors
Step 1.4 | Evaluate risk tolerance of your entity
Ensure everyone is on the same page; articulate vague concepts Some commonly miscommunicated: • Prudent Investor versus Prudent Person • Delegation of Authority • Ethics and Conflicts of Interest • Priorities of Safety, Liquidity and Return
Policies with a Purpose
10
Government Portfolio Advisors
Step 1.4 | Quantify risk
Safety, liquidity, return may be understood differently • i.e., does safety, or preservation of principal, refer to each individual security or to the portfolio as a whole? • If a portfolio manager realizes a lost to improve the position of the overall portfolio, are they acting in contradiction to the safety mandate? • How will entity manage potentially conflicting goals? i.e., some will argue that putting liquidity first, or on par with safety, actually increases the overall safety of your portfolio
Policies with a Purpose
11
Time invested now will reap rewards later
12
Government Portfolio Advisors
Step Two: Gather Information
2.1 Assess and obtain all legal and accounting requirements 2.2 Assess Internal Resources 2.3 Ask for clarification
Policies with a Purpose
13
Government Portfolio Advisors
Step 2.1 | Obtain all legal and accounting requirements
Obtain and familiarize with governing code • Ask for clarification of terms • Discuss internally to ensure common understanding Are you restricted by your accounting rules? • Are there limitations with your accounting system? • Do you have the ability to amortize/accrete? • How are you impacted by GASB 31, 40, 72, 79?
Policies with a Purpose
14
Government Portfolio Advisors
Step 2.2 | Assess Internal Resources
Knowledge of portfolio management staff Experience of operational staff Type and familiarity with portfolio management/accounting systems •
Able to calculate duration, return, amortization and accretion?
Type and familiarity with Portfolio Analytic systems •
What if scenarios, shock testing, attribution?
Policies with a Purpose
15
Government Portfolio Advisors
Step 2.2 | Assess Internal Resources
Helpful Hint: While assessing resources it’s a good time to determine total annual cost of operations whether operating in-house or using external advisors
Policies with a Purpose
16
Government Portfolio Advisors
Step 2.3 | Ask for clarification • Will you manage on total return or book return? • What is an appropriate benchmark? • Have you engaged a third party custodian for assets? • Will you employ an active or passive strategy? • Do internal managers have the expertise required? • Will you engage an outside manager or consultant? Policies with a Purpose
17
Government Portfolio Advisors
Step Three: Write (or Re-write)
3.1 - Find good templates – But DON’T cut and paste 3.2 - Use guidelines as a check and balance 3.3 - Think of ways to demonstrate compliance 3.4 – Helpful tips
Policies with a Purpose
18
Government Portfolio Advisors
Preparing to write
Talent Needs
Resources
Time to Write Policies with a Purpose
19
Government Portfolio Advisors
Step 3.1 | Find good templates
WPTA offers excellent resources (www.wpta.us)
Consider applying for WPTA policy certification
GFOA’s Best Practice Recommendations
Policies with a Purpose
20
Government Portfolio Advisors
Step 3.2 | Guidelines can help cover the bases
Suggested requirements include: • Scope • Prudence • Objective • Delegation of authority • Ethics and conflicts of interest • Internal controls • Investment Policy adoption and certification • Requirements for continuing education and development
Policies with a Purpose
21
Government Portfolio Advisors
Step 3.2 | Guidelines (continued) • Authorized Financial Dealers and Institutions • Authorized and Suitable Investments • Credit Quality Guidelines at the security and portfolio level • Use of Investment Pools / Mutual Funds • Collateralization • Safekeeping and Custody (3rd party custody!)
• Diversification • Maximum Maturities, weighted average life or duration • Performance Standards (Benchmarks) • Reporting Requirements and Standards • Glossary
Policies with a Purpose
22
Government Portfolio Advisors
Step 3.3 | Demonstrate Compliance
If you say you are going to do something, incorporate a process for getting it done! Imagine there is an auditor looking over your shoulder at all times!
Policies with a Purpose
23
Government Portfolio Advisors
Step 3.4 | Helpful tips
• Keep your WHY in mind • Be clear and concise • Avoid vague and contradictory statements • Clearly define guidelines, but not too restrictive • Always include checks and balances (more in procedures) • Remember trust and verify • Solicit stakeholder feedback
Policies with a Purpose
24
Government Portfolio Advisors
Good Policies are an Effective Relationship Management Tool
Governing Body
IPS Asset Owners
Staff
Policies with a Purpose
25
Government Portfolio Advisors
Step Four: Use policy to enhance communication
4.1 - Keep stakeholders informed. Transparency promotes trust! 4.2 - Keep parties accountable 4.3 – Provide basis for regular review of objectives 4.4 - Clear and concise communication
Policies with a Purpose
26
Government Portfolio Advisors
Step 4.1 | Keep stakeholders informed Distribute formally
Publish on the website
Encourage interaction
Policies with a Purpose
27
Government Portfolio Advisors
Step 4.2 | Keep everyone accountable
Managing expectations is key!
Stakeholder buy-in reduces tough conversations
Policies with a Purpose
28
Government Portfolio Advisors
Step 4.3 | Promote discussion
• Encourage feedback • Creating a process for feedback improve staff performance • Clearly conveyed expectations empowers teams • Improved performance will lead to improved results
Policies with a Purpose
29
Government Portfolio Advisors
Step 4.4 | Communicate Clearly
The single biggest problem in communication is the illusion that it has taken place. George Bernard Shaw
Policies with a Purpose
30
Government Portfolio Advisors
Step Five: Hone as objectives and processes evolve
5.1 - Review at regular intervals – no less than once a year 5.2 - Stay informed of industry practices and changes in regulation 5.3 - Empower teams to ask questions
Policies with a Purpose
31
Government Portfolio Advisors
Step 5.1 | Review at regular intervals
Review at least annually with finance team or committee
Document with a memo
Present to the board at least every three years
Policies with a Purpose
32
Government Portfolio Advisors
Step 5.2 | Stay up on best practices
• Stay active in trade associations • Collaborate with peers • Monitor State Treasurer’s legislative changes • Make friends
Policies with a Purpose
33
Government Portfolio Advisors
Step 5.3 | Empower teams to ask questions
• Adopt a culture of “always be learning” • Require attendance of educational forums • Watch for resources from GFOA, WPTA and other trade associations
Policies with a Purpose
34
Government Portfolio Advisors
Conclusion: • A little extra work upfront to set the tone reaps rewards • Convey philosophy and reasons behind practice to all stakeholders • Realistic assessment of resources a must • Strategies should align with available resources • Results must be measurable • Use templates, but don’t cut and paste • Policy should reflect what actually happens • Don’t forget your friendly auditor! Policies with a Purpose
35
Government Portfolio Advisors
Disclaimer
Government Portfolio Advisors, LLC (GPA) presentations have been prepared either from publicly available information or reflects the opinions of the author. Information contained within the investment reports provided by GPA are believed to be reliable but may not have been independently verified. GPA, LLC does not guaranty, represent or warrant, or accept an responsibility or liability as to, the accuracy, completeness or appropriateness of the information contained in these reports. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in these reports are subject to change without notice. Forecasts represent estimates. Information provided by Government Portfolio Advisors is expressed in good faith, but not guaranteed. Investing carries risk of losses. Information provided by GPA does not constitute, and should not be used as a substitute, tax, legal or investment advice. It is imperative for investors to understand the risks before trading or making investment decisions. The content of this report may not be altered, reproduced or redistributed in whole or in part, without prior written consent of Government Portfolio Advisors.
Policies with a Purpose
Thank You! Enjoy the rest of the conference!
Deanne Woodring, CFA® [email protected]
If you have any questions, do not hesitate to ask.
Susan Munson, CFP®, CFIP [email protected] Mike Clark [email protected]
www.gpafixedincome.com 503-248-9973
Government Portfolio Advisors
Good investment policies are more than just a plan…
Use to Enhance Communication
Gather Information
Define your purpose
Write & Re-write
Policies with a Purpose
Improve as things evolve
4
Government Portfolio Advisors
Step One: Define your purpose and goals
1.1 Define the purpose of the assets
ASK WHY?
1.2 Identify the beneficial owner(s) of the assets 1.3 Consider stakeholders (aka interested parties) 1.4 Evaluate risk tolerance and profile of your entity
Policies with a Purpose
5
Government Portfolio Advisors
Step 1.1 | Define the purpose of the assets
What is the money for? When are you going to spend it? Do you plan to spend or reinvest the earnings?
Policies with a Purpose
6
Government Portfolio Advisors
Step 1.2 | Identify the beneficial owners
Who is going to benefit by prudent investment management? Why does knowing matter? •
Identify who will be most interested in the outcomes
•
Anticipate concerns
Policies with a Purpose
7
Government Portfolio Advisors
Step 1.3 | Owners and Stakeholders
Stakeholders are interested parties belonging to a system or organization where all participants are seen as having an interest in achieving success.
Policies with a Purpose
8
Government Portfolio Advisors
Step 1.3 | Consider all stakeholders Who are stakeholders beyond beneficial owners? • Authoritative Bodies • Bond Holders (Creditors) • Oversight Committees • Elected Officials • Internal Staff • Outside service providers
Policies with a Purpose
9
Government Portfolio Advisors
Step 1.4 | Evaluate risk tolerance of your entity
Ensure everyone is on the same page; articulate vague concepts Some commonly miscommunicated: • Prudent Investor versus Prudent Person • Delegation of Authority • Ethics and Conflicts of Interest • Priorities of Safety, Liquidity and Return
Policies with a Purpose
10
Government Portfolio Advisors
Step 1.4 | Quantify risk
Safety, liquidity, return may be understood differently • i.e., does safety, or preservation of principal, refer to each individual security or to the portfolio as a whole? • If a portfolio manager realizes a lost to improve the position of the overall portfolio, are they acting in contradiction to the safety mandate? • How will entity manage potentially conflicting goals? i.e., some will argue that putting liquidity first, or on par with safety, actually increases the overall safety of your portfolio
Policies with a Purpose
11
Time invested now will reap rewards later
12
Government Portfolio Advisors
Step Two: Gather Information
2.1 Assess and obtain all legal and accounting requirements 2.2 Assess Internal Resources 2.3 Ask for clarification
Policies with a Purpose
13
Government Portfolio Advisors
Step 2.1 | Obtain all legal and accounting requirements
Obtain and familiarize with governing code • Ask for clarification of terms • Discuss internally to ensure common understanding Are you restricted by your accounting rules? • Are there limitations with your accounting system? • Do you have the ability to amortize/accrete? • How are you impacted by GASB 31, 40, 72, 79?
Policies with a Purpose
14
Government Portfolio Advisors
Step 2.2 | Assess Internal Resources
Knowledge of portfolio management staff Experience of operational staff Type and familiarity with portfolio management/accounting systems •
Able to calculate duration, return, amortization and accretion?
Type and familiarity with Portfolio Analytic systems •
What if scenarios, shock testing, attribution?
Policies with a Purpose
15
Government Portfolio Advisors
Step 2.2 | Assess Internal Resources
Helpful Hint: While assessing resources it’s a good time to determine total annual cost of operations whether operating in-house or using external advisors
Policies with a Purpose
16
Government Portfolio Advisors
Step 2.3 | Ask for clarification • Will you manage on total return or book return? • What is an appropriate benchmark? • Have you engaged a third party custodian for assets? • Will you employ an active or passive strategy? • Do internal managers have the expertise required? • Will you engage an outside manager or consultant? Policies with a Purpose
17
Government Portfolio Advisors
Step Three: Write (or Re-write)
3.1 - Find good templates – But DON’T cut and paste 3.2 - Use guidelines as a check and balance 3.3 - Think of ways to demonstrate compliance 3.4 – Helpful tips
Policies with a Purpose
18
Government Portfolio Advisors
Preparing to write
Talent Needs
Resources
Time to Write Policies with a Purpose
19
Government Portfolio Advisors
Step 3.1 | Find good templates
WPTA offers excellent resources (www.wpta.us)
Consider applying for WPTA policy certification
GFOA’s Best Practice Recommendations
Policies with a Purpose
20
Government Portfolio Advisors
Step 3.2 | Guidelines can help cover the bases
Suggested requirements include: • Scope • Prudence • Objective • Delegation of authority • Ethics and conflicts of interest • Internal controls • Investment Policy adoption and certification • Requirements for continuing education and development
Policies with a Purpose
21
Government Portfolio Advisors
Step 3.2 | Guidelines (continued) • Authorized Financial Dealers and Institutions • Authorized and Suitable Investments • Credit Quality Guidelines at the security and portfolio level • Use of Investment Pools / Mutual Funds • Collateralization • Safekeeping and Custody (3rd party custody!)
• Diversification • Maximum Maturities, weighted average life or duration • Performance Standards (Benchmarks) • Reporting Requirements and Standards • Glossary
Policies with a Purpose
22
Government Portfolio Advisors
Step 3.3 | Demonstrate Compliance
If you say you are going to do something, incorporate a process for getting it done! Imagine there is an auditor looking over your shoulder at all times!
Policies with a Purpose
23
Government Portfolio Advisors
Step 3.4 | Helpful tips
• Keep your WHY in mind • Be clear and concise • Avoid vague and contradictory statements • Clearly define guidelines, but not too restrictive • Always include checks and balances (more in procedures) • Remember trust and verify • Solicit stakeholder feedback
Policies with a Purpose
24
Government Portfolio Advisors
Good Policies are an Effective Relationship Management Tool
Governing Body
IPS Asset Owners
Staff
Policies with a Purpose
25
Government Portfolio Advisors
Step Four: Use policy to enhance communication
4.1 - Keep stakeholders informed. Transparency promotes trust! 4.2 - Keep parties accountable 4.3 – Provide basis for regular review of objectives 4.4 - Clear and concise communication
Policies with a Purpose
26
Government Portfolio Advisors
Step 4.1 | Keep stakeholders informed Distribute formally
Publish on the website
Encourage interaction
Policies with a Purpose
27
Government Portfolio Advisors
Step 4.2 | Keep everyone accountable
Managing expectations is key!
Stakeholder buy-in reduces tough conversations
Policies with a Purpose
28
Government Portfolio Advisors
Step 4.3 | Promote discussion
• Encourage feedback • Creating a process for feedback improve staff performance • Clearly conveyed expectations empowers teams • Improved performance will lead to improved results
Policies with a Purpose
29
Government Portfolio Advisors
Step 4.4 | Communicate Clearly
The single biggest problem in communication is the illusion that it has taken place. George Bernard Shaw
Policies with a Purpose
30
Government Portfolio Advisors
Step Five: Hone as objectives and processes evolve
5.1 - Review at regular intervals – no less than once a year 5.2 - Stay informed of industry practices and changes in regulation 5.3 - Empower teams to ask questions
Policies with a Purpose
31
Government Portfolio Advisors
Step 5.1 | Review at regular intervals
Review at least annually with finance team or committee
Document with a memo
Present to the board at least every three years
Policies with a Purpose
32
Government Portfolio Advisors
Step 5.2 | Stay up on best practices
• Stay active in trade associations • Collaborate with peers • Monitor State Treasurer’s legislative changes • Make friends
Policies with a Purpose
33
Government Portfolio Advisors
Step 5.3 | Empower teams to ask questions
• Adopt a culture of “always be learning” • Require attendance of educational forums • Watch for resources from GFOA, WPTA and other trade associations
Policies with a Purpose
34
Government Portfolio Advisors
Conclusion: • A little extra work upfront to set the tone reaps rewards • Convey philosophy and reasons behind practice to all stakeholders • Realistic assessment of resources a must • Strategies should align with available resources • Results must be measurable • Use templates, but don’t cut and paste • Policy should reflect what actually happens • Don’t forget your friendly auditor! Policies with a Purpose
35
Government Portfolio Advisors
Disclaimer
Government Portfolio Advisors, LLC (GPA) presentations have been prepared either from publicly available information or reflects the opinions of the author. Information contained within the investment reports provided by GPA are believed to be reliable but may not have been independently verified. GPA, LLC does not guaranty, represent or warrant, or accept an responsibility or liability as to, the accuracy, completeness or appropriateness of the information contained in these reports. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in these reports are subject to change without notice. Forecasts represent estimates. Information provided by Government Portfolio Advisors is expressed in good faith, but not guaranteed. Investing carries risk of losses. Information provided by GPA does not constitute, and should not be used as a substitute, tax, legal or investment advice. It is imperative for investors to understand the risks before trading or making investment decisions. The content of this report may not be altered, reproduced or redistributed in whole or in part, without prior written consent of Government Portfolio Advisors.
Policies with a Purpose
Thank You! Enjoy the rest of the conference!
Deanne Woodring, CFA® [email protected]
If you have any questions, do not hesitate to ask.
Susan Munson, CFP®, CFIP [email protected] Mike Clark [email protected]
