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Hornsby Shire Council |
Attachment to Report No. CC25/09
Page 0 |
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Council Investment Strategy |
March
13 2009 |
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This document
outlines Hornsby Shire Council’s Strategy for the investment of surplus funds. |
Version
1.1 |
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Investment Objectives
The purpose of this Strategy is to establish the risk management framework that Hornsby Shire Council adopts in investing surplus funds that are not required to meet immediate operational and capital expenditure. The overall investment objective of Council is to ensure the security of investments through the prudent management of investment risks while maximising returns.
Council therefore has two primary objectives for its investment portfolio:
· The preservation of the amount invested;
and
· To generate income from the investment
that exceeds the 11 am cash rate from time to time.
Authority for Investment
All investments are to be made in accordance with:
· Local
Government Act 1993 - Section 625;
· Local
Government Act 1993 - Order (of the Minister) dated 31 July 2008;
· The
Trustee Amendment (Discretionary Investments) Act 1997 – Sections
14A(2), 14C(1) & (2);
· Local
Government General Regulation 2005; and
· Department
of Local Government Circular 08-48.
· Hornsby
Shire Council Investment Policy
Implementation
This Investment Strategy sets out the intended approach to investments
in market conditions that are expected to prevail over the medium to long term
investment horizon. However, there will
be periods, sometimes sustained, where “normal” market conditions do not
apply. For example, periods where short
term interest rates are higher than long term interest rates, or investments of
similar credit quality offer different yields due to liquidity
differences. In these circumstances, the
investment approach taken at a given point in time may vary from strategy.
Where this occurs, it is incumbent on Council’s advisors to explain the
rationale for this variation as part of its recommendations to the Council
executive and/or elected Councillors.
Investment Management
Practices
The following investment management practices will be undertaken with the
applicable outcomes and objectives in mind.
|
Risk Area |
Outcomes & Objectives |
|
Investment Policy Compliance |
The portfolio is at all times compliant with
Council’s Investment Policy and relevant regulation pertaining to Local
Government. |
|
Liquidity |
Under this Investment Strategy, Council shall at all
times maintain sufficient funds in “Working Capital” to meet the anticipated
liabilities of Council for the following 90 days. In addition, sufficient capital shall be retained in
Short Term Assets to meeting Council’s funding requirements, net of
anticipated borrowings, for the following 3 to 12 month period. Medium and long-term investments will have varying
degrees of liquidity. An early exit
from these investments may result in incurring penalties. Regular reviews of Council’s allocation to these
investments relative to Council’s underlying investment horizons should
minimize the risk of having to exit an investment in adverse market
conditions. Exposure to medium and long-term
investments will be limited to the proportion of the portfolio identified for
these investment horizons. |
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Security |
Working Capital Funds, Short Term Funds and Short –
Medium Term Funds (as defined in this document) are to be invested to target
capital (principal) security over their nominated investment horizon to an
extremely high probability level.
Medium Term Funds and Long Term Funds (as defined in this document)
are to be invested to target capital (principal) security over their
nominated time horizon, and assuming they are held to maturity, to a high
probability level. This is achieved through investing in products of
minimal credit risk and matching term to available investment term. Where
possible, investments with external guarantees are preferred. |
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Income |
As a minimum that Council’s
requirement for investment income as quantified in operational budgets is
provided for. |
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Total
Return |
Having provided for liquidity, security and income
needs, total returns on Council funds are maximized with the view of
achieving the stated investment objective. |
Risk Management
All investments carry a trade-off between risk, liquidity and
return. Further, risks can either be
amplified or reduced when investments are combined within a portfolio. To address these risks the following
mechanisms are in place:
· Council’s investment policy is the key
risk control document. This will be complied
with at all times.
· Council has determined a list of
Investment Types that may be used for Council funds. These are set out in the table under
“Portfolio Construction”.
· Council will manage its Counterparty risk
by limiting the amount invested in any one financial institution to no more
than 30% of the total portfolio balance.
· Council will receive professional
assistance with evaluation and monitoring of longer term investments to ensure
they will meet Council needs. The advisor
shall also assist Council to ensure that the commercial terms on which Council
is offered investments by fund managers, issuers and brokers is fair and
reasonable.
· Council will be limited to investing with
financial institutions that have an Australian Banking Licence and are
regulated by the Australian Prudential Regulation Authority (APRA).
· Council will receive professional
assistance with portfolio construction so that:
8 The overall risk of the portfolio can be appropriately
assessed.
8 The portfolio can be adjusted over time as
circumstances warrant.
8 Regulatory changes are accommodated.
8 This Investment Strategy can be properly reviewed from
time to time and recommendations made for improvement where required.
Portfolio Construction
The Investment Strategy shall be developed to support Council’s
investment objectives for liquidity, security and return.
Council’s investment portfolio strategy shall be built around allocation
of Council funds into appropriate categories based on time horizon of
investment. Within each time horizon,
funds shall be allocated amongst approved investment types. The investment categories, and approved forms
of investment within each, are set out in the following table.
|
Investment
Category & Net Performance Target |
Investment
Horizon |
Investment
Types |
Comments |
Benchmark |
|
Working
Capital Cash
Rate |
0-3 months |
11 am call accounts Term deposits in ADIs TCorp cash facility |
Funds need to be available at short notice. With exception of call account funds should be diversified to take advantage of the Federal Government Deposit Guarantee and minimise counterparty risk. |
11am Indicative Cash Rate |
|
Short
Term Funds >benchmark |
3-12 months |
Term deposits in ADIs |
Should be diversified to take advantage of the Federal Government Deposit Guarantee and minimise counterparty risk. |
11am Indicative Cash Rate |
|
Short-Medium
Term Funds >benchmark |
1-2 years |
Term deposits in ADIs |
Should be diversified to take advantage of the Federal Government Deposit Guarantee and minimise counterparty risk. |
11am Indicative Cash Rate |
|
Medium
Term Funds >benchmark |
2-5 years |
Capital Guaranteed Structured Products Collateralised Debt Obligations TCorp Long Term Growth Facility |
Currently suspended – hold to maturity Currently suspended – hold to maturity |
UBSA Bank Bill Index UBSA Bank Bill Index Morningstar Growth Net Fund Median |
|
Long
Term Funds >benchmark |
5 years plus |
Capital Guaranteed Structured Products Collateralised Debt Obligations TCorp Long Term Growth Facility |
Currently suspended – hold to maturity Currently suspended – hold to maturity |
UBSA Bank Bill Index UBSA Bank Bill Index Morningstar Growth Net Fund Median |
Allocation of Funds
The Target Asset Allocation (TAA) will be determined by Council from time to time having regard to the economic conditions that are prevalent. The following table outlines the present TAA adopted by Council. The TAA will be established between the minimum and maximum allocation range shown in the table below.
|
Investment
Category |
Investment
Horizon |
Minimum Allocation |
Maximum Allocation |
|
Working capital funds |
0-3 months |
10.0% |
100.0% |
|
Short term funds |
3-12 months |
20.0% |
100.0% |
|
Short-Medium term funds |
1-2 years |
0% |
70.0% |
|
Medium term funds |
2-5 years |
0% |
50.0% |
|
Long term funds |
5 years |
0% |
25.0% |
Rebalancing
Each investment category will be re-balanced back to the target asset allocation weight at least quarterly. The tolerance range outside of the target asset allocation is reflected in the table below.
|
Investment
Category |
Tolerance range outside of target asset
allocation |
|
Working capital funds |
+ 10.0% |
|
Short term funds |
+ 10.0% |
|
Short-Medium term funds |
+ 7.5% |
|
Medium term funds |
+ 7.5% |
|
Long term funds |
+ 5.0% |
Benchmarking and Monitoring
Each investment in the portfolio is to be evaluated and monitored
against a performance benchmark appropriate to the risk and time horizon of the
investment concerned. The objective is
to ensure that all investments considered can deliver a level of return commensurate
with their risk profile and that they are competitive with an appropriate peer
group of alternative investment options.
The performance of each investment will be assessed against the benchmarks listed in the table below. It is Councils expectation that the performance of each investment will be greater than or equal to the applicable benchmark.
|
Investment |
Performance Benchmark |
|
Cash/Term
Deposits |
11am
Indicative Cash Rate |
|
Cash
Enhanced Funds/ FRN’s, CDO’s, Capital Guaranteed Products |
UBSA
Bank Bill Index |
|
NSW
T-Corp Long Term Growth Facility |
Morningstar
Growth Net Fund Median |
Minister’s Order
Following the release of the Cole Report in April 2008, the Department
of Local Government issued Circular 08-10 advising that the NSW Government has
adopted all 8 recommendations. These recommendations can be summarised as
follows:
8 All investment instruments be defined to include principal and interest income
8 Grandfather the right to retain existing investments that will no longer be eligible
8 Exclude manufactures and distributors of investment products from acting as investment advisors to councils
8 Suspend council’s right to utilise specific credit ratings until December 2009
8 Retain a partial deregulation model for governing local government investments
8 Ensure councils are better aware of their investment obligations
8 Tighten the current Minister’s Investment Order to limit investment options
8 Issue investment policy guidelines for councils
Given the grandfathering provisions contained in the Department of Local Government Circular 08-10 Council is not enforced to rebalance existing investments nor dispose of non-compliant investments if significant losses could be realised. Given the current economic climate and recent market valuations of structured financial products Council has determined that liquidation is not economically viable and has elected to hold these to maturity for the moment. Council will continue to monitor performance and seek regular valuations and advice from its investment advisor. Should favourable conditions return Council will look towards liquidation if losses can be guaranteed to be minimised.
Federal Government Deposit Guarantee
Scheme
In November 2008, legislation was passed by the Australian Parliament to
guarantee a range of deposit products and other securities up to and including
$1 Million for a period of 3 years with Approved Deposit-taking Institutions
(ADI’s). This mirrors other schemes internationally.
Council will seek advice on the conditions and implications of the
Guarantee schemes and prioritise investments supported by external guarantees.
Current
Investment Portfolio
Financial Markets
The second half of 2008 was a period of severe stress in
financial markets; a rapidly deteriorating macroeconomic outlook saw credit
markets factor in significant write-downs and equity indices fall to multi-year
lows. The events to date follow on from the bursting of the
As concerns grew over the depth of the underlying problems in these markets, trading in structured financial products effectively stalled and the lack of willing investors in the market drove down the deterioration of the capital value of these securities. The lack of investor confidence in markets also flowed over from credit markets into the stock markets causing equity prices to fall.
Portfolio Mix at 31
January 2009
Although council’s investment portfolio did not directly
purchase any
Analysis
Of Investment options
The Revised Ministerial Investment Order dated 31 July 2008 limits new investment options until 31 December 2009 to
· Term Deposits with Approved Deposit-taking Institutions (ADI’s)
· Other ADI securities that must rank equally with APRA regulated deposits
· Investments with NSW Treasury Corporation (T-Corp)
Cash/Term Deposits (50%)
Council’s portfolio has around $16.6M (50%) invested in cash/term deposits, one of the basic investment types still allowed following the release of the Cole Report.
Given the interest rate risk inherent in an RBA rate hiking environment, Council will restrict the term of these deposits to fairly short term durations.
Deposits in ADI’s up to $1M automatically qualify for the Federal Government Deposit Guarantee which will be utilised. Many institutions are offering attractive spreads given alternative funding constraints which should see Council realise above published rates.
Floating Rate Notes (6%)
Council’s portfolio contains $2M (6%) of floating rate notes. Given its current yield, the investment remains an attractive one compared to redeeming at the unwind price and reinvesting.
T-Corp Long Term
Growth Facility (3%)
Council’s portfolio contains $859K (3%) of Treasury Corporation managed funds. These funds will continue to be monitored in respect of performance; however returns in recent years have been volatile. Given poor performance additional investments in this category is unlikely in the short term.
Collaterised Debt
Obligations (CDO) (19%)
Council’s portfolio contains $6.5M (19%) in CDO’s which can no longer be acquired under the revised criteria but may be grandfathered. CDO prices remain significantly below face value; driven by structural weakness, higher expected defaults and the lack of a secondary market. Given the current absence of a secondary market, investors have no other option but to retain these assets. The most appropriate strategy is to hold these investments until they mature or until the markets recover. However any opportunities to sell these products at a beneficial price will be separately evaluated and considered on their merits to switch to an alternative investment on profitable terms.
Capital Guaranteed
Products (CGP) (22%)
Council’s portfolio contains $7.550M (22%) in CGP’s which can no longer be acquired under the revised criteria but may be grandfathered.
Equity market falls, accelerating over September to December 2008 have been detrimental to the asset values of all Capital Guaranteed Products. While the capital is guaranteed the underlying drop in the net asset value has resulted in no coupons being paid. The most appropriate strategy is to hold these investments until they mature or until the markets recover. However any opportunities to sell these products at a beneficial price will be separately evaluated and considered on their merits to switch to an alternative investment on profitable terms.
REPORTING
A monthly report will be provided to Council, detailing the investment portfolio in terms of performance, security, credit rating and counterparty percentage exposure of total portfolio.
The report will also detail investment income earned versus budget year to date and confirm compliance of Council’s investments within legislative and policy limits.
For auditing purposes, certificates must be obtained from the banks/fund managers/custodian confirming the amounts of investment held on Council’s behalf at 30th June each year.
Authority to Amend Strategy
The General Manager may amend this strategy at any time where it is in
the Council’s interest to do so, or to meet a changing regulatory environment.
Authority to Implement
Strategy
The following officers have delegated authority to invest surplus funds
in accordance with the Investment Policy and Investment strategy:
· Executive Manager Corporate and
Community Division
· Manager Financial Services
· Other senior financial officers ( as
per Council’s delegation manual)
Each investment recommendation is to be approved by two authorised
signatories.
Investment recommendations exceeding $3 Million dollars require one of
the two authorised signatories to be the General Manager, Executive Manager
Corporate & Community, or the Manager Financial Services.
Investments other than in approved deposit taking institutions (ADI’s),
and/or investments with maturity terms that are in excess of 5 years will
require written authority by any of two of the General Manager, Executive
Manager Corporate & Community and Manager Financial Services.
Professional Advice
Council currently retains CPG Research & Advisory to provide
assistance in Investment Strategy formulation, portfolio implementation and monitoring.
Council may change the advisor at any time provided any person or organization
engaged to provide advice is reputable and independent.
SAFE CUSTODY
ARRANGEMENTS
Where necessary, investments may be held in safe custody on Council’s behalf as long as the following criteria are met:
· Council
must retain beneficial ownership of all investments.
· Adequate
documentation is provided, verifying the existence of the investments.
· The
Custodian conducts regular reconciliation of records with relevant registries
and/or clearing systems.
· The
Institution or Custodian recording and holding the assets will be:
8 Austraclear;
8 An institution with an
investment grade Standards and Poors or Moody’s rating; or
8 An institution with
adequate insurance, including professional indemnity insurance and other
insurances considered prudent and appropriate to cover its liabilities under
any agreement.