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HomeMy WebLinkAbout13 Investment Policy City of Lansing Police& Fire Retirement System City of Lansing Police & Fire Retirement System Statement of Investment Policies and Objectives Statement of Investment Policies& Objectives City of Lansing Police& Fire Retirement System Table of Contents I. Purpose Page 1 II. General Goals Page 1 III. General Policies Pages 1- 3 IV. Investment Responsibilities Pages 3-4 V. Investment Manager Responsibilities Pages 4-5 VI. Investment Manager Guidelines and Restrictions Pages 6-9 VII. Performance Measurement Standards Pages 9-10 VIII. Performance Benchmarks Pages 10-12 IX. Securities Lending Page 12 Statement of Investment Policies& Objectives City of Lansing Police& Fire Retirement System GENERAL INVESTMENT POLICY I. PURPOSE The purpose of this statement is to identify a set of general investment policies which the joint Board (Board) currently consider appropriate for the City of Lansing Police & Fire Retirement System ("System") and to provide guidance to the investment managers. This statement shall be reviewed periodically and may be revised from time to time by the Board to ensure that it properly reflects the investment policies of the City of Lansing Police & Fire Retirement System. II. GENERAL GOALS The overall investment goal of the City of Lansing Police & Fire Retirement System is to obtain a competitive rate-of-return on portfolio assets commensurate with the prudent man rule, the Retirement System's risk taking ability (and Trustees' collective risk tolerance), Michigan statutes governing the investment of public retirement funds and its responsibility to provide retirement benefits for members, retirees and their beneficiaries. The System also has as an objective to reduce costs incurred by the City of Lansing in administration of the Retirement System. Other objectives of the System include controlling risks, and achieving consistent returns. The Board has determined that the annual performance of the Plan's assets should not vary dramatically from the established benchmark nor should it vary substantially from returns achieved by other public pension funds with similar goals and objectives. It is the intention of the Board to consistently meet or exceed Plan objectives. III. GENERAL POLICIES A. Safety of Principal Avoidance of financial risk (default or compromise of the financial integrity of the issuer of a security) which is not to be confused with market risk (upward or downward movement of security prices due to normal market fluctuations). B. Earn an Investment Return at Least Equal to the Actuarial Interest Assumption Exceed the interest assumption as calculated by the actuary. (This investment return calculation does not necessarily recognize the full annual market value fluctuations of securities held in the portfolio). Statement of Goals& Objectives 1 City of Lansing Police& Fire Retirement System C. Diversification of Assets Assets should be diversified both by general types of securities and by individual issues in order to avoid undue exposure to any single type of security or individual issue. D. Maintain Portfolio Assets in Highly Marketable Form 1. To provide for unforeseen cash requirements of the Retirement System. 2. To allow basic restructuring of the portfolio if the System's needs change over time. 3. To allow the investment managers, consistent with their specific objectives, to manage the portfolios so as to optimize the long-term total rate-of-return on investments. (Total rate-of-return is based on market value instead of book value (or cost) and takes into consideration the fluctuations in the market prices of securities. As noted above, this calculation may differ from the actuarial calculation of return). 4. Investments made under Michigan Public Acts 314 of 1965 as amended within the limitations prescribed below are accepted under this section. E. Legal Limitations The investment guidelines and restrictions as set forth in Michigan Public Acts 314 of 1965 as amended and any City of Lansing Ordinances shall be adhered to at all times. F. Realized Gains and Losses Capital gains and losses may be realized in both the common stock and fixed income portfolios if the investment advisors believe such action is in the best interest of the Retirement System, however, losses may be limited by certain guidelines as may from time to time be set forth by the Board. G. Asset Allocation Based on its determination of the appropriate risk posture for the Pension Fund, and in light of the higher expected long-term return from equity securities, the Board has established the following asset-mix guidelines for the System: Statement of Goals&Objectives 2 City of Lansing Police& Fire Retirement System Asset Class Minimum Target Maximum Total Equity Investments 55.0% 60.0% 65.0% Domestic Equity: Large Cap 22.0% 27.0% 32.0% Domestic Equity: Small/Mid 5% 10.0% 15.0% Cap International Developed 9.0% 14.0% 19.0% Markets Equity Emerging Markets Equity 0% 4.0% 8.0% Global Long/Short Equity 0.0% 5.0% 7.0% Total Fixed Income 25.0% 30.0% 35.0% Investments Intermediate Bonds 5.0% 10.0% 15.0% Core Plus Bonds 5.0% 10.0% 15.0% Global Opportunistic Bonds 5.0% 10.0% 15.0% Real Assets (includes Real 5.0% 10.0% 15.0% Estate) IV. INVESTMENT RESPONSIBILITIES Several parties have responsibilities related to the investment of the System's assets. These responsibilities are described briefly below: Board of Trustees The Board for the System has the responsibility for managing the investment process. In fulfilling this responsibility, the Board will establish and maintain investment policies and objectives. Within this framework, the Board will monitor and evaluate the investment managers, bank custodian, and other parties, to monitor whether operations conform to the guidelines and actual results meet objectives. If necessary, the Board is responsible for making changes to achieve this. Investment Managers The investment managers will construct and manage investment portfolios. They will select specific securities, buy and sell such securities, and modify the asset mix within the guidelines. They will also allocate brokerage commissions and use only acceptable investment vehicles as outlined in this statement. More detailed investment manager responsibilities are outlined in the following section. Bank Custodian The bank custodian(s) will hold all cash and securities, and will regularly summarize these holdings for the Trustee's review. In addition, a bank or trust depository Statement of Goals& Objectives 3 City of Lansing Police& Fire Retirement System arrangement will be utilized to accept and hold cash prior to allocating it to the investment manager, and to invest such cash in liquid, interest-bearing instruments. Other Parties Other parties with important responsibilities in the investment process are the Fund's actuary and investment consultant. The Fund's actuary advises the Board as to the impact of investment results on funding levels. The investment consultant assists the Board in monitoring the investment results of the various investment managers and portfolios on a quarterly basis, provides perspective on overall portfolio structure, helps establish investment policy issues, and assists in investment manager and custodian bank search and selection. V. INVESTMENT MANAGER RESPONSIBILITIES Each investment manager must invest assets in accordance with this General Investment Policy and the specific objectives, goals, and limitations applicable to their segment of the portfolio and adhere to their own investment philosophy as presented to the Board at the time of their selection. Each manager shall comply at all times with all applicable State and Federal laws and regulations concerning the investment of Pension assets, particularly Michigan Public Acts 314 of 1965 as. Additionally, each manager must provide periodic and effective communications to the Board, as follows: A. Initially and/or as Necessary Thereafter 1. A written statement acknowledging the manager's acceptance of the performance standards herein stated. 2. A written statement describing, in brief form, what specific investment program each manager intends to undertake to achieve the objectives and goals herein stated. 3. A written notification of any change in investment philosophy. B. At Least Quarterly 1. Portfolio composition showing asset structure for each major class of security. 2. Positions by individual security, showing both cost and market value (except for commingled assets, in which case, showing the unit position and unit value). 3. Portfolio transaction activity, including a summary of transactions which lists brokers used and commissions generated. Statement of Goals& Objectives 4 City of Lansing Police& Fire Retirement System C. At Least Annually Participate in review meetings; the agenda to include, but not restricted to: 1. A review and reappraisal of the aforementioned investment program. 2. A commentary on investment results. 3. A synopsis of the key investment decisions made by the manager, the impact on recorded results, and the underlying rationale. 4. A discussion of the manager's outlook, the specific investment decisions it may trigger, and how it may impact future results. D. Upon Written Request 1. Copies of all documentation and other reasonable explanations in support of any buy sell or hold decision. 2. Certified financial statements of the investment management organization. E. As a Matter of Course 1. Report material changes in ownership, organization structure, financial conditions, senior staffing and management. 2. Report investment results for the total portfolio, as well as for fixed and equities including cash equivalents, using time-weighted total rate-of-return. 3. The investment managers responsible for equities shall have complete discretion with respect to the voting of proxies subject to the requirements of Michigan Public Acts 314 of 1965 as amended. Further,the manager shall advise the Board as to their proxy policies and report to the Board their proxy voting record on an annual basis. F. Cash Flow and Liquidity Due to the maturity of the Police & Fire Retirement System and based on sound actuarial assumptions, the Police & Fire Retirement System recognizes the need for cash flow in excess of employer and employee contributions. As this portfolio is structured with a"total return" objective and without specific income requirements, the Board shall rebalance assets periodically towards target levels in order to meet cash flow needs and to maintain proper asset allocation. Statement of Goals&Objectives 5 City of Lansing Police & Fire Retirement System VI. INVESTMENT MANAGER GUIDELIN ES AND RESTRICTIONS The Board believes that investment decisions are best made when not restricted by excessive procedure. Therefore, full discretion is delegated to the investment managers to carry out investment policy within the guidelines herein stated. The Trustees of the Police & Fire Retirement System have determined that under regulatory restraints it is prudent to diversify by investment manager so as not to assume undue risk as a result of over reliance on the success of one manager. Thus a multi manager approach has been employed. Asset managers will be employed to utilize individual expertise within their assigned area of responsibility. Each manager will be governed by individual manager guidelines which will serve as addenda to the Investment Policy. Portfolio weightings shall be reviewed at least quarterly and redistributed to reflect the Investment Manager Structure when excessive risk due to over weighting or under weighting by management style occurs. A. Investment Strategies Investment strategies must be oriented to long-term investment horizons and requirements for broadly diversified portfolios. B. Asset Categories Investment of Fund assets will be in three general categories: 1. Fixed Income 2. Equities (includes convertible bonds and convertible preferred stocks). 3. Real Assets (includes Real Estate) C. Permissible Investments Listed below are the investment vehicles specifically permitted currently under this Statement of Investment Policies and Objectives. They are categorized as equity or fixed income to indicate how they are classified for purposes of the asset-mix guidelines in a subsequent section. EQUITY FIXED INCOME ♦ Common Stocks ♦ Bonds(including Treasuries, Corporates, Government, MBS, &ABS) ♦ Convertible Preferred Stocks ♦ GIC's, BIC's ♦ Convertible Bonds ♦ Cash-Equivalent Securities(e.g., U.S. T-Bills, Commercial Paper, etc.) Statement of Goals& Objectives 6 City of Lansing Police& Fire Retirement System ♦ Certificates of Deposit in institutions with FDIC/FSLIC protection ♦ Money Market Funds/Bank STIF Funds ♦ Preferred Stocks The above assets can be held in commingled (mutual) funds as well as privately managed separate accounts. Those investments prohibited by the Board without prior approval are: ♦ Private Placement ♦ Short Sales ♦ Commodities Futures ♦ Index Options ♦ Warrants ♦ Structured Securities ♦ Leveraged Instruments Some of the strategies identified above may be deployed within the Global Long/Short Equity Fund of Funds selected by the System. As such, the Board approves the use of these investments within the limited scope of the Global Long/Short Equity allocation. D. Equity Investments The overall investment strategy of the Fund is to ultimately establish a commitment of sixty percent (60%) of the total portfolio (defined as the current market value of all investments) in equities for the System. Equity managers should be fully invested most of the time; however, if the investment manager believes market conditions warrant, he may reduce his equity holdings to no less than 90% of the market value of the portfolio without prior consent of the Board. The portfolio will be invested in marketable securities. Restricted or letter stock are not permitted. The selection of securities will be at the discretion of each manager. Within the Equity Investments, the System has made an allocation to Global Long/Short Equities. The target allocation for this investment is 5% which is to be invested in a"Fund of Funds" vehicle. A Fund of Funds is an investment strategy of holding a portfolio of investment funds rather than owning individual securities. Equity investments shall be made within the following framework: 1. Rate-of-Return Goal—The overall goal for the equity portfolios over a full market cycle is to achieve a rate-of-return exceeding the S&P 500 Index (for large cap managers, hedge fund of funds), Russell 2500 Index (for small/mid cap managers), and the median relevant peer for domestic equity portfolios, the MSCI EAFE Index and median relevant peer for developed international equity portfolios and the MSCI Emerging Markets Small Cap Index (for EM small cap managers) and MSCI Emerging Markets Index (for EM large/mid managers) and median relevant peer for emerging markets equity portfolios. Statement of Goals&Objectives 7 City of Lansing Police& Fire Retirement System 2. Diversification—The manager is expected to prudently diversify the portfolio across industry/economic sectors, number of securities, and size of positions. Equity investment in any one company may not exceed 5% of the individual manager's portfolio based on market price, or 5% of any one company's outstanding equity. E. Fixed Income Investments Money market instruments should have a minimum quality rating comparable to an A bond rating. Commercial paper should be rated Al/P1 unless held in a diversified short-term commingled fund. The fixed income and cash equivalents portion of the Funds should be invested to preserve principal and achieve a net total return after management fees in excess of the inflation rate. The portfolio will be invested in marketable securities. The selection of securities will be at the discretion of each manager. Fixed income investments shall be made within the following framework: Rate-of-Return Goal—The overall goal for fixed income portfolios is to achieve a rate-of-return exceeding the Barclay's Intermediate Government Bond Index for the intermediate bond manager, the Barclays Capital Aggregate Index for the core plus bond manager, the Barclays Capital Multiverse Index for the global opportunistic bond manager and the relevant median peer bond manager over a full market cycle. Quality Standards - Investment in Corporate Bonds shall only be in those companies rated investment grade by at least two of three rating agencies (S&P, Moody's and Fitch) for the intermediate portfolio. The core plus portfolio may include opportunistic allocations to high yield, non-dollar, and emerging market bonds. Allocations to each of these sectors will be at the discretion of the investment manager and will be limited to 30% of the manager's portfolio. Unrated fixed income securities may not be purchased. The global opportunistic portfolio has the flexibility to invest in a broad range of fixed income securities including domestic, international and emerging market debt. The manager will have the flexibility to invest in fixed income obligations issued by national governments, government agencies, supranational organizations, banks and corporations, based on their opportunistic views of the market. The portfolio may include exposure to currencies other than the U.S. dollar. Diversification—The intermediate and core plus fixed income portfolios shall be diversified by maturity and industry. The average duration should not deviate from the manager's benchmark duration by +/- 20%. The diversification of the fixed- income securities held in the global opportunistic portfolio is the responsibility ofthe investment manager. The investment manager is expected to diversify the portfolio sufficiently to minimize the risk of a large loss from a single security. Statement of Goals&Objectives 8 City of Lansing Police& Fire Retirement System F. Real Estate Investments The real estate portfolio is designed with a core mandate: investments in real estate properties will be broadly diversified geographically, by property type, and number of properties. While income and appreciation are dual considerations, more emphasis will be placed on high quality, income-producing properties in the portfolio. The manager should not assume excessive risk in terms of developmental properties or leverage utilized. The portfolio may be invested in commingled or partnership vehicles. The selection of properties/investments will be at the discretion of each manager. Rate-of-Return Goal—The overall goal for the real estate portfolios over a full market cycle is to achieve a rate-of-return exceeding the NCREIF Index and median core real estate manager. Diversification—The Fund shall be well diversified by property type, number of properties, and geographic location. VII. PERFORMANCE MEASUREMENT STANDARDS Performance will be reviewed in accordance with the following: A. Relative to the Investment Policy Statement The investment performance of any of the retained investment managers shall be judged in relation to the primary guidelines, goals, and objectives of the Investment Policy Statement. B. Relative to Other Public Funds The investment results shall be compared against a universe of other tax exempt public funds giving due regard to the differences in investment objectives, restrictions by the Board, and any restrictions imposed by State and local laws. C. Market Cycles In reviewing investment results the Board will emphasize results over full market cycles (typically 3-5 years) rather than quarter to quarter or year to year standards. D. Relative to General Market Indices The equity and fixed income segments shall also be compared to broad market indices that best reflect the portfolio composition. Performance comparisons will be made versus appropriate benchmarks and peer groups. Statement of Goals&Objectives 9 City of Lansing Police& Fire Retirement System E. Timely Basis The performance measurement reports shall be delivered on a quarterly basis measuring a composite of the total fund and each manager separately. VIII. PERFORMANCE BENCHMARKS Total Pension Fund Objectives Both relative and absolute results will be considered in the evaluation of the total Pension Fund's performance. Over a three to five year period, the total Pension Fund should: ♦ Outperform Inflation The Pension Fund's annualized total return should exceed the annualized rate of inflation as indicated by the Consumer Price Index by at least 1%. ♦ Exceed the Actuarial Assumption rate The Pension Fund's annualized total return should equal or exceed the Fund's actuarial interest rate assumption (currently 7.5% for the System). ♦ Meet specific performance benchmarks The Pension Fund's total return should exceed the total return of an index composed as follows: 32% Standard & Poor's 500 Stock Index 10% Russell 2500 Index 18% MSCI ACWI ex U.S. Index 35% Barclays Capital Aggregate Bond Index 5% NCREIF Property Index The Pension Fund's total return should rank at median or above as compared to a universe of balanced portfolios with similar weightings in equities and fixed income. Large Cap Equity: ♦ The total return of each portfolio, after fees, should exceed the total return of the Standard & Poor's 500 Index. ♦ The total return of each portfolio should rank above median in a universe of all equity oriented styles, and the equity portion of each portfolio should rank above median in a universe of"equity only" managers. ♦ The total return of each portfolio should rank above median in a universe of the manager's particular peer sample. Small/Mid Cap Equity: Statement of Goals&Objectives 10 City of Lansing Police& Fire Retirement System ♦ The total return of the portfolio should exceed the total return of the Russell 2500 Index, and exceed the total return of the relevant style benchmark (Russell 2500 Growth and Russell 2500 Value). ♦ The total return of each portfolio should rank above median in a universe of equity style peers. Global Long/Short Equip, (Fund of Funds): ♦ The Primary emphasis of this portfolio should be on equity like returns with low correlation to the long only equity markets. The portfolio should be managed in a style that will provide less volatility in returns than the broad long only equity markets so as to provide protection in down markets, but allow participation in up markets. ♦ The S&P 500 Index shall be used for comparative purposes. ♦ The total return should rank above median in a universe of the manager's particular peer universe (HFRI). Developed International Equity: ♦ The total return of the portion of each portfolio invested in international equity securities should exceed the total return of the MSCI EAFE Index. ♦ The total return of each portfolio should rank above median in a universe of developed international equity oriented portfolios. Emerging Markets Equity: ♦ The total return of each portfolio invested in emerging markets large/mid equity should exceed the total return of the MSCI Emerging Markets Index. ♦ The total return of each portfolio invested in emerging markets small cap equity should exceed the total return of the MSCI Emerging Markets Small Cap Index. ♦ The total return of each portfolio should rank above median in a universe of emerging markets equity oriented portfolios. Fixed Income: ♦ The total return of the intermediate fixed income portfolio, after fees, should exceed the total return of the Barclays Intermediate Government Bond Index. ♦ The total return of the core plus fixed income portfolio, after fees, should exceed the total return of the Barclays Capital Aggregate Bond Index. ♦ The total return of the global opportunistic fixed income portfolio, after fees, should exceed the total return of the Barclays Capital Multiverse Index. ♦ The total return of each portfolio should rank above median in a universe of all fixed income styles. Statement of Goals&Objectives 1 City of Lansing Police& Fire Retirement System ♦ The total return of each portfolio should rank above median in a universe of the manager's particular peer sample. Real Estate: ♦ The total return of each portfolio should exceed the total return of the NCREIF Index. Although performance expectations are established for a market cycle, performance comparisons to relevant benchmarks and peer groups will be on an on-going basis. ♦ The total return of each portfolio should rank above median in universe of real estate fund peers. IX. SECURITIES LENDING 1. Objective. The System seeks to earn an incremental level of income through a securities lending program with lending practices consistent with the preservation of capital. The Board has selected a securities lending agent"Agent"to perform the securities lending function. The goal is minimize risk to a reasonable and acceptable level with respect to both the broker/borrower and collateral investment. 2. Broker/Borrower Risk. Initial Collateral; Marking to Market. At the time of loan, the broker/borrower shall deliver collateral in cash or U.S. government securities not less than 100% market value of loaned security. Marking to market is the process whereby on each business day, the Agent shall determine the market value of the security loaned versus the value of the collateral provided by the broker/borrower. If that collateral amount provided by the broker/borrower shall fall below the value of the security loaned, the Agent shall require additional collateral be provided by the broker/borrower. If the collateral amount provided by the broker/borrower exceeds the value of the security loaned, the broker/borrower may require that some portion of the collateral be returned. 3. Cash Collateral Investment. Cash collateral shall be invested in a commingled fund established for the purpose of securities lending collateral investments and shall be managed by the Agent. Investments shall be made in accordance with the published investment guidelines. 4. Indirect participation in Securities Lending. The System has some investments in pooled products that may engage in securities lending. These manager(s) shall make the Board aware of this practice. Statement of Goals& Objectives 12 City of Lansing Police& Fire Retirement System Investment Policy Statement for the City of Lansing Police & Fire Retirement System: Amended April 1987 Amended May 1987 Amended May 1999 Amended December 2000 Amended February 2002 Amended February 2003 Amended February 2006 Amended February 2008 Amended March 2008 Amended August 2009 Amended March 2011 Amended November 2012 Amended June 2013 Amended November 2013 Amended December 2014 Statement of Goals&Objectives 13