Policy #4

 

Reserve and Investment Policy

(Adopted by the Council 7/20/12)

 

 

I.  SCOPE AND PURPOSE

This Reserve and Investment policy applies to all cash and cash equivalent assets of the Association’s general fund and related investment activity.  The purposes of this policy are to:

 

·        Establish reserve funds.

·        Establish investment guidelines and standards.

·        Outline the responsibilities of the Investment Subcommittee, the Executive Director, and the providers of investment services.

·        Provide a framework for regular constructive communication between the Investment Subcommittee, MSBA staff and the Association’s providers of investment services.

·        Create standards of investment performance which are historically achievable and by which the Investment Managers can be measured over a reasonable time period.

It is expected that this Statement will be reviewed annually by the Investment Subcommittee of the Operation Committee to ensure the relevance of its contents to current capital market conditions and the needs of the Association.

 

II.  GENERAL RESERVE FUNDS

For the purpose of this policy, the reserve funds are the cash or marketable securities of the Association and do not include other assets such as accounts receivable, prepaid expenses, property and equipment.  The reserve funds of the association include the following:

 

OPERATING FUND.  The purpose of the Operating Fund is to segment and effectively manage revenues collected for the current or next fiscal year. Funds not otherwise allocated to one of the other reserve funds are designated to the Operating Fund.

 

OPERATING Contingency Fund.  The purpose of the Operating Contingency Fund is to provide resources for unbudgeted shortfalls in revenue or increases in expenses.   

 

Capital equipment fund.  The purpose of the Capital Equipment Fund is to provide sufficient cash to meet the capital equipment needs of the Association in a timely manner, avoiding the need to finance purchases. 

 

The reserve goal is to maintain the level of reserves at 25-30% of the operating budget.

 

IIi.  Rent Subsidy Fund 

The purpose of the Rent Subsidy Fund is to provide sufficient cash flow to offset the increased rent expense that will be incurred by the Association over the next fifteen years, through June 30, 2014.

 

IV.  APPROPRIATED FUNDS

Appropriated funds are held for a specific purpose or organization including sections, districts, foundations, or other outside organizations.

 

V.  RESPONSIBILITIES ‑ INVESTMENT SUBCOMMITTEE/EXECUTIVE DIRECTOR

The Association’s Operation Committee shall have an Investment Subcommittee, which is comprised of no fewer than five members including the Treasurer.  The members of the Subcommittee will be selected by the chairperson(s) of the Committee and will serve until they are replaced.  The Investment Subcommittee has the overall fiduciary responsibility for the assets, sets their related general policies and shall be responsible for the periodic guidance, monitoring and oversight of its managed assets.

 


 

The Subcommittee will be responsible for:

1.      Reviewing the reserve and investment policy annually for any necessary revisions.  Necessary revisions will be approved by the Operation Committee, and submitted to the Council and the Assembly for approval.

 

2.      Evaluating the performance of the providers of investment services annually, or more frequently as circumstances indicate, to ensure the objectives are being achieved as nearly as possible.

 

3.      Appointing, evaluating and removing (as necessary) investment managers for the assets of the Association; appoint, evaluate and remove (as necessary) any other service providers that it deems necessary for the Association.

 

4.      All evidence of investment ownership are to be held by one or more depositories selected by the Council upon the recommendation of the Executive Director and Investment Subcommittee.

 

The Executive Director will receive statements, at least quarterly, from the providers of investment services.  At least annually, the Executive Director will receive annual shareholder reports from the providers of investment services.

 

The Investment Subcommittee and MSBA staff will meet periodically to discuss the current cash/financial position and expected revenue requirements of MSBA. The purpose will be to evaluate short and long-term cash flow needs, and to provide guidance on the investment asset allocation strategy.  This includes, developing, reviewing and recommending the overall asset allocation for the Association, as well as funding levels for each individual investment manager.

 

VI.  RESPONSIBILITIES ‑ CUSTODIAN BANK

The Custodian Bank must assume the following responsibilities as they pertain to:

1.      REPORTING
Provide monthly reports showing individual fund holdings with sufficient descriptive detail to include units, unit price, market value, and any other information requested by the Investment Subcommittee.

2.      TRANSFER
At the direction of MSBA staff, expeditiously transfer funds into and out of specified accounts.

VII.  RESPONSIBILITIES - INVESTMENT MANAGERS

The Investment Managers are the brokerage team or individual of a financial institution managing the investment portfolio.

Each Investment Manager is responsible for providing the Association with an annual Shareholder Report.  Generally the Shareholder Report should address:

1.                Fund Performance.

2.                Fund Fees.

3.                Any material changes in firm ownership, organizational structure, financial condition, senior staffing and management.

4.                Involvement in any litigation, or involvement in any regulatory investigation or complaint process.

VIII.               INVESTMENT POLICY

Delegation

The Investment Subcommittee has the authority, subject to budget approval by the Council, to retain the services of a professional Investment Advisor who will be responsible for  reviewing and making recommendations on the investment objectives and policies, asset allocation structure, and investment manager selection  Unless under certain circumstances, an Investment Advisor will be retained approximately every three years, and should be reviewed as part of the Three-Year budget planning process. 

 

The following procedure will be used to engage a new or replace a current Investment Advisor:

 

The Executive Director, working with the Investment Subcommittee, will solicit proposals from at least three qualified advisors.

 

The Executive Director, working with the Investment Subcommittee will recommend hiring an Investment Advisor.  The recommendation will be made to the full committee and the Council. 

 

Pooled Investments

The Investment Subcommittee is authorized to pool investments among the funds for the purpose of accomplishing the objectives of this policy and reducing transaction fees.

 

Prudent Person

The Investment Manager shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

 

Conflict of Interest

Officers, employees, consultants, committee members, and others involved in the investment process shall refrain from personal business activity that could conflict with the investment programs or which could reasonably cause others to question or doubt their ability to make impartial investment decisions.

 

Financial Objectives

The Association’s investment objectives are as follows:

 

            1.  To preserve capital

            2.  To maintain liquidity

3.  To optimize current income within the construct of (1) and (2).

 

The Association’s assets will therefore be actively invested to achieve growth of capital through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.

 

IX.        ASSET ALLOCATION

Overall asset allocation for the Association’s Reserve Fund shall be as follows:

 

Asset Class

Target

Minimum

Maximum

Large Capitalization U.S. Stocks

35%

25%

45%

Small Capitalization U.S. Stocks

15%

10%

20%

International (Non-U.S.) Stocks

20%

15%

25%

     Total Stocks

70%

65%

75%

Core Fixed Income (Bonds)

30%

20%

40%

Cash and Equivalents

0%

0%

10%

                                                                                                                       

Overall asset allocation for the Association’s Rent Subsidy Funds shall be as follows:

 

Asset Class

Target

Minimum

Maximum

Large Capitalization U.S. Stocks

25%

15%

35%

Small Capitalization U.S. Stocks

5%

0%

10%

International (Non-U.S.) Stocks

10%

5%

15%

     Total Stocks

40%

35%

45%

Core Fixed Income (Bonds)

45%

35%

55%

Cash and Equivalents

15%

10%

20%

 

The target allocations of each Portfolio will be maintained using the cash flows to rebalance the split among asset classes.  If these cash flows are not sufficient to bring the allocation within the target levels, MSBA staff  will re-balance the component weightings to the target levels on a semi-annual basis.  Based on the December and June asset allocation reports, the re-balancing transfers will take place by the end of January and July, respectively.

 

X          ASSET GUIDELINES
Permissible Asset Classes

To achieve the financial objectives, and after consultation with the Investment Subcommittee and MSBA staff the Investment Managers shall develop appropriate asset allocation selecting from these allowable investments:

 

1.   Cash - The term “cash”’ includes cash, U.S. Government and Agency obligations, commercial paper rated “A1” or “A2” by Standard and Poor’s or “P1” or “P2” by Moody’s, the custodial banks’ short-term investment funds, and no-load money market mutual funds with average maturities not exceeding ninety days.

 

2.   Certificates of Deposit - issued by U.S. banks having at least $500 million in total assets.  Such certificates shall have a less than one year maturity and shall be in amounts less than the maximum insurance provided.

 

            3.       Fixed income securities, which are held in a separate account, must be investment grade of AA or higher, and have a duration of one year or less.

     

4.  Balanced, Equity or Fixed Mutual Funds which meet the following criteria:

 

·        The fund must be well diversified by holdings, sectors and industries as described in the most recent report to shareholders.

 

·        The fund must have a 3-year track record.

 

·        Assets held by the Investment Fund shall exceed $50 million.

Policies Governing Mutual Funds and Commingled Funds
As the Association’s Investment Subcommittee cannot direct the particular investment policies of mutual funds used in the investment structure, the broad guidelines outlined below will govern the selection and retention of appropriate vehicles.

 

1.      Aggregate Assets

a)  Minimum: The Investment Subcommittee will determine for each fund provider a threshold level of aggregate assets (including both the assets in the pool or fund and any separate account assets managed similarly) sufficient to ensure broad diversification, efficient trading, and economies of scale in administrative expenses and transaction costs.

b).  Maximum:  The Investment Subcommittee will determine for each fund provider whether the aggregate assets (including both the assets in the pool or fund and any separate account assets managed similarly) have reached a size where they are causing the asset manager to deviate from the portfolio construction methods upon which the performance record was built.

2.      Personnel:  The Investment Subcommittee will monitor the organizations providing investment management services to the funds, to ensure stability of personnel, thereby encouraging consistency of investment method.

3.      Expenses:  The Investment Subcommittee will monitor both management fees and administrative expenses, to ensure that expenses are within normal and customary tolerances.

 

Prohibited Investments

Investment in letter stock, private placements, options, short sales, warrants, margin transactions, financial futures, commodities, speculative securities, real estate, collectibles, or other forms not specifically approved are prohibited.

 

Diversification

No more than 10 percent of any Mutual Fund may be in the securities of any one issuer with the exception of obligations of the U.S. Government, its agencies and instrumentalities, repurchase agreements, collateralized by obligations of the U.S. Government, its agencies and instrumentalities and federally insured certificates of deposit.

XI.        PERFORMANCE STANDARDS

A.               TIME HORIZON

Progress of the Portfolios, their components and the Investment Managers will be measured over a full Market Cycle. Market Cycles may differ markedly in length, and there is no standardized measure for a Market Cycle's term. For the Association's purposes, a full Market Cycle encompasses both a down leg and an up leg, in either order. The up or down portions each will be of at least two consecutive quarters in length. Thus, a full Market Cycle may be as short as one year, though generally most Market Cycles to last from three to five years. Shortfalls relative to the return targets for the Portfolios may be tolerated over portions of the Market Cycles, provided that the return objectives for the Portfolios are met over the full Market Cycle.

 

B.               PERFORMANCE MEASUREMENT

Benchmark Indices:

Asset Class

Benchmark Index

Large Capitalization Equity

S&P 500

Small Capitalization Equity

Russell 2000 - Managers with a style bias will also be compared to their appropriate style indices (Russell 2000 Growth Index and Russell 2000 Value Index)

International Equity

MSCI Europe Australasia Far East (“EAFE”)

Domestic Fixed Income

Lehman Brothers Aggregate Bond

Cash

U.S. Treasury Bills

The Portfolios are expected to outperform a custom benchmark consisting of the appropriate indices (in bold lettering) of each asset class and their proportional weighting in the portfolio.

C.               RISK‑ADJUSTED PERFORMANCE

The Sharpe Ratio divides the excess return (portfolio return less risk‑free return) by the standard deviation of total return, and will be the measure of risk‑adjusted performance. Over a Market Cycle, the Sharpe Ratios for each component employed by the plan structure is expected to exceed that of its respective benchmark index. 

D.               VOLATILITY

The volatility of returns should be controlled.  In general, higher-than-market volatility for the Portfolios and each of their components is permitted only to the extent that returns in excess of the appropriate benchmark are generated.

 

E.               Automatic Review Process for Investment Funds

Investment performance reviews of all funds will be conducted quarterly to ascertain progress against the return objectives of each component.

Beyond these customary reviews certain circumstances or events, as outlined below, will trigger automatic formal reviews and potentially, reconsideration by the Investment Subcommittee of the appropriateness of continuing to use the affected manager in the investment structure. None of these circumstances or events shall serve as automatic causes for changing investment managers, but will merely indicate the need for review.

1.                Disappointing Relative Performance

a)               Three-year cumulative return trails benchmark index

b)               Five-year cumulative return trails benchmark index

2.                Disappointing Risk-Adjusted Performance

a)               Three-year Sharpe Ratio (excess return divided by variance of returns) is below benchmark

b)               Five-year Sharpe Ratio is below benchmark

3.                Fund Management Organization Changes

a)               Turnover of portfolio manager or other personnel significant to the portfolio management process

b)               Ownership change

c)               Involvement in relevant regulatory investigation or litigation

4.                Deviation from Investment Methods that Built Historical Records

a)               Aggregate assets in product are insufficient to ensure broad diversification, efficient trading, and economies of scale

b)               Assets in product grow too large to be managed in manner similar to methods that built historical record

c)               Portfolio characteristics do not match stylistic expectations

d)               Significant increase in fees