Investment Policy Statement

Transcription

1 Investment Policy Statement SCOPE OF THIS INVESTMENT POLICY This statement of investment policy reflects the investment policy, objectives, and constraints of the Village of Orland Park Police Pension Fund by its Trustees. The investment policy will be reviewed at least annually by the Trustees of the Village of Orland Park Police Pension Fund. PURPOSE OF THIS INVESTMENT POLICY STATEMENT This statement of investment policy is set forth by the Board of Trustees of the Village of Orland Park Police Pension Fund in order to: 1. Define and assign the responsibilities of all involved parties. 2. Establish a clear understanding for all involved parties of the investment goals and objectives for Fund assets. 3. Offer guidance and limitations to all Managers regarding the investment of Fund assets. 4. Establish a basis for evaluating investment results. 5. Ensure that Fund assets are managed in accordance with the State of Illinois Division of Insurance regulations, and the requirements of the Illinois Pension Code (40 ILCS 5/1-101 et seq. and 5/1A-101 et seq.) and other laws as may be applicable to investments under Article 3 of the Code (40 ILCS 5/3-101 et seq.), and as such statutes may be amended hereafter. 6. Establish the relevant investment horizon for which Fund assets will be managed. In general, the purpose of this statement is to outline a philosophy and attitude which will guide the investment management of the assets toward the desired results. It is intended to be sufficiently specific to be meaningful, yet flexible enough to be practical. DEFINITIONS 1. Fund shall mean the Village of Orland Park Police Pension Fund. 2. Board of Trustees shall refer to the governing board established to administer the Fund as specified by applicable ordinance. 3. Illinois Pension Investment Law shall mean the State of Illinois Division of Insurance including the requirements of the Illinois Pension Code (40 ILCS 5/1-101 et seq. and 5/1A-101 et seq.) and other laws as may be applicable to investments under Articles 1 and 3 of the Code (40 ILCS 5/1-101 et seq.) and as such statutes may be amended hereafter. 1

2 4. Fiduciary shall mean any individual or group of individuals as defined in the Illinois Pension Code, 40 ILCS 5/1-101, et seq. as may be applicable to investments under Article 3 (Police Pension Code). 5. Investment Manager A person is an "investment adviser", "investment advisor", or "investment manager" with respect to a pension fund or retirement system established under this Code if the person: (a) is a fiduciary appointed by the board of trustees of the pension fund or retirement system in accordance with Section ; (b) has the power to manage, acquire, or dispose of any asset of the retirement system or pension fund; (c) has acknowledged in writing that he or she is a fiduciary with respect to the pension fund or retirement system; and (d) is at least one of the following: (i) registered as an investment adviser under the federal Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.); (ii) registered as an investment adviser under the Illinois Securities Law of 1953; (iii) a bank, as defined in the Investment Advisers Act of 1940; or (iv) an insurance company authorized to transact business in this State. 6. "Consultant" or Investment Management Consultant means any person or entity retained or employed by the board of a retirement system, pension fund, or investment board to make recommendations in developing an investment strategy, assist with finding appropriate investment advisers, or monitor the board's investments. "Consultant" does not include non-investment related professionals or professionals offering services that are not directly related to the investment of assets, such as legal counsel, actuary, proxy-voting services, services used to track compliance with legal standards, and investment fund of funds where the board has no direct contractual relationship with the investment advisers or partnerships. "Investment adviser" has the meaning ascribed to it in Section Securities shall refer to the marketable investment securities which are defined as acceptable in this statement. DELEGATION OF AUTHORITY The Board of Trustees of the Village of Orland Park Police Pension Fund is a fiduciary under Illinois Pension Investment Law, and is responsible for directing and monitoring the investment of Fund assets. Acknowledging that duty, the Board of Trustees, from time to time may choose to authorize certain professional experts in various fields to assist them. These include, but not limited to: 1. Investment Management Consultant. The consultant will assist the Board of Trustees in: establishing investment policy, objectives, and guidelines; selecting investment managers; reviewing such mangers over time; measuring and evaluating investment performance; ensuring that investments comply with the Illinois Pension Code and other applicable regulations, laws, and rules, and other tasks as deemed appropriate. 2. Investment Manager. The investment manager has discretion to purchase, sell, or hold the specific securities that will be used to meet the Fund s investment objectives. The investment manager(s) will assume fiduciary responsibility for the management of the funds under their control. 2

3 3. Custodian. The third party custodian will hold securities purchased by the Fund or its Investment Mangers and will clear all trades. The custodian will assume fiduciary responsibility for the administration of Fund assets. 4. Additional specialists such as attorneys, auditors, actuaries, retirement plan consultants, and others may be employed by the Board of Trustees to assist in meeting its responsibilities and obligations to administer Fund assets prudently. The Board of Trustees will have ultimate control of Fund assets and in Investment Manager allocations. The Board of Trustees will not reserve any control over daily investment decisions; those decisions will be the responsibility of the Investment Managers selected. Managers will be held responsible and accountable to achieve the objectives herein stated and operate within the Illinois Pension Investment Law. All managers investments will comply with the Illinois Pension Code and other applicable regulations, laws, and rules. If such experts employed are also deemed to be fiduciaries, they must acknowledge such in writing. All expenses for such experts must be customary and reasonable, and will be borne by the Fund as deemed appropriate and necessary. ASSIGNMENT OF RESPONSIBILITY Responsibility of the Board of Trustees of the Village of Orland Park Police Pension Fund The Board of Trustees is charged by law with the responsibility for management of the assets of the Fund. The Board of Trustees shall discharge its duties solely in the interest of the Fund, with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent man, acting in an like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. The specific responsibilities of the Board of Trustees relating to the investment management of Fund assets include: 1. Adhering to the guidelines as defined in Illinois Pension Investments Law and all other applicable regulations. 2. Projecting the Fund s financial needs, and communicating such needs to the Investment Managers on a timely basis. 3. Determining the Fund s risk tolerance and investment horizon, and communicating these to the appropriate parties. 4. Establishing reasonable and consistent investment objectives, policies and guidelines which will direct the investment of the Fund s assets. 5. Prudently and diligently selecting qualified investment professionals, including Investment Manager(s), Investment Consultant(s), and Custodian(s). 6. Regularly evaluating the performance of the Investment Manager(s) to assure adherence to policy guidelines and monitor investment objective progress. 3

4 7. Developing and enacting proper control procedures: For example, replacing Investment Manager(s) due to fundamental change in investment management process, or failure to comply with established guidelines. 8. Reviewing overall investment performance of entire Fund and its Investment Managers no less than quarterly. 9. Informing the Investment Management Consultant and Investment Managers, as far in advance as possible, of expected cash flow requirements and new deposits. This advance notice will allow for sales of securities in the most financially advantageous manner to meet cash flow requirements, or, in the event of new deposits, will allow for proper asset allocation decisions to be made. 10. The Independent, third party Custodian, having at least $1 Billion in custodied assets, will be appointed by the Board to hold and administer the Fund s assets. The third party custodian will be a separate entity from the Investment Manager(s) and Investment Consultant(s). Responsibility of the Investment Consultant(s) The Investment Consultant s role is that of a non-discretionary advisor to the Board of Trustees of the Village of Orland Park Police Pension Fund. Investment advice concerning the investment management of Fund assets will be offered by the Investment Consultant, and will be consistent with the investment objectives, policies, guidelines and constraints as established in this statement. Specific responsibilities of the Investment Consultant include: 1. Assisting in the development and periodic review of investment policy. 2. Conducting investment manager searches when requested by the Board of Trustees. 3. Providing due diligence, or research, on the Investment Manager(s). 4. Monitoring the performance of the Investment Manager(s) to provide the Board of Trustees with the ability to determine the progress toward the investment objectives. 5. Communicating matters of policy, manager research, and manager performance to the Board of Trustees. 6. Reviewing Fund investment history, historical capital markets performance and the contents of this investment policy statement to any newly appointed members of the Board of Trustees. 7. The Investment Management Consultant has fiduciary status as may be defined under the applicable provisions of the Illinois Pension Code and the Consultant will acknowledge, in writing, that it/he/she is a fiduciary to the Fund. 8. Negotiating Investment Manager s contracts on behalf of the Village of Orland Park Police Pension Fund. 9. Disclose all fees earned by the Consultant and Investment Managers in a manner required by the Illinois Pension Code. 4

5 10. Monitoring the Investment Manager(s) to ensure that all investments comply with the Illinois Pension Code and other applicable regulations, laws, and rules. 11. Monitoring the Investment Manager(s) to ensure that all investments comply with this investment policy. Responsibility of the Investment Manager(s) Each Investment Manager must acknowledge in writing its acceptance of responsibility as a fiduciary under Illinois Pension Investment law and other applicable regulations. Each Investment Manager will have full discretion to make all investment decisions for the assets placed under jurisdiction, while observing and operating within all policies, guidelines, constraints, and philosophies as outlined in this statement. Specific responsibilities of the Investment Manager(s) include: 1. Discretionary investment management including decisions to buy, sell or hold individual securities, and to alter assets allocation within the guidelines established in this statement. 2. Reporting, on a timely basis, quarterly investment performance results. 3. Communicating any major changes to economic outlook, investment strategy, or any other factors which affect implementation of investment process, or the investment objective progress of the Fund s investment management. 4. Informing the Board of Trustees regarding any qualitative change to investment management organization: Examples include changes in portfolio management personnel, ownership structure, investment philosophy, etc. 5. Voting proxies on behalf of the Fund, and communicating such voting records to the Board of Trustees on a timely basis (unless this responsibility is reserved by the Board of Trustees). 6. The Investment Manager has fiduciary status as may be defined under the applicable provisions of the Illinois Pension Code and will acknowledge, in writing, that the Investment Manager is a fiduciary to the Fund. 7. Disclose all fees earned by the Investment Manager in a manner required by the Illinois Pension Code. Responsibility of Custodian 1. Provide safekeeping for all assets purchased by the Fund or its Investment Managers. Ownership of assets in the Village of Orland Park Police Pension Fund with the custodian serving as an agent of the Fund. 2. Invest, buy, sell, dispose of, receive, deliver, vote or grant proxies and otherwise deal with the assets only upon and pursuant to the instruction of the Investment Agent or third party Investment Manager. 5

6 3. Insure that all trades are executed via Delivery vs. Payment (DVP) so all securities are deposited prior to the release of payment. This policy helps reduce the counter party risk in any and all trades. 4. Provide daily pricing and cash sweep capabilities. 5. Insure that securities are not used in any security lending programs. 6. Maintain qualified money market mutual funds with portfolios limited to the investments authorized under Article 3 of the Illinois Pension Code (40 ILCS 5/1-101 et seq. and as such statutes may be amended hereafter. 7. Provide monthly reports to the Finance Director and Investment Consultant, highlighting all positions held, all activity during the month (i.e. trades, dividends & interest, deposits & withdrawals). 8. Make available audited copies of SAS-70 report (Statement on Auditing Standards #70) which highlights internal risk controls and internal operational procedures. GENERAL INVESTMENT PRINCIPALS 1. Investments shall be made solely in the interest of the participants and beneficiaries of the Fund and for the exclusive purpose of providing benefits accrued there under and defraying the reasonable expenses of administration. 2. The Fund shall be invested with 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 investment of a fund of like character and with like aims. 3. Investment of the Fund shall be so diversified as to minimize risk of large losses. 4. The Board of Trustees may employ one or more investment managers of varying styles and philosophies to attain the Fund s objectives. 5. Cash is to be employed productively at all times, by investment in short term cash equivalents to provide safety, liquidity, and return. INVESTMENT MANAGEMENT POLICY 1. Preservation of Capital Consistent with their respective investment styles and philosophies, investment managers should make reasonable efforts to preserve capital, understanding that losses may occur in individual securities. 2. Risk Aversion Understanding that risk is present in all types of securities and investment styles, the Board of Trustees recognizes that some risk is necessary to produce long-term investment results that are sufficient to meet the Fund s objectives. However, the investment managers are to make reasonable efforts to control risk, and 6

7 will be evaluated regularly to ensure that the risk assumed is commensurate with given investment style and objectives. 3. Adherence to Investment Discipline Investment managers are expected to adhere to the investment management styles for which they were hired. Managers will be evaluated regularly for adherence to investment discipline. INVESTMENT OBJECTIVES In order to meet its needs, the investment strategy of the Village of Orland Park Police Pension Fund is to emphasize total return; that is, the aggregate return from capital appreciation and dividend and interest income. Specifically, the primary objectives in the investment management for Fund assets shall be: Income and Growth To achieve a balance return of current income and modest growth of principal. Preservation of Capital To minimize the probability of loss over the investment horizon. Emphasis is placed on minimizing return volatility rather than maximizing total return. Preservation of Purchasing Power After Spending To achieve returns in excess of the rate of inflation plus spending over the investment horizon in order to preserve purchasing power of fund assets. Risk control is an important element in the investment of Fund assets. Liquidity To ensure the ability to meet all expected or unexpected cash flow needs by investing in securities which can be sold readily and efficiently. The secondary objective in the investment management of Fund assets shall be: Long-Term Growth of Capital To emphasize long-term growth of principal while avoiding excessive risk. Short-term volatility will be tolerated in as much as it is consistent with the volatility of a comparable market index. SPECIFIC INVESTMENT GOALS Over the investment horizon established in the statement, it is the goal of the aggregate Fund assets to exceed: The Fund s liabilities and cash flow disbursements The rate of inflation as measured by the Consumer Price Index by 3.0% The return of a balanced market index comprised of 45% S&P 500, 55% Intermediate Treasury The actuarial rate of 7.0% 7

8 The investment goals above are the objectives of the aggregate Fund, and are not meant to be imposed on each investment account (if more than one account is used). The goal of each Investment Manager, over the investment horizon, shall be to: 1. Meet or exceed the market index, of blended market index, selected and agreed upon by the Board of Trustees that most closely corresponds to the style of investment management. 2. Display an overall level of risk in the portfolio which is consistent with the risk associated with the benchmark specified above. Risk will be measured by the standard deviation of quarterly returns. Specific investment goals and constraints for each Investment Manager, if any, shall be incorporated as part of this statement of investment policy. Each Investment Manager shall receive a written statement outlining his specific goals and constraints as they differ from those objectives of the entire Fund. DEFINITION OF RISK The Board of Trustees realizes that there are many ways to define risk. It believes that any person or organization involved in the process of managing the Village of Orland Park Police Pension Fund assets understands how it defines risk so that the assets are managed in a manner consistent with the Fund s objectives and investment strategy as designed in this statement of investment policy. The Board of Trustees defines risk as: LIQUIDITY The probability of losing money over any time period. The probability of losing money over the Fund s investment time horizon. The probability of not maintaining purchasing power over the Fund s investment time horizon. The probability of not meeting the Fund s investment objectives. The probability of not meeting the Fund s liabilities or cash flow requirements. The probability that the investment returns of the Fund s assets fail to meet of exceed the return of the specified investment goals. High volatility (fluctuation) of investment returns. The possibility of surprises (upside or downside) in investment returns. To minimize the possibility of a loss occasioned by the sale of a security forced by the need to meet a required payment, the Board of Trustees will periodically provide the Investment Manger and Investment Management Consultant with an estimate of expected net cash flow. The Board of Trustees will notify the Investment Manager and the Investment Manager Consultant in a timely manner, to allow sufficient time to build up necessary liquid reserves. 8

9 MARKETABILITY OF ASSETS The Board of Trustees requires that all of Fund assets be invested in liquid securities, defined as securities that can be transacted quickly and efficiently for the Fund, with minimal impact on market price. INVESTMENT GUIDELINES Allowable Assets Allowable assets are all assets specifically allowed under Illinois Pension Investment Law including, but not limited to the following: 1. Cash Equivalents Treasury Bills Money Market Funds consisting of government agencies of obligations Pooled interest bearing accounts managed by Illinois Public Treasuries Investment Pool (Illinois Funds) 2. Fixed Income Securities Fixed Annuities of a life insurance company that have an excellent rating or higher by one of the national rating agencies (i.e. AM Best, S&P, Moodys, Fitch) Interest bearing direct obligations of the United States of America Interest bearing obligation to the extent that they are fully guaranteed or insured as to payment of principal and interest by United States of America Interest bearing bonds, notes, debentures or other similar obligations of agencies of the United States of America. For the purposes of this section, agencies of the United States of America includes: (i) the Federal National Mortgage Association and the Student Loan Marketing Association; (ii) federal land banks, federal intermediate credit banks, federal farm credit banks, and any other entity authorized to issue direct debt obligations of the United States of America under the Farm Credit Act of 1971 or amendments to Act; (iii)federal home loan banks and the Federal Home Loan Mortgage Corporation; and (iv) any agency created by Act of Congress that is authorized to issue direct debt obligations of the Unites States of America. Interest bearing savings accounts of certificates of deposit, issued by federally chartered banks or savings and loan associations, or State of Illinois chartered banks or savings and loan associations to the extend that the deposits are insured by agencies of instrumentalities of the federal government. The Board requires that flow through FDIC coverage must fully cover each participant. Investments in credit unions, to the extent that the investment are insured by agencies or instrumentalities of the federal government Interest bearing bonds of the State of Illinois Pooled interest bearing accounts managed by the Illinois Public Treasurer s Investment Pool in accordance with the Deposit of State Moneys Act and interest bearing funds or pooled accounts managed, operated, and administered by banks, subsidiaries of banks, or subsidiaries of bank holding companies in accordance with the laws of the State of Illinois Interest bearing bonds or tax anticipation warrants of any county, township, or municipal corporation of the State of Illinois. These bonds or warrants must have 9

10 one of the four highest ratings by one of the national rating agencies (i.e. AAA,AA,A or BAA) 3. Equity Securities Common Stocks Convertible Notes and Bonds Convertible Preferred Stocks 4. Mutual Funds 5. Variable Annuities Derivative Investments Derivative securities are defined as synthetic securities whose price and cash flow characteristics are based on the cash flows and price movements of other underlying securities. Most derivative securities are derived from equity or fixed income securities and are packaged in the form of options, futures, CMOs (PAC bonds, IOs, Pos, residual bonds, etc.), and interest rate swaps, among others. The Board of Trustees feels that many derivative securities are relatively new and therefore have not been observed over multiple market cycles. Due to this uncertainty, the Board of Trustees will take a conservative posture on derivative securities in order to maintain its risk nature. Since it is anticipated that new derivative products will be created each year, it is not the intention of this document to list specific derivatives that are prohibited from investment, rather it will form a general policy on derivatives. Unless a specific type of derivative security is allowed in this document, the Investment Manager(s) may not invest Fund assets in derivative investments. Stock Exchanges To ensure marketability and liquidity, investment advisors will execute equity transactions through the following exchanges: New York Stock Exchange; American Stock Exchange; and NASDAQ over-the counter market. In the event that an Investment Manager determines that there is a benefit or need to execute transactions in exchanges other than those listed in this statement written approval is required from the Board of Trustees. Prohibited Assets Prohibited investments include, but are not limited to the following: 1. Commodities and Futures Contracts 2. Private Placements 3. Options 4. Limited Partnerships 5. Venture-Capital Investments 6. Real Estate Properties 7. Interest-Only (IO), Principal-Only (PO), and Residual Tranche CMOs Prohibited Transactions Prohibited transactions include, but are not limited to the following: 10

11 1. Short Selling 2. Margin Transactions 3. Purchase of commodities or options 4. Lending Asset Allocation Guidelines Investment management of the assets of the City Village of Orland Park Police Pension Fund shall be in accordance with the following asset allocation guidelines: 1. Aggregate Fund Asset Allocation Guidelines (at market value) Asset Class Minimum Maximum Preferred Equities 0% 50% 45% Mutual Funds/Variable Annuities 0% 50% 10% Fixed Income 55% 100% 55% Cash and Equivalents 0% 100% 0% Note: Under current Illinois Pension Investment Law, the aggregate of equities, mutual funds and variable annuities can not exceed 45% 2. The Board of Trustees may employ Investment Managers whose investment disciplines require investment outside the established asset allocation guidelines. However, taken as a component of the aggregate Fund, such disciplines must fit within the overall assets allocation guidelines established in this statement. Such Investment Managers will receive written direction from the Board of Trustees regarding specific objectives and guidelines. 3. In the event that the above aggregate asset allocation guidelines are violated, for reasons including but not limited to market price fluctuations, the Board of Trustees will instruct the Investment Manager(s) to bring the portfolio(s) into compliance with these guidelines as promptly and prudently as possible. 4. The City Village of Orland Park Police Pension Fund will review the portfolio quarterly. In conjunction with Illinois Pension Code (40 ILCS 5/1-101 et seq.), if the equity allocation exceeds the maximum allowable (45% of portfolio value) for three consecutive quarters, there will be a mandatory reallocation. Diversification for Investment Managers The Board of Trustees does not believe it is necessary or desirable that securities held in the Fund represent a cross section of the economy. However, the portfolio will be invested in a diverse and prudent manner. Guidelines for Fixed Income Investments and Cash Equivalents Fund assets may be invested only in those issues which are expressly allowed under the Illinois Pension Investment Law 11

12 SELECTION OF INVESTMENT MANAGERS The Board of Trustee s selection of Investment Manager(s) must be based on prudent due diligence procedures. A qualifying Investment Manager must be a registered investment advisor under the Investment Advisors Act of 1940, or bank or insurance company. The Board of Trustees requires that each Investment Manager provide, in writing, acknowledgement of fiduciary responsibility to the Village of Orland Park Police Pension Fund and receipt of Investment Policy, Objectives and Guidelines. INVESTMENT MANAGER PERFORMANCE REVIEW AND EVALUATION Performance reports generated by the Investment Consultant shall be compiled at least quarterly and communicated to the Board of Trustees for review. The investment performance of total portfolios, as well as asset class components, will be measured against commonly accepted performance benchmarks. Consideration shall be given to the extent to which the investment results are consistent with the investment objectives, goals, and guidelines as set forth in this statement. The Board of Trustees intends to evaluate the portfolio(s) over at least a three-year period, but reserves the right to terminate a manager for any reason including the following: 1. Investment performance which is significantly less than anticipated given the discipline employed and the risk parameters established, or unacceptable justification of poor results. 2. Failure to adhere to any aspect of this statement of investment policy, including communication and reporting requirements. 3. Significant qualitative changes to the investment management organization. Investment Managers shall be reviewed regularly regarding performance, personnel, strategy, research capabilities, organizational and business matters, and other qualitative factors that may impact their ability to achieve the desired investment results. 12