GUIDE TO FIXED INCOME INVESTING
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addressing the corporate treasury challenge From start-ups to multi-billion dollar revenue generating corporations, the challenges for corporate treasurers in maintaining well diversified investment portfolios is ever growing due to the increased complexity in the fixed income market. Adding to the challenge is the lack of transparency of non-traditional investment classes that have made their way into many investment portfolios. By using a combination of a sound investment policy, transparent reporting tools and a well defined corporate governance policy, the corporate treasurer takes an important step towards constructing a framework that could preserve the corporation s most prized asset the working capital. 3
the decision process The investment process begins with the selection of an appropriate benchmark by which investment return and risk is measured. The benchmark selection process and a well defined investment policy (soon to be discussed) are key elements in limiting the duration and price volatility of an investment portfolio. The corporate treasurer should consider the visibility of the corporation s cash needs before selecting a benchmark. Historically, longer portfolios will provide higher return while experiencing greater return variance as illustrated in the graph below. Typical benchmarks for corporate cash portfolios are ML 3-month U.S. Treasury Bill Index ML 6-month U.S. Treasury Bill Index ML 1-year U.S. Treasury Bill Index 30.00 Merrill Lynch Government Indices Plus S&P 500 Volatility of Returns 1996-2007 20.00 + One Standard Deviation Total Return - One Standard Deviation 24.47 16.83 10.00 0.00 4.77 3.91 3.05 5.05 4.14 3.23 5.62 4.40 3.17 6.80 4.92 3.04 9.92 5.98 2.05 11.40 6.44 1.49 7.96-0.90 6.41-10.00-11.64-20.00 T-Bill 3 Mo T-Bill 6 Mo U.S. Tsy 1 yr U.S. Tsy 1-3 yrs U.S. Tsy 3-5 yrs U.S. Tsy 5-7 yrs U.S. Tsy 15+ yrs S&P 500 4
benchmark definitions 3-month U.S. Treasury Bill Index (Ticker: GO01) The 3-month U.S. Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each monthend re-balancing is the outstanding Treasury bill that matures closest to, but not beyond 3 months from the re-balancing date. To qualify for selection, an issue must have settled on or before the re-balancing (month-end) date. While the index will often hold the Treasury bill issued at the most recent or prior 3-month auction, it is also possible for a seasoned 6-month or 1-year bill to be selected. (Source: Merrill Lynch) 6-month U.S. Treasury Bill Index (Ticker: GO02) The 6-month U.S. Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month-end re-balancing is the outstanding Treasury bill that matures closest to, but not beyond 6 months from the re-balancing date. To qualify for selection, an issue must have settled on or before the re-balancing (month-end) date. While the index will often hold the Treasury bill issued at the most recent or prior 6-month auction, it is also possible for seasoned 1- year bill to be selected. (Source: Merrill Lynch) 1-year U.S. Treasury Bill Index (Ticker: GO03) The 1-year U.S. Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month-end re-balancing is the outstanding Treasury bill with the longest maturity. To qualify for selection, an issue must have settled on or before the re-balancing month-end) date. At times, it is possible for the longest bill, and therefore the selected issue, to have slightly longer than one year remaining term to maturity. Also, in the event the new 1-year bill has not settled by month-end, the prior bill could be held for a second month, meaning that the maturity of the index could be as short as 10 months by the time of the next re-balancing. (Source: Merrill Lynch) 5
the Investment Policy a guide and sample for constructing the investment policy The intent of the investment policy is to establish a board approved set of guidelines for investment of your company s corporate cash. The investment policy defines the parameters, or limits, for investments, including the establishment of investment objectives, approved security types, portfolio diversification, performance measurement and portfolio maturity. For venture-backed to public companies the primary objective of the investment policy is to establish investment boundaries that will protect capital and provide for liquidity when needed. The third objective is largely considered to be income optimization. Because the purpose of an investment policy is to establish the boundaries for investing, it should not dictate investment strategy. For this reason, it is important to establish guidelines that are not overly restrictive. For example, it may be preferable to specify a maximum duration for individual securities of 12 months, even if the cash flow needs of your company dictate having access to the cash prior to the 12-month milestone. Keeping investment guidelines open allows for greater flexibility in deploying a strategy that meets your company s changing liquidity needs and eliminates the need for repeated board approval. sample investment policies We have provided sample investment policies to fit your company s specific investment objective and risk tolerance. investment policy components Heading/Title It is important to date the investment policy. This ensures users have the most updated version. Objectives The investment objectives are prioritized as: 1) preserve capital, 2) provide liquidity, 3) maximize income. By stating clearly and concisely the order of these three objectives, the outside money manager can clearly balance the trade-offs among safety, liquidity and return. Investment Guidelines: Commonly Approved Instruments for The approval of asset classes as appropriate investments will be company specific depending on each company s investment horizon, risk tolerance, liquidity needs and tax status. (See for a description of typical money market instruments) Obligations of the U.S. government and its agencies 6
the Investment Policy Agency securities Obligations of states and municipalities ( municipals or munis ) Repurchase agreements ( repo ) Certificates of deposit (negotiable and nonnegotiable CDs) Eurodollar certificates of deposit SEC Rule 2a-7 registered money market mutual funds Commercial paper Corporate bonds Floating rate securities without interest rate caps Asset-backed securities Prohibited Investments The risk level of these securities is generally not appropriate for corporate cash portfolios. Auction rate securities Collateralized mortgage obligations Collateralized loan obligations Collateralized debt obligations Extendable commercial paper Structured investment vehicles Investment Guidelines: Credit Quality Defining the minimum acceptable short-term and long-term credit ratings is an important component of the investment policy and helps to define the investment universe. While AAA ratings are implicit in U.S. government obligations and agencies, other approved investments such as municipal obligations, commercial paper and corporate bonds are assigned distinct ratings by the major ratings agencies. For example, the sample ratings shown in the investment policy (A1/P-1 for commercial paper and A2/A for long-term credit ratings) allow for investing in top-tier issuers while still providing investment diversity and acceptable risk profile of the portfolio. Default potential for A2 ratings remains very low with a five-year default rate of 0.68 percent. (Moody s Investors Service) Investment Guidelines: Diversification Given the variety of instruments and maturities money managers are allowed to choose, it is important to limit concentration risk. A typical corporate cash portfolio will limit risk per parent issuer to the greater of 5 percent of account value or $1 million. The reason for greater of language is due to the potential for a portfolio to become very small over time as cash is needed for regular operations. Investment Guidelines: Marketability/Liquidity Liquidity is very important for corporate cash investors. There are two potential pitfalls with regard to liquidity when investing in the corporate cash markets. The first is owning a small issue size, which reduces the number of other owners in the marketplace who may be willing to provide a bid for your securities. The second is a high concentration of one particular issue, which can put you at a disadvantage for the same reason. Investment Guidelines: Performance Measurement Performance should be measured according to the CFA Institute s Global Investment Performance Standards (GIPS ), which mandate a time-weighted 7
the Investment Policy total return performance measurement method. This measurement standard gives the company a readily comparable apples to apples performance number that can be compared against agreed upon benchmarks. Approved asset managers should be able to claim compliance with the GIPS standards and have that claim verified annually by an independent auditor. Any asset manager that does not claim compliance with the GIPS standards should agree to be able to claim compliance within one year of management. Signature Line It is important for the board-approved investment policy to be signed by the appropriate authorized agent in order to ensure complete communication between the company and its outside money manager. 8
Many instruments are at the disposal of a corporate treasurer for meeting and exceeding the organization s investment objectives. To achieve capital preservation and provide sufficient liquidity for working capital purposes, the listed securities are highly recommended in constructing a well diversified portfolio. A select set of money market instruments is provided to illustrate the various financing vehicles used by governments, government-sponsored agencies and corporations to bridge the gap between expenditures and cash receipts. types of money market instruments Commercial Paper (CP) A promissory note with a fixed maturity of one to 270 days, usually sold at a discount from face value. Bulk of the CP issued is for maturities of less than 2 months. CP provides funds for working capital needs, bridge financing for plant and equipment expenditures and to fund corporate takeovers. Minimum lot transaction is $100,000, but most paper is bought in million dollar blocks. Rated by credit agencies that evaluate the liquidity, cash flow, profitability and backup credit availability of the issuing entity. Role of Commercial Paper An extremely liquid market ($1.78 trillion market as of Y/E 2007) with various access points. Investments could be placed directly with the issuers and provides flexibility to match maturities (day-specific). Indirect access through broker-dealers is also an option. Due to the size of this market, liquidation prior to maturity is competitively priced with a narrow bid/ask spread by issuers and broker-dealers. Certificate of Deposit (CD) A certificate issued by a bank, that shows a specific amount of money has been deposited at the issuing institution. The CD bears a specific maturity date, interest rate and denomination. Issued either in a negotiable (i.e., investor can sell the CD in open market prior to the maturity date) or non-negotiable form. A CD with a maturity of one year or less pays interest at maturity, whereas a medium-term CD will pay semi-annually. An alternative to CP, BAs and agency discount notes. Bankers Acceptances (BAs) A draft or bill of exchange accepted by a bank to guarantee payment of the bill. BAs are often issued by banks as a by product of a foreign trade transaction and incorporate the use of a letter of credit issued against a specific set of imported goods. Sold at a discount and redeemed by the accepting bank at full face value at maturity. Technical difference between BAs and Commercial Paper (CP): CP is backed by the creditworthiness of the issuing entity, whereas BAs are backed by the underlying goods or products that are being financed. 9
An alternative to CP, CDs and agency discount notes. Federal Agency Securities Securities that carry some form of direct or quasi government backing and can be divided into two sectors: 1) government-sponsored enterprises (GSEs) such as the Fannie Mae and Freddie Mac; and 2) federally-related institutions such as the Farm Credit System and Federal Home Loan Banks. Outside of the Treasury market, the federal agency market is the second most liquid market. Agency discount notes usually range in maturity from five days to 270 days but some issues go out for as long as one year. Returns on agency securities have compressed relative to historical levels; however, a relatively small allocation in this asset class is a prudent method of enhancing the overall credit quality of a portfolio. Money Market Funds Mutual funds that invest in short-term debt instruments. Because they provide the benefit of pooled investments, investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. Money market funds seek to maintain a stable net asset value of $1 per share and pay a dividend. They are generally considered to be conservative; however they are not guaranteed by the U.S. government and can lose value. Prime money market funds provide both daily liquidity and also competitive yields. Municipal notes Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Repurchase Agreements Short-term loans normally for less than two weeks and frequently for one day arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Bulk of repo financing is done on an overnight basis called overnight repo. Many purchasers of repos ask for an over-collateralization of the transaction that equates to 102 or 103 percent of the face value of the securities that are on loan. Repos are viewed as safer investments because of the direct and often over-collateralized lending link. Used properly, repo offers investors the opportunity to keep surplus working capital cash invested with minimal liquidity or credit risk. Treasury Bills Short-term debt obligations of the U.S. government that mature in one year or less. They are sold at a discount of the par value to create a positive yield to maturity. The U.S. Treasury market is the largest and most liquid securities market in the world. Excellent for clients with minimal tolerance for credit risk. 10
other instruments held in shortduration accounts Corporate Bonds Debt obligations issued by private and public corporations. An investor essentially is lending money to the issuing corporation to finance activities of the issuer. Principal is returned to investors at maturity, with interest paid on specific or periodic dates. Credit spectrum range from investment grade to high-yield junk status. Nationally Recognized Statistical Rating Organizations (NRSRO) and non-nrsros provide credit analysis to assist potential investors in assessing corporate bonds. Wide selection of bonds is available with varying maturity, credit profile, industry sector and income stream. The Staple of a Corporate Cash Portfolio: Corporate Bonds A substantial yield pickup to comparable Treasury investments. Does require ongoing credit and event risk evaluation, but the additional returns warrant the added analysis. The longer the maturity of a corporate bond, the greater the marginal yield relative to comparable Treasuries. Asset-Backed Securities (ABS) Short-term investments that contain stable or established cash flows that are backed by the payment streams from a variety of loans, leases or credit card receivables. Majority of asset-backed issues are AAA or AArated due to the strong quality of the underlying collateral, the integrity of the payment structure and the amount of additional credit support Provide a greater diversification than mortgagebacked securities due to the smaller loan balances and the greater number of consumer receivables Short average life Typically high credit quality Substantial yield enhancement above U.S. Treasuries of equivalent maturity Excellent credit enhancements to overall portfolio as 85 percent of ABS are AAA-rated Additional 5-10 basis point pickup relative to bullet corporate bonds: As of 12/31/07, ABS were trading in line with A-rated financial bonds A 10-15 percent allocation in this asset class can marginally increase overall yield to a portfolio, and help to minimize event risk Conclusion No one single asset class can completely achieve the primary investment objectives of a corporation with the following goals in mind: 1) preservation of capital, 2) liquidity provision and 3) return in excess of a chosen benchmark. A well-diversified portfolio with a broad mix of investments will greatly reduce credit risk, provide required liquidity and maximize market opportunities. 11
Outstanding Bond Market Debt As of June 30, 2008 Treasury $4.6 T Federal Agency $3.1 T Municipal $2.6 T Corporate $6.1 T Mortgage Related $7.5 T Money Market $4.1 T Asset-Backed $2.5 T Source: SIFMA This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. 12
Sample Investment Policy: Company Name Investment Policy Date objectives The company s primary objectives when investing excess cash: Preservation of principal Liquidity Current income The company s Chief Financial Officer will review the company s cash flow requirements and determine the amount of daily liquidity required for working capital. Funds not required for working capital will be invested in a managed portfolio of fixed income securities within the guidelines set forth below. investment guidelines Approved Instruments The funds will be invested only in fixed income instruments denominated and payable in U.S. dollars. The following investments are considered appropriate: Obligations of the U.S. government and its agencies Tax-exempt obligations of states and municipalities, including tax-exempt commercial paper and variable rate demand notes (VRDNs) with a put feature Money market instruments: repurchase agreements, commercial paper, negotiable (tradeable) certificates of deposit, bankers acceptances and eurodollar certificates of deposit Money market funds registered according to SEC Rule 2a-7 of the Investment Company Act of 1940. Assets under management must be at least $1 billion Corporate bonds, including eurodollar issues of U.S. corporations and U.S. dollar denominated issues of foreign corporations Credit card asset-backed securities 13
Sample Investment Policy: Prohibited Investments Collateralized mortgage obligations Collateralized debt obligations Collateralized loan obligations Structured investment vehicles Auction rate securities. This includes, but is not limited to, the following types of auction rate securities (auction market preferred shares (AMPS), auction preferred shares (APS), auction rate certificates (ARC)) Extendable commercial paper Asset backed commercial paper Credit Quality Short-term credit rating must be rated A-1/P-1, or better by Standard and Poor s Corporation and Moody s Investor Services at the time of purchase. Securities of Issuers with a long-term credit rating must be rated at least A2 by Moody s or A by Standard & Poor s at the time of purchase. Asset-backed or municipal securities must be rated AAA. Securities that are downgraded by the above rating services below these minimum ratings may be held with approval of the Chief Financial Officer. A notification of the downgrade and recommended action should be sent to the Chief Financial Officer within 2 days of the downgrade event. Municipal notes with only a short-term rating must be MIG1 or SP-1 or better. Tax-exempt commercial paper must have a rating of A-1/P-1 or better. Municipal securities that have been Pre-refunded, Defeased or Escrowed to Maturity (ETM s) with U.S. Treasury securities do not require a AAA rating. Repurchase agreements will be at least 102 percent collateralized with securities issued by the U.S. government or its agencies. Diversification Securities of a single issuer, including securities of an entity acquired or merged into the single issuer, valued at cost at the time of purchase, should not exceed 5 percent of the market value of the portfolio or $1 million, whichever is greater, at time of purchase. 14
Sample Investment Policy: For purposes of this diversification restriction, securities of a parent company and its subsidiaries will be combined. Securities issued by the U.S. Treasury and U.S. government agencies are specifically exempted from these restrictions. Marketability/Liquidity Issue size must be greater than $50 million for corporate bonds, although exceptions are permissible with prior approval of the Chief Financial Officer. No single position in a corporate bond will equal more than 10 percent of that issue. Certificate of deposits must be negotiable. Maturity/Portfolio Duration The final maturity of each security within the portfolio shall not exceed 24 months. The weighted average maturity of the portfolio will be no greater than 130 percent of the stated benchmark. In the case of securities with regularly scheduled principal repayments (i.e., asset-backed securities), the average life of the security shall determine the maximum maturity threshold of 24 months and the weighted average maturity of the portfolio. For variable rate demand note securities (VRDNs) with periodic interest rate resets and a put feature, the final maturity will be deemed to be equal to the reset period. Performance Measurement The investment manager will meet with the Chief Financial Officer or a designee no less than annually and will be available for regular telephone contact. Investment performance for the portfolio will be measured against the agreed upon index. On a daily and monthly basis, the investment manager will provide statements of transactions and market valuation of portfolio assets including, on a security-by-security and portfolio basis: Investment policy compliance reporting Risk analytics including duration analysis, sector exposure, credit ratings and comparisons relative to the benchmark Balance sheet, income statement and statement of cash flows summaries Interest accrual and amortization/accretion reporting Balance sheet classification per FAS115 and FAS95 Unrealized and realized gain/loss summaries 15
Sample Investment Policy: Yield to maturity on cost and market Duration by security and by portfolio Portfolio total return performance vs. the agreed upon benchmark The Investment Manager must be able to claim compliance with the CFA Institute s Global Investment Performance Standards (GIPS ) and provide an independent verification of that compliance within one year of service. Furthermore, the Investment Manager must provide on an annual basis a copy of their SAS 70 Type II report. Authorized Signature Date 16
Sample Investment Policy: Company Name Investment Policy Date objectives The company s primary objectives when investing excess cash: Preservation of principal Liquidity Current income The company s Chief Financial Officer will review the company s cash flow requirements and determine the amount of daily liquidity required for working capital. Funds not required for working capital will be invested in a managed portfolio of fixed income securities within the guidelines set forth below. investment guidelines Approved Instruments The funds will be invested only in fixed income instruments denominated and payable in U.S. dollars. The following investments are considered appropriate: Obligations of the U.S. government and its agencies Tax-exempt obligations of states and municipalities, including tax-exempt commercial paper and variable rate demand notes (VRDNs) with a put feature Money market instruments: repurchase agreements, commercial paper, negotiable (tradeable) certificates of deposit, bankers acceptances and eurodollar certificates of deposit Money market funds registered according to SEC Rule 2a-7 of the Investment Company Act of 1940. Investments in the fund must be consistent with approved instruments listed. Assets under management must be at least $1 billion Corporate bonds, including eurodollar issues of U.S. corporations and U.S. dollar denominated issues of foreign corporations 17
Sample Investment Policy: Prohibited Investments Collateralized mortgage obligations Collateralized debt obligations Collateralized loan obligations Structured investment vehicles Auction rate securities. This includes, but is not limited to, the following types of auction rate securities (auction market preferred shares (AMPS), auction preferred shares (APS), auction rate certificates (ARC)) Asset-backed securities Extendable commercial paper Asset backed commercial paper Credit Quality Short-term credit rating must be rated A-1/P-1, or better by Standard and Poor s Corporation and Moody s Investor Services at the time of purchase. Securities of Issuers with a long-term credit rating must be rated at least A2 by Moody s or A by Standard & Poor s at the time of purchase. Asset-backed or municipal securities must be rated AAA. Securities that are downgraded by the above rating services below these minimum ratings may be held with approval of the Chief Financial Officer. A notification of the downgrade and recommended action should be sent to the Chief Financial Officer within 2 days of the downgrade event. Municipal notes with only a short-term rating must be MIG1 or SP-1 or better. Tax-exempt commercial paper must have a rating of A-1/P-1 or better. Municipal securities that have been Pre-refunded, Defeased or Escrowed to Maturity (ETM s) with U.S. Treasury securities do not require a AAA rating. Repurchase agreements will be at least 102 percent collateralized with securities issued by the U.S. government or its agencies. Diversification Securities of a single issuer, including securities of an entity acquired or merged into the single issuer, valued at cost at the time of purchase, should not exceed 5 percent of the market value of the portfolio or $1 million, whichever is greater, at time of purchase. 18
Sample Investment Policy: For purposes of this diversification restriction, securities of a parent company and its subsidiaries will be combined. Securities issued by the U.S. Treasury and U.S. government agencies are specifically exempted from these restrictions. Marketability/Liquidity Issue size must be greater than $50 million for corporate bonds, although exceptions are permissible with prior approval of the Chief Financial Officer. No single position in a corporate bond will equal more than 10 percent of that issue. Certificate of deposits must be negotiable. Maturity/Portfolio Duration The final maturity of each security within the portfolio shall not exceed 24 months. The weighted average maturity of the portfolio will be no greater than 130 percent of the stated benchmark. In the case of securities with regularly scheduled principal repayments (i.e., asset-backed securities), the average life of the security shall determine the maximum maturity threshold of 24 months and the weighted average maturity of the portfolio. For variable rate demand note securities (VRDNs) with periodic interest rate resets and a put feature, the final maturity will be deemed to be equal to the reset period. Performance Measurement The investment manager will meet with the Chief Financial Officer or a designee no less than annually and will be available for regular telephone contact. Investment performance for the portfolio will be measured against the agreed upon index. On a daily and monthly basis, the investment manager will provide statements of transactions and market valuation of portfolio assets including, on a security-by-security and portfolio basis: Investment policy compliance reporting Risk analytics including duration analysis, sector exposure, credit ratings and comparisons relative to the benchmark Balance sheet, income statement and statement of cash flows summaries Interest accrual and amortization/accretion reporting Balance sheet classification per FAS115 and FAS95 19
Sample Investment Policy: Unrealized and realized gain/loss summaries Yield to maturity on cost and market Duration by security and by portfolio Portfolio total return performance vs. the agreed upon benchmark The Investment Manager must be able to claim compliance with the CFA Institute s Global Investment Performance Standards (GIPS ) and provide an independent verification of that compliance within one year of service. Furthermore, the Investment Manager must provide on an annual basis a copy of their SAS 70 Type II report. Authorized Signature Date 20
Sample Investment Policy: Company Name Investment Policy Date objectives The company s primary objectives when investing excess cash: Preservation of principal Liquidity Current income The company s Chief Financial Officer will review the company s cash flow requirements and determine the amount of daily liquidity required for working capital. Funds not required for working capital will be invested in a managed portfolio of fixed income securities within the guidelines set forth below. investment guidelines Approved Instruments The funds will be invested only in fixed income instruments denominated and payable in U.S. dollars. The following investments are considered appropriate: Obligations of the U.S. government and its agencies Repurchase agreements will be at least 102 percent collateralized with securities issued by the U.S government or its agencies Money market funds registered according to SEC Rule 2a-7 of the Investment Company Act of 1940. Investments in the fund must be consistent with approved instruments listed. Assets under management must be at least $1 billion 21
Sample Investment Policy: Prohibited Investments Collateralized mortgage obligations Collateralized debt obligations Collateralized loan obligations Structured investment vehicles Auction rate securities. This includes but is not limited to the following types of auction rate securities (auction market preferred shares (AMPS), auction preferred shares (APS), auction rate certificates (ARC)) Asset-backed securities Extendable commercial paper Asset backed commercial paper Money market instruments: repurchase agreements, commercial paper, certificates of deposit, bankers acceptances and eurodollar certificates of deposit Corporate bonds, including eurodollar issues of U.S. corporations and U. S. dollar denominated issues of foreign corporations Maturity/Portfolio Duration The final maturity of each security within the portfolio shall not exceed 24 months. The weighted average maturity of the portfolio will be no greater than 130 percent of the stated benchmark. Performance Measurement The investment manager will meet with the Chief Financial Officer or a designee no less than annually and will be available for regular telephone contact. Investment performance for the portfolio will be measured against the agreed upon index. On a daily and monthly basis, the investment manager will provide statements of transactions and market valuation of portfolio assets including, on a security-by-security and portfolio basis: Investment Policy Compliance Reporting Risk analytics including duration analysis, sector exposure, credit ratings and comparisons relative to the benchmark Balance sheet, income statement and statement of cash flows summaries 22
Sample Investment Policy: Interest accrual and amortization/accretion reporting Balance sheet classification per FAS115 and FAS95 Unrealized and Realized gain/loss summaries Yield to maturity on cost and market Duration by security and by portfolio Portfolio Total Return Performance vs. the agreed upon benchmark The Investment Manager must be able to claim compliance with the CFA Institute s Global Investment Performance Standards (GIPS ) and provide an independent verification of that compliance within one year of service. Furthermore, the Investment Manager must provide on an annual basis a copy of their SAS 70 Type II report. Authorized Signature Date 23
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