Chapter 5.20
CITY AND BOROUGH OF WRANGELL PERMANENT FUND
Sections:
5.20.010 Scope of the investment policy.
5.20.020 Investment policy statement.
5.20.030 Delegation of authority.
5.20.050 Assignment of responsibility.
5.20.060 General investment principles.
5.20.070 Investment management policy.
5.20.080 Investment objectives.
5.20.090 Specific investment goals.
5.20.095 Distribution of permanent fund earnings.
5.20.096 Withdrawal of corpus.
5.20.120 Marketability of assets.
5.20.130 Investment guidelines.
5.20.140 Selection of managers.
5.20.150 Investment manager performance review and evaluation.
5.20.160 Investment policy review.
5.20.010 Scope of the investment policy.
This investment policy reflects only investment policy, objectives, and constraints of the permanent fund and does not amend or change any of the policies for investment of borough general funds hereinabove. [Ord. 970 § 2, 2019.]
5.20.020 Investment policy statement.
This statement of investment policy is set forth by the City and Borough of Wrangell regarding its permanent fund in order to:
A. Define and assign the responsibilities of all involved parties.
B. Establish a clear understanding for all involved parties of the investment goals and objectives of plan assets.
C. Offer guidance and limitations to all investment managers regarding the investment of plan assets.
D. Establish a basis for evaluating investment results.
E. Manage plan assets according to prudent standards as established in common trust law.
F. Establish the relevant investment horizon for which the plan 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. [Ord. 970 § 2, 2019.]
5.20.030 Delegation of authority.
The City and Borough of Wrangell is a fiduciary, and is responsible for directing and monitoring the investment management of plan assets. As such, the City and Borough of Wrangell will from time to time delegate certain responsibilities to professional experts in various fields. These include, but are not limited to:
A. Investment Management Consultant. The consultant may assist the City and Borough of Wrangell in establishing investment policy, objectives, and guidelines; selecting investment managers; reviewing such managers over time, measuring and evaluating investment performance, and other tasks as deemed appropriate.
B. Investment Manager. The investment manager has discretion to purchase, sell, or hold the specific securities that will be used to meet the plan’s investment objectives.
C. Custodian. The custodian will physically (or through agreement with a subcustodian) maintain possession of securities owned by the plan, collect dividend and interest payments, redeem maturing securities, and effect receipt and delivery following purchases and sales. The custodian may also perform regular accounting of all assets owned, purchased, or sold, as well as movement of assets into and out of the plan accounts.
D. Additional specialists such as attorneys, auditors, actuaries, retirement plan consultants, and others may be employed by the City and Borough of Wrangell to assist in meeting its responsibilities and obligations to administer plan assets prudently.
The City and Borough of Wrangell will not reserve any control over investment decisions, with the exception of specific limitations described in these ordinances. Managers will be held responsible and accountable to achieve the objectives herein stated. While it is not believed that the limitations will hamper investment managers, each manager should request modifications which they deem appropriate.
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 plan as deemed appropriate and necessary. [Ord. 970 § 2, 2019.]
5.20.040 Definitions.
A. “Plan” shall mean the City and Borough of Wrangell permanent fund.
B. “The City and Borough of Wrangell” shall refer to the borough assembly which shall administer the plan as specified by applicable ordinance.
C. “Fiduciary” shall mean any individual or group of individuals that exercise discretionary authority or control over fund management or any authority or control over management, disposition or administration of the plan assets.
D. “Investment manager” shall mean any individual, or group of individuals, employed to manage the investments of all or part of the plan assets. The investment manager may also act as the investment management consultant.
E. “Investment management consultant” shall mean any individual or organization employed to provide advisory services, including advice on investment objectives and/or asset allocation, manager search, and performance monitoring. The investment management consultant may also act as the investment manager.
F. “Securities” shall refer to the marketable investment securities which are defined as acceptable in this statement.
G. “Investment horizon” shall be the time period over which the investment objectives, as set forth in this statement, are expected to be met. The investment horizon for this plan is 20 years.
H. “Corpus or principal” shall mean the original investment creating the permanent fund and all inflation-proofed earnings not annually deposited into the general fund. [Ord. 970 § 2, 2019.]
5.20.050 Assignment of responsibility.
A. Responsibility of the Investment Managers. Each investment manager must acknowledge in writing its acceptance of responsibility as a fiduciary. Each investment manager will have full discretion to make all investment decisions for the assets placed under its jurisdiction, while observing and operating within all policies, guidelines, constraints, and philosophies as outlined in this statement. Specific responsibilities of the investment managers include:
1. Discretionary investment management including decisions to buy, sell, or hold individual securities, and to alter asset allocation within the guidelines established in this statement.
2. Reporting, on a timely basis, monthly investment performance results.
3. Communicating any major changes in economic outlook, investment strategy, or any other factors which affect implementation of investment process, or the investment objective progress of the plan’s investment management.
4. Informing the City and Borough of Wrangell regarding any qualitative change to investment management organization. Examples include changes in portfolio management personnel, ownership structure, investment philosophy, etc.
5. Voting proxies, if requested by the City and Borough of Wrangell, on behalf of the plan, and communicating such voting records to the finance committee on a timely basis.
B. Responsibility of the Investment Consultant. The investment consultant’s role is that of a nondiscretionary advisory to the finance committee of the City and Borough of Wrangell. Investment advice concerning the investment management of plan 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 and by resolution. 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 finance committee.
3. Providing “due diligence,” or research, on the investment manager(s).
4. Monitoring the performance of the investment manager(s) to provide the finance committee with the ability to determine the progress toward the investment objectives.
5. Communicating matters of policy, manager research, and manager performance to the finance committee.
6. Reviewing plan investment history, historical capital markets performance and the contents of this investment policy statement to members of the finance committee. [Ord. 970 § 2, 2019.]
5.20.060 General investment principles.
A. Investments shall be made solely in the interest of the beneficiaries of the plan.
B. The fund shall be invested 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 investment of a fund of like character and with like aims.
C. Investment of the fund shall be so diversified as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
D. The City and Borough of Wrangell may employ one or more investment managers of varying styles and philosophies to attain the fund’s objectives.
E. Cash is to be employed productively at all times, by investment in short-term cash equivalents to provide safety, liquidity, and return. [Ord. 970 § 2, 2019.]
5.20.070 Investment management policy.
A. 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.
B. Risk Aversion. Understanding that risk is present in all types of securities and investment styles, the City and Borough of Wrangell recognizes that some risk is necessary to produce long-term investment results that are sufficient to meet the plan’s objectives. However, the investment managers are to make reasonable efforts to control risk, and will be evaluated annually to ensure that the risk assumed is commensurate with the given investment style and objectives.
C. Adherence to Investment Discipline. Investment managers are expected to adhere to the investment management styles for which they were hired. Managers will be evaluated annually for adherence to investment discipline. [Ord. 970 § 2, 2019.]
5.20.080 Investment objectives.
In order to meet its needs, the investment strategy of the City and Borough of Wrangell permanent fund is to emphasize total return, that is, the aggregate return from capital appreciation and dividend and interest income.
A. Specifically, the primary objective in the investment management for plan assets shall be:
1. 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 plan assets. Risk control is an important element in the investment of plan assets.
B. The secondary objective in the investment management of plan assets shall be:
1. 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. [Ord. 970 § 2, 2019.]
5.20.090 Specific investment goals.
A. Over the investment horizon established in this statement, it is the goal of the aggregate plan assets to exceed:
1. A reasonable rate of return will be aligned with the strategic asset allocation of the permanent fund. This rate of return and the corresponding strategic asset allocation will satisfy the amount to be deposited annually in the City and Borough of Wrangell’s general fund, including the inflation proofing formula as determined by the Consumer Price Index for the United States and the fund growth objectives.
B. The investment goals above are the objectives of the aggregate plan and are not meant to be imposed on each investment account. The goal of each investment manager, over the investment horizon, shall be to:
1. Meet or exceed the market index, or blended market index, selected and agreed upon by the finance committee 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. [Ord. 970 § 2, 2019.]
5.20.095 Distribution of permanent fund earnings.
The distribution of permanent fund earnings shall be as follows:
The assembly may appropriate annually not more than the maximum sustainable distribution rate of the five-year average fund market value, to be computed using the five-prior year, calendar year end audited market value. The sustainable distribution rate is defined as the long term expected return of the fund less inflation and expenses. Draws of fund earnings are not to exceed the sustainable rate and draws cannot impair inflation adjusted principal. [Ord. 970 § 2, 2019.]
5.20.096 Withdrawal of corpus.
No corpus of the City and Borough of Wrangell Permanent Fund shall be withdrawn except upon the vote of a majority of the borough voters voting in a general election or special election called for that purpose. Corpus is defined as the inflation adjusted value of all contributions. Inflation shall be measured using the U.S. Consumer Price Index (CPI-U). [Ord. 970 § 2, 2019.]
5.20.100 Definition of risk.
The finance committee realizes that there are many ways to define risk. It believes that any person or organization involved in the process of managing the City and Borough of Wrangell permanent fund assets understands how it defines risk so that the assets are managed in a manner consistent with the plan’s objectives and investment strategy as designed in this statement of investment policy. The City and Borough of Wrangell defines risk as:
A. The probability of not maintaining purchasing power over the plan’s investment time horizon.
B. The possibility of surprises (upside or downside) in investment returns. [Ord. 970 § 2, 2019.]
5.20.110 Liquidity.
To minimize the possibility of a loss occasioned by the sale of a security forced by the need to meet a required payment, the City and Borough of Wrangell will periodically provide investment counsel with an estimate of expected net cash flow. The City and Borough of Wrangell will notify the investment consultant in a timely manner, to allow sufficient time to build up necessary liquid reserves. [Ord. 970 § 2, 2019.]
5.20.120 Marketability of assets.
The City and Borough of Wrangell requires that all plan assets be invested in liquid securities, defined as securities that can be transacted quickly and efficiently for the plan, with minimal impact on market price. [Ord. 970 § 2, 2019.]
5.20.130 Investment guidelines.
A. Allowable Assets. The assets of the permanent fund shall be invested in investment vehicles that provide exposure to asset classes or implementation strategies which have been approved as part of the strategic asset allocation. All investments must comply with the fund level investment guidelines and product level investment guidelines outlined below.
1. Fund Level Investment Guidelines. The fund will use low cost, efficient investment vehicles, such as index mutual funds and/or ETFs. The fund will achieve its objective via long-only, unlevered investments. The fund is prohibited from engaging in short sales and margin transactions.
2. Product Level Investment Guidelines. The borough assembly will take a conservative posture on derivative securities in order to maintain a risk averse nature. Since it is anticipated that new derivative products will be created each year, it is not the intention of this chapter to list specific derivatives that are prohibited from investment; rather, it will form a general policy on derivatives. The borough assembly recognizes that derivatives may be utilized within products as a portfolio management tool. All derivative exposure must be fully collateralized. Direct leverage or borrowing for the purpose of magnifying returns is prohibited.
B. Prohibited Assets. Prohibited investments include, but are not limited to, the following:
1. Private placements;
2. Limited partnerships;
3. Venture-capital investments;
4. Interest-only (IO), principal-only (PO), and residual tranche CMOs (collateralized mortgage obligations);
C. Asset Allocation Guidelines. Investment management of the assets of the City and Borough of Wrangell permanent fund shall be in accordance with the following asset allocation guidelines:
The permanent fund’s strategic asset allocation will be determined based upon the desired return, risk tolerance, and other investment parameters (liquidity needs, time horizon, etc.). The appropriateness and characteristics of the asset allocation strategy will be reviewed by the finance committee and confirmed by the assembly by resolution not less than 60 days of the fiscal year end.
The investment manager has discretion to make modest adjustments to the strategic asset allocation’s allowable asset classes, weights, and ranges so long as the changes do not materially alter the risk and return profile of the investment portfolio. All discretionary adjustments to the strategic asset allocation will be made with the fiduciary obligation that decisions are made in the best interest of the City and Borough of Wrangell and its residents. Prior to the investment manager implementing any changes to the strategic asset allocation, the borough manager and finance director shall be notified, which begins a five-day negative consent period for consultation with the borough manager, finance director, and borough assembly before implementing any adjustments. [Ord. 970 § 2, 2019.]
5.20.140 Selection of managers.
The City and Borough of Wrangell’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 a bank or insurance company. The finance committee requires that each investment manager provide, in writing, acknowledgement of fiduciary responsibility to the City and Borough of Wrangell permanent fund. [Ord. 970 § 2, 2019.]
5.20.150 Investment manager performance review and evaluation.
Performance reports generated by the investment consultant shall be compiled at least monthly and communicated to the City and Borough of Wrangell 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 City and Borough of Wrangell shall evaluate the portfolio(s) using a rolling three-year period annually, but reserves the right to terminate a manager for any reason including the following:
A. Investment performance which is significantly less than anticipated given the discipline employed and the risk parameters established, or unacceptable justification of poor results.
B. Failure to adhere to any aspect of this statement of investment policy, including communication and reporting requirements.
C. Significant qualitative changes to the investment management organization.
D. The pleasure of the borough assembly.
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. [Ord. 970 § 2, 2019.]
5.20.160 Investment policy review.
To assure continued relevance of the guidelines, objectives, financial status and capital markets expectations as established in this statement of investment policy, the City and Borough of Wrangell shall review investment policy at least annually not less than 60 days of the fiscal year end. [Ord. 970 § 2, 2019.]