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HomeMy WebLinkAboutMorgan Stanley Investment Policy Statement - marked upCity of Sebastian Police Officers' Retirement System Statement of Investment Policy Goals and Guidelines Adopted Septewher 15, 2?-2 September 21, 2021 Introduction The City of Sebastian Police Officers' Retirement System is a defined benefit plan established by Ordinance of the City of Sebastian to provide retirement benefits for its employees. The City of Sebastian is the "plan sponsor". The Plan is administered by the Police Pension Fund Board of Trustees. The Plan is a pension plan maintained to provide retirement, disability, termination and death benefits to participants in accordance with the express provisions of the Plan. The Plan and the benefits provided thereunder are funded by contributions by the City of Sebastian, tax rebates from the State of Florida pursuant to Chapter 185, Employees' contributions, interest income and other income in accordance with the underlying Plan documents. The Board of Trustees of the City of Sebastian Police Officers' Retirement System has established this Statement of Investment Policy. The trustees are named fiduciaries. The investment of the assets of our retirement plan must be consistent with the written investment policy adopted by the board of trustees. The policies are structured to maximize the financial return to the retirement plan consistent with the risks incumbent in each investment and are structured to establish and maintain an appropriate diversification of the retirement system or plan's assets. To assist the Board in this function, they are authorized to engage the services of investment and actuarial consultants to provide expert assistance. The Board determined this Policy after evaluating the implications of increased investment return versus the increased volatility of return for a number of asset allocation strategies with varying commitments to stocks and bonds. In the view of its consultants and the Board, the investment program defined in this Statement will produce a result over the long term consistent with the Plan's primary objective of preserving and enhancing the purchasing power of assets. 1 Purpose This Policy is intended to complement the investment guidelines provided in all applicable State Statutes and local ordinances. The purpose of this Policy is to define the City of Sebastian Police Officers' Retirement System investment objectives to develop a strategy to help meet investment goals. This statement is meant to clarify risk factors to establish guidelines consistent with the investment profile of the City of Sebastian Police Officers' Retirement System. Through open communication among the Fund, Investment Consultant and Investment Managers, continuity of investment direction can be more easily achieved. This Policy is meant to: 1. Provide the investment consultant and manager(s) a more accurate understanding of the Trustees' investment objectives and, 2. Indicate the criteria by which the investment manager's performance will be evaluated. In the implementation of the investment program, the Plan will employ investment managers who have demonstrated expertise with particular asset classes. Pursuant to the Prudent Investor Rule, the Plan's investment policy will utilize a variety of investment approaches. This diversification of managers and investment approach is intended to increase the risk adjusted return of the portfolio and contribute to a more consistent return. Nonetheless, the systemic risk inherent in the overall market cannot be diversified away. Consequently, there will be periods of time when the fund may experience negative returns. Such periods are not inconsistent with achievement of the targeted long term objective. General Obiectives The primary investment objective of the City of Sebastian Police Officers' Retirement System is the preservation of invested capital. The secondary objective is to achieve moderate long term real growth of the assets while minimizing the volatility of returns. To achieve these objectives, the Board seeks to create a conservative, well diversified and balanced portfolio of equity, fixed income, and money market securities. The Board has determined that one or more outside investment managers shall be retained to assure all investments are managed in a prudent and professional manner and in compliance with the stated investment guidelines. W Investment Obiectives Investment Objectives are intended to provide quantifiable benchmarks to measure and evaluate portfolio return and risk. Asset allocation requires a full market cycle to allow a diversified portfolio of investment managers to demonstrate their abilities. As a result, performance results will be measured over a full market cycle. Performance over shorter time periods will be monitored as a means of identifying the trend of results. The specific investment objectives of the City of Sebastian Police Officers' Retirement System are as follows: Primary Objective: To earn a total rate of return over the long term (a full market cycle) which exceeds the return of a Target Index. The Target Index for the City of Sebastian Police Officers' Retirement System is defined as: 16.25% Russell 1000 Value, 16.25% Russell 1000 Growth, 12.00% Russell 2500 Value, 8.00% Russell 2500 Growth, 5% MSCI EAFE (Net), 7.50% MSCI ACWI ex US (Net), 25% Bloomberg Barclays U.S. Aggregate, 5.00% Dow Jones Brookfield Infrastructure Composite, 5.00% NCREIF indexes. In addition, it is expected the total rate of return earned by the Fund and the returns earned by the stock, bond, and cash portfolios will rank above average when compared to a representative universe of other similarly managed portfolios. Secondary Objectives: A further goal of the City of Sebastian Police Officers' Retirement System shall be to achieve a return greater than the assumed actuarial rate of return over the longer term. This absolute return objective will be evaluated in the context of the prevailing investment market conditions. In addition, the Fund should earn a return greater than inflation, as measured by the Consumer Price Index, by 3.0% per year. Volatility: The volatility of the Funds total returns is expected to be similar to the Target Index and will be evaluated accordingly. 3 Investment Strate2v Guidelines Based on an analysis of Plan assets and expected returns and risks associated with various asset mix strategies, the Board of Trustees has established a target asset allocation for the entire City of Sebastian Police Officers' Retirement System to meet the long term investment goals of the Fund. Investment Policy Portfolio Allocation Asset Class Benchmark Min Target Max EQUITIES 40.00 % 65.00 % 70.00 % Large Cap Equity Large Cap Value RUSSELL 1000 12.50% 16.25% 22.50% VALUE Large Cap Growth RUSSELL 1000 12.50% 16.25% 22.50% GROWTH SMid Cap Equity SMid Cap Value RUSSELL 2500 2.50% 12.00% 15.00% VALUE SMid Cap Growth RUSSELL 2500 2.50% 8.00% 10.50% GROWTH International (INT'L) Int'l Value MSCI EAFE 2.50% 5.00% 7.50% (Net) Int'l Growth MSCI ACWI ex 5.00% 7.50% 10.00% US (Net) FIXED INCOME 20.00 % 25.00 % 35.00 % Core Fixed Income BLOOMBERG 20.00% 25.00% 35.00% BARCLAY'S U.S. AGGREGATE Infrastructure DOW JONES 0.00% 5.00% 10.00% BROOKFIELD INFRA. COMP. Private Real Estate NCREIF 0.00% 5.00% 10.00% Total Alternatives 0.00% 10.00% 20.00 % TOTAL I 100.00 % The allocation to each asset class may vary from the target asset allocation depending upon market conditions. When necessary and/or available, cash may be deployed in a manner consistent with the strategic asset allocation limits set by this statement of investment policy. rd Professional Monev Managers To implement this strategy, the Board has chosen to hire one or more professional investment managers. Within the guidelines and restrictions set forth within, it is the intention of the Board of Trustees to give each investment manager full investment discretion with respect to assets under its management. The investment managers shall discharge their responsibilities in the same manner as if the Fund were governed by the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Although the Fund Trustees acknowledge ERISA does not apply to a governmental fund, the trustees hereby imposes the fiduciary provisions of ERISA upon each investment manager whose performance shall conform to statutory provisions, rules, regulations, interpretations and case law of ERISA. Each investment manager shall acknowledge, in writing, that it is a named fiduciary of the Fund. The signed document shall be attached to this Investment Policy Statement. Each investment manager is expected to provide any reasonable information requested by the Board of Trustees. At a minimum, managers shall provide a quarterly report detailing their investment activity, the portfolios current value and any changes in investment philosophy or strategy. Each investment manager is expected to meet with the Board of Trustees or their designated representatives periodically to review investment performance and philosophy. Unless otherwise provided by the Funds' Custodian, each investment manager will monitor portfolio activity to minimize uninvested cash balances. Each investment manager shall be responsible only for those assets under their management. It will be the responsibility of each investment manager to review the monthly valuations provided by the Funds custodian and to note, in writing, any significant discrepancies from the valuations provided in their own reports. Caution must be used in selecting appropriate money managers to manage the Fund's assets. At a minimum, the money manager must meet the following criteria: 1. Be an investment management company, bank, insurance company, or Investment Consultant as defined by the Registered Investment Advisers Act of 1940. 2. Provide historical quarterly performance data calculated on a time weighted basis, based on a composite of all fully discretionary accounts of similar investment styles, and reported net and gross of fees. 3. Provide detailed information on the history of the firm, key personnel, fee schedules and support personnel. 0 4. Have no outstanding legal judgments or past judgments that may reflect negatively on the firm. Securities Guidelines In accordance with the policies established by the Board of Trustees, the assets of the City of Sebastian Police Officers' Retirement System shall be invested in a diversified portfolio of fully negotiable equity, fixed income, and money market securities, provided they meet the following criteria: Equity Securities 1. Investments in all equity securities shall be limited to no more than 70% (at market) of the Fund's total portfolio value. 2. All equity investments shall be limited to fully and easily negotiable equity securities. 3. The equity position in any one company shall not exceed 5% of the total plan portfolio at market. 4. Allocation to any one economic sector should not be excessive and should be consistent relative to a broadly diversified equity market and to managers following similar style disciplines. 5. Investments in stocks of foreign companies shall be limited to 25% (at market value) of the total investment portfolio. The definition of a foreign stock for purposes of this policy is found in Florida Statues, Section 185.06(1)(b)4. The compliance and monitoring of this Section (Equity Securities) is the responsibility of the consultant and the trustees. The consultant's responsibility is to report any non-compliance to the trustees each quarter. a.) Large Capitalization Value & Growth Stocks Large capitalization stocks are expected to have the greatest weighting in the Pension Fund. They are expected to provide more consistent returns over time than other equity styles. The objective is to maximize investment return over a market cycle by investing in large capitalization equities having the potential to generate investment returns exceeding a passively managed large stock index. Large capitalization equity manager performance parameters include the following: • Performance within the top half of a Universe of Large Capitalization Value or Growth Managers. on • Performance comparable to the appropriate Russell indexes commensurate with the recognized level of risk. • The risk associated with the manager's portfolio as measured by the variability of quarterly returns (standard deviation) should not exceed the comparison index without a corresponding increase in performance above the index. • Achieve the performance parameters within a time horizon of a minimum of a full market cycle. b.) Mid/Small Capitalization Stocks Mid/Small capitalization stocks are expected to improve total portfolio diversification and provide opportunities for higher incremental returns in the long run. The objective is to maximize investment return over a market cycle by investing in mid/small capitalization equities having the potential to generate investment returns exceeding a passively managed mid/small stock index. Mid/Small capitalization growth stock managers generally purchase companies with a market capitalization of greater than $500 million. Mid/Small capitalization equity manager performance parameters include the following: • Performance within the top half of a Universe of Mid/Small Capitalization Value or Growth Managers • Performance comparable to the appropriate Russell indexes commensurate with the recognized level of risk. • Achieve the performance parameters within a time horizon of a minimum of a full market cycle for the mid/small capitalization market. c.) Developed & Emmin2 Markets International Stocks International Stocks are expected to improve total portfolio diversification and provide opportunities for higher incremental returns in the long run. The objective is to maximize investment return over a market cycle by investing in international securities through American Depository Receipts (ADRs) as well as any foreign company that trades directly in a U.S. equity market. These equities should generate investment returns exceeding a passively managed international index. Developed & Emerging Markets International equity manager performance parameters include the following: 7 • Performance comparable to to the appropriate MSCI developed and emerging markets international indexes commensurate with the recognized level of risk. • Achieve the performance parameters within a time horizon of a minimum of a full market cycle of the international market. Fixed Income Securities 1. Investments in corporate fixed income securities shall be limited to: a) Those securities rated investment grade by a recognized rating agency. Fixed income securities downgraded below the minimum rating by both entities shall be sold at the earliest beneficial opportunity as determined by the manager. It is the manager's responsibility to notify the board in writing immediately after a security is downgraded below the policy guidelines. The written explanation should describe the manager's intentions regarding the disposition of the security being downgraded. b) Securities issued by a corporation organized under the laws of the United States, any state or organized territory of the United States, or the District of Columbia. c) No more than 10% (at market) of the fixed income portfolio total value may be invested in the securities of any single corporate issuer. 2. Investments in Collateralized Mortgage Obligations shall be limited to 25% of the market value of the total fixed income portfolio and shall be restricted to those issues: a) Those issues backed by the full faith of the U.S. Government, an Agency thereof, or rated AAA by a major rating service. b) PAC (planned amortization class), NAC (non -accelerated securities) or VADM (very accurately defined maturity) securities. 3. There is no limit imposed on investments in fixed income securities issued directly by the United States Government or any agency or instrumentality thereof. Fixed income manager(s) performance parameters include the following: • Performance comparable to the appropriate Bloomberg Barclays Fixed Income Index commensurate with the recognized level of risk. • Achieve the above objectives within a time horizon of a minimum of a full market cycle. Cash Equivalent Securities: 1. The Investment managers may invest only in the following short — term investment vehicles: a) The money market or STIF provided by the Fund's custodian. b) Direct Obligations of the United States Government with a maturity of one year or less. c) Commercial Paper issued by United States corporations with a maturity of one year or less. Infrastructure Infrastructure funds seek total return from both capital appreciation and current income. Investments in Infrastructure shall be managed by experienced and professional investment managers. Investments may be made through a listed infrastructure or private infrastructure fund. Infrastructure manager performance parameters include the following: • Performance comparable to the Dow Jones Brookfield Infrastructure Composite Index commensurate with the recognized level of risk. • Achieve the performance parameters within a time horizon of a minimum of a full market cycle. Private Real Estate Private real estate investments are expected to improve total portfolio diversification and provide income and opportunities for higher incremental returns in the long-term. The objective is to maximize investment return over a market cycle by investment in real estate through private ownership. The investment managers are permitted to invest in private real estate. Private real estate will be purchased through an institutional vehicle. The institutional vehicle provides diversification of property type and geographical location and provides a competitive price structure. These private real estate investments should generate investment returns exceeding a passively managed private real estate index. Private real estate investment performance parameters include the following: • Performance comparable to the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index or Open -End Diversified Core indexes commensurate with the recognized level of risk. 0J • Achieve the above objectives within a time horizon of a minimum of a full real estate market cycle. Mutual Funds/Commingled Funds/Exchange Traded Funds: The Board of Trustees recognizes and accepts commingled fund, mutual fund, and exchange traded fund investments will be dictated by the investment policies and guidelines of those funds and no additional constraints may be imposed upon them. The decision to invest assets of the City of Sebastian Police Officers' Retirement System in any commingled fund, mutual fund, or exchange traded fund will only be made by the Trustees after a thorough review of the policies and/or prospectuses of those funds and after it has been determined those policies are appropriate and consistent with the investment philosophy of the City of Sebastian Police Officers' Retirement System. Sudan/Iran Divestiture In accordance with the Protecting Florida's Investment Act (Fla. Stat. 215.473), the Board is prohibited from directiv investing in any company identified each quarter by the State Board of Administration on its website as a scrutinized company. The Board shall review its investments each quarter to determine whether it is required to sell, redeem, divest, or withdraw any publicly traded security of a company identified by the SBA as a scrutinized company. Section 112.661 Florida Statutes The Board of Trustees has adopted the following additional provisions to comply with Section 112.661, Florida Statutes: 1. SCOPE: The investment policy applies to those funds under control of the Board. 2. INVESTMENT OBJECTIVES: The investment policy describes the investment objectives of the Board. 3. PERFORMANCE MEASUREMENT: The investment policy specifies performance measures as are appropriate for the nature and size of the assets within the Board's custody. 4. INVESTMENT AND FIDUCIARY STANDARDS: In performing its investment duties, the Board and its investment managers shall comply with the fiduciary standards set forth in ERISA (Employee Retirement Income Security Act). 5. AUTHORIZED INVESTMENTS: The Board of Trustees recognizes those assets listed in its attached Statement of Investment Policy. Investments not listed are prohibited. 10 6. MATURITY AND LIQUIDITY REQUIREMENTS: The investment portfolio shall be structured in such a manner to provide sufficient liquidity to pay obligations as they come due. To the extent possible, an attempt will be made to match investment maturities with known cash needs and anticipated cash -flow requirements. 7. PORTFOLIO COMPOSITION: The investment policy establishes guidelines for investments and limits on security issues, issuers and maturities. These guidelines are commensurate with the nature and size of the funds within the custody of the Board. 8. RISK AND DIVERSIFICATION: The Board of Trustees has developed a diversified investment program to control the risk of loss resulting from over concentration in a specific maturity, issuer, instrument, dealer or bank through which financial instruments are bought and sold. 9. EXPECTED ANNUAL RATE OF RETURN: With consideration to rates of return from different asset classes, the Board of Trustees has crafted its investment program to deliver an expected rate of return similar to the actuarial assumed rate. The Board shall determine for each actuarial valuation, the total expected annual rate of return for the current year, for each of the next several years and for the long term thereafter. The total expected annual rate of return is anticipated to be similar to the actuarial assumed rate of return. This determination is filed with the Department of Management Services and with the plan sponsor and consulting actuary. 10. THIRD -PARTY CUSTODIAL AGREEMENTS: All assets shall be held by a third party custodian selected by the Board. Securities transactions between a broker -dealer and the custodian involving purchase or sale of securities by transfer of money or securities are to be made on a "delivery vs. payment" basis to ensure the custodian will have the security or money in hand at conclusion of the transaction. 11. MASTER REPURCHASE AGREEMENT: Repurchase Agreements are prohibited investments. 12. BID REQUIREMENT: To the extent possible, the intention of the Board of Trustees is to determine the approximate maturity date based on cash -flow needs and market conditions, analyze and select one or more optimal types of investment and competitively bid the security in question when feasible and appropriate. Except as otherwise required by law, the most economically advantageous bid is selected. 13.INTERNAL CONTROLS: The Board recognizes the internal controls and operational procedures outlined in the Board's operation rules and procedures, in 11 the plan document, and in the custodial agreement. These controls are reviewed by the Board's independent certified public accountant as part of the financial audit periodically required. The internal controls are designed to prevent losses of funds, which might arise from fraud, error and misrepresentation, by third parties or imprudent actions by the Board or employees of the plan sponsor. 14. CONTINUING EDUCATION: The Board of Trustees relies on its consultants and professionals to provide continuing education on pension and investment issues. The Board of Trustees recognizes state and regional conferences as a source of continuing education. The Trustees are encouraged to attend conferences, schools, and other functions periodically to fulfill this requirement. 15. REPORTING: The Custodian's valuation report is filed annually with the plan sponsor. This report is available to the public. 16. FILING OF INVESTMENT POLICY: The investment policy is promptly filed with the Department of Management Services, plan sponsor and consulting actuary. The effective date of the investment policy and any amendment thereto shall be the 31St calendar day following the filing date with the plan sponsor. 17. VALUATION OF ILLIQUID INVESTMENTS: The Board defines an illiquid investment as one for which a generally recognized market is not available or for which there is no consistent or generally accepted pricing mechanism. Should an investment become illiquid or in the event the fund acquires an illiquid investment, the Board shall develop the methodology for valuation as set forth in the criteria in Section 215.47(6), Florida Statutes (the SBA/FRS methodology for valuation). 12 ASSIGNMENT OF RESPONSIBILITIES Responsibility Table Fiduciary Written Written Strategic Asset Allocation Level Investment Investment Allocation Within Policy Strategy Among Asset Asset Class(s) Class(s) Manager Security Performance Search & Selection Measurement Selection Trustees 1 1 1 4 1 4 4 Investment 2 2 2 2 2 4 3 Consultant Investment 4 4 2 2 4 1 3 Manager(s) Custodian 4 4 4 4 4 4 4 Delegation of Responsibility: 1)Approves 2) Recommends 3) Monitors 4) Informed INVESTMENT POLICY REVIEW The intention of the Board of Trustees is to review this Statement of Investment Policy and its addenda periodically and to amend it to reflect any changes in philosophy or objectives. However, if at any time the Investment managers believe the specific objectives defined herein cannot be met or these guidelines unnecessarily constrict performance, the Trustees shall be so notified in writing. ACCEPTANCE AND AUTHORIZATION This statement of investment policy is adopted q+k 16 September 21, 2021 by the Board of Trustees of the City of Sebastian Police Officers' Retirement System whose signatures appear below. Chairman, Board of Trustees City of Sebastian Police Officers' Retirement System 13 Investment Manager's Acknowledgment I, the undersigned, acknowledge I have received the policy statement for the City of Sebastian Police Officers' Retirement System, dated . I affirm I have read and understand said Policy Statement, and do hereby agree to abide to the guidelines expressed in the Policy Statement. Name of Firm Signed Date 14 A Self -Assessment for the Trustees of the City of Sebastian Police Officers' Retirement System • Are investments managed in accordance with applicable by-laws, trust documents, and written investment policy statements? • Are the roles and responsibilities of all involved parties defined, documented and acknowledged? • Are service agreements and contracts in writing? Are they written with provisions that conflict with fiduciary standards of care? • Has an investment time horizon been identified? • Has a risk level been identified? • Has an expected, modeled return to meet investment objectives been identified? • Are selected asset classes consistent with identified risk, return and time horizon? • Are selected asset classes consistent with implementation and monitoring constraints? • Is there an Investment Policy Statement (IPS), which contains the detail to define, implement, and manage a specific investment strategy? • Is the investment strategy implemented in compliance with the required level of prudence? • Does the IPS define appropriately structured, socially responsible investment strategies (where applicable)? • Are Investment vehicles appropriate for the portfolio, size? • Is a due diligence process followed in selecting service providers, including the custodian? • Are there periodic reports comparing investment performance against an appropriate index, peer group, and IPS objectives? • Are periodic reviews made of qualitative and/or organizational changes of investment decision -makers? • Are control policies in place to periodically review policies for best execution, "soft dollar", and proxy voting? • Are fees for investment management consistent with agreements and all applicable laws? • Are "finder's fees" or other forms of compensation that may have been paid for asset placement, appropriately applied, utilized and documented? Is there a process to periodically review the Organization's effectiveness in meeting its fiduciary responsibilities? 15