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4. ENDOWMENT FUND Investment
policy
politique
d’investissement dans le fonds de dotation
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COMMITTEE
RECOMMENDATIONS
That Council:
1. Adopt the investment policy and procedures statement attached
hereto as Appendix "A" for the City of Ottawa Endowment Fund .
2. Approve the establishment of an Investment Committee with the
roles and responsibilities and membership as detailed in Appendix "B"
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RECOMMENDATIONS
DU COMITÉ
Que le Conseil :
1. adopte l’énoncé des
procédures et de la politique d’investissement visant le Fonds de dotation de
la Ville d’Ottawa, ci-joint comme Annexe « A »;
2. approuve l’établissement d’un comité des
investissements, dont le rôle, les responsabilités et la composition sont
détaillés dans l’Annexe « B ».
DOCUMENTATION
1. Chief
Corporate Services Officer’s report dated 29 May 2006
(ACS2006-CRS-FIN-0025).
Report
to/Rapport au :
Corporate Services and Economic Development Committee
Comité des services organisationnels
et du développement économique
and Council / et au Conseil
29 May 2006 / le 29 mai 2006
Submitted by/Soumis par : Greg Geddes, Chief Corporate Services
Officer/Chef des Services généraux
Contact
Person/Personne ressource : Marian Simulik, Acting Director, Financial
Services and City Treasurer/Directrice des services financiers et Trésoričre municipale par intérim
Financial Services/Services financiers
580-2424, Ext./poste 14159,
Marian.Simulikl@ottawa.ca
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Ref N°: ACS2006-CRS-FIN-0025
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SUBJECT:
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ENDOWMENT FUND INVESTMENT POLICY
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OBJET :
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politique
d’investissement dans le fonds de dotation
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REPORT RECOMMENDATIONS
That the Corporate Services and
Economic Development Committee recommend Council:
1. Adopt
the investment policy and procedures statement attached hereto as Appendix
"A" for the City of Ottawa Endowment Fund .
2. Approve the establishment of an
Investment Committee with the roles and responsibilities and membership as
detailed in Appendix "B" .
RECOMMANDATIONS DU
RAPPORT
Que le Comité des
services organisationnels et du développement économique recommande au
Conseil :
1. d’adopter l’énoncé
des procédures et de la politique d’investissement visant le Fonds de dotation
de la Ville d’Ottawa, ci-joint comme Annexe « A »;
2. d’approuver
l’établissement d’un comité des investissements, dont le rôle, les
responsabilités et la composition sont détaillés dans l’Annexe « B ».
BACKGROUND
On
August 25, 2004, Council received a report relating to the Governance of Hydro
Ottawa and adopted a number of recommendations relating to the structure of the
Board of Directors and the formulation of the financial structure of Hydro
Ottawa. Among the recommendations was
one that Council convert $37,825,000 of the $237,825,000 promissory note and
call on the balance to be paid to the City in January 2005.
On
October 25, 2004, as part of its consideration of the Long Range Financial
Plan, Council approved the following motion:
“That the City establish an Endowment Fund with the proceeds of the
Hydro Ottawa refinancing and that the City request special legislation that
would allow the fund to be invested under the Trustees Act”. In early January 2005, Hydro Ottawa completed
its refinancing and paid the City $200,000,000. The City subsequently requested special legislation that would
allow the fund to be invested under the Trustees Act providing a broader range
of investments than allowed under municipal legislation. The Minister of Municipal Affairs and Housing
was approached to provide authorization to the City to broaden the scope of
investments eligible solely for these funds.
On
October 12, 2005, Council authorized the City Treasurer upon receipt of the
enabling Provincial regulation, to proceed with the establishment of an
Endowment Fund ("Fund") on the basis outlined in the report and to
hire an investment consultant.
Provincial Regulation 655/05 was adopted on December 19, 2005, which
provided the framework for the eligible investments for the Endowment Fund and
required that investments be made in a professionally-managed fund.
In
order to develop the investment policy, strategies and search for qualified
investment managers to meet the requirements of the Provincial regulation,
proposals for investment consulting services were sought from five experienced
firms. Submissions were received from
four firms and following a review of the various proposals, James P. Marshall,
a Hewitt Company was selected as the successful proponent.
This
report recommends the investment policy for the Fund which includes a spending
target of 6.5%. The spending target is
the minimum earnings the City wants to achieve from the investment of the Fund. The report also recommends the ranges for
the investment mix between equity and fixed income and the governance structure
for the Fund.
DISCUSSION
Ontario
Regulation 655/05 broadened the scope of eligible investments specifically for
the funds received by the City of Ottawa from the Hydro Ottawa
refinancing. In addition to Government
of Canada and Provincial short and long-term treasury bills, notes and bonds,
Canadian bank obligations and Asset Backed Securities, the Regulation allows
the Fund to own Canadian corporate bonds and Canadian equities. Although this represents a significant
increase in the scope of investments and thus the possibility of greater
long-term returns, the regulation did not permit the full scope of investments
available under the Trustee Act or to the City’s pension funds (the Ottawa
Carleton Regional Transit Commission Employees' Pension Plan and the City of
Ottawa Superannuation Fund). Thus the
Fund's assets cannot be invested in the full range of asset classes, including
foreign investments (i.e. bonds and equities), lower investment grade fixed
income instruments and alternatives.
Not only does this limit the possibility of improved investment returns
from these asset classes but this diminishes the Endowment Fund's ability to
diversify its portfolio which is generally regarded as an important criteria to
reduce fluctuations in portfolio valuations and minimize risk.
One
of the first steps to be taken in setting up the Fund is to determine a
realistic spending policy or rate at which funds will be withdrawn to support
the City’s capital program. Long-term
historical evidence suggests that the investment returns which we have
experienced in recent years in bond and equity markets are not representative
of future expected returns and the spending policy target should reflect
this. For example, based on our
consultant's asset class returns assumptions, they believe that over the next
ten years long-term bonds will deliver approximately 4.5% per annum, compared
to the previous ten years where this asset class returned 10.1%.
A
survey of Canadian endowment funds carried out by the Canadian Association of
University Officers (CAUBO) in 2004
indicates that 70% of the respondents reported average spending rates of 6.0%
or less. Given that anticipated
investment returns are less than those recently experienced, and the objective
of preserving the initial capital in the fund of $200 million, it is
recommended the spending policy be set at the lesser of 6.5% and the earnings
of the Fund after expenses for the year.
The expenses attributable to the Fund and recovered from its earnings
include, custodian fees, investment management fees, investment consultant
fees, the costs of performance measurement, banking costs and possibly
financial information provider services.
If earnings are greater than 6.5% in any given year, the additional
earnings will be kept in the Fund.
The
retention of these earnings will provide a margin of safety for those years
when the Fund generates returns that are less than the spending required to
operate the Fund. It also provides some
adjustment for inflation so that future contributions from the Fund can keep up
with inflated future capital costs. A
target earnings rate of 6.5% may appear low in comparison to the exceptional
returns which some investment classes (real estate and Canadian equities) have
provided in recent years, however, as mentioned previously, future investment
returns are expected to be subtantially more moderate. It is useful to compare the 6.5% target
return for the Fund to the City's own investment portfolios with restricted
eligible investments which returned 3.45% on a market to market basis for 2005
which exceeded ONE Fund returns as reported to Council on May 24, 2006.
In
order to provide a return which is greater than the returns provided by the
City’s other investment assets, exposure to other asset classes is
required. Regulation 655/05 permits
Canadian equities and corporate bonds.
According
to the CAUBO survey the median asset mix for University Endowment funds over
$100 million is 61% equity (including US and international equities) and 34%
fixed income (Government and corporate bonds, asset backed securites
etc.). Several model portfolios were
developed in a Spending Policy Review prepared by Marshall's using various
target returns around the 6.5% range.
The performance of each portfolio was simulated over a 10-year period
using a multitude of economic scenarios.
The asset mix set out in Annex A with benchmarks of 70% Canadian
equities and 30% fixed income (with ranges of a minimum 50% to 80% equities and
20% to 40% fixed income) was selected as offering the best combination of risk
and returns.
Governance
Structure
Appendix
B provides the details of the proposed governance structure for the Endowment
Fund Investment Committee. The
Committee would include the City Manager, the City Solicitor, the Chief
Corporate Service Officer, the City Treasurer, and the Manager, Treasury. The Committee would be authorized to
undertake all the administrative aspects of operating the Fund including
investment strategy, asset allocation mix, setting benchmarks, investment
manager selection and monitoring the Fund's performance. J. P. Marshall will develop a short list of
qualified investment managers for consideration by the Committee from managers
who measure their investment returns in accordance with accepted industry
standards as specified by the Global Investment Performance Standards (GIPS)
published by the Chartered Financial Analysts Institute. Compliance with the CFA Institute's GIPS
Standards will ensure that there is uniformity among the pool of investment
manager candidates when it comes to their return calculation methodology. The Committee would report to Council
annually on the performance of the fund and provide the reporting information
required under O. Regualtion 655/05.
Any proposed changes to the governance structure would require Council
approval.
CONSULTATION
The
public consultation process is not applicable.
FINANCIAL IMPLICATIONS
The
Endowment Fund will provide the City with an on-going source of revenue to
contribute to the City's capital program.
The statement of Investment Policies and Procedures in Appendix A are
expected to provide attractive long-term investment returns within an acceptable
level of risk.
SUPPORTING DOCUMENTATION
Appendix
A - Statement of Investment Policies
and Procedures
Appendix
B - Investment Committee Governance Manual.
DISPOSITION
Upon
approval of the investment policy and procedure statement and governance
structure by Corporate Services and Council, the Investment Committee will
proceed to develop more detailed investment manager mandates, select fund
managers and implement the steps required to make the fund operational.
APPENDIX B
City of Ottawa
Endowment Fund Investment Committee
Governance Manual
May 2006
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To protect
the confidential and proprietary information included in this material, it
may not be disclosed or provided to any third parties without the approval of
your organization and Hewitt Associates.
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Contents
Section 1—Overview 83
1.01 Purpose of Governance Manual 83
1.02 Mandate of the Committee 83
1.03 Background of the Fund 83
1.04 Governance Structure 83
Section 2—Structure of the Committee 84
2.01 Composition
of the Committee 84
2.02 Officers 3
2.03 Appointment
of Members 3
2.04 Resignation 84
2.05 Termination 84
Section 3—Conduct of Meetings 86
3.01 Frequency 86
3.02 Venue 86
3.03 Agenda 86
3.04 Voting 86
3.05 Quorum 86
3.06 Meeting
Records 86
3.07 Conflicts
of Interest 86
3.08 Confidential
Information 88
Section 4—Duties and Responsibilities 89
4.01 Facilitation
of Investment of the Fund 89
4.02 Standard
of Care 89
4.03 Delegation 89
4.04 Reporting 89
Section 5—General Provisions 91
5.01 Protection
from Liability 91
5.02 Compensation 91
5.03 Adoption
of Manual 91
5.04 Amendment
of Manual 91
Appendix A—Governance Structure 92
Appendix
B—Fund Activity Chart 93
Appendix C—List of Agents 95
Section 1—Overview
This Governance Manual sets out the policies and procedures
to be followed by the City of Ottawa Endowment Fund Investment Committee
(the “Committee”) in the investment of the assets of the City of Ottawa
Endowment Fund (the “Fund”).
The Committee was established by resolution of the City
Council of Ottawa (the “Council”) on . The mandate of the Committee
is to facilitate the prudent investment of the Fund.
On January 6, 2005, as part of its financial restructuring, Hydro
Ottawa paid a sum of money to the City of Ottawa (the “City”) to retire a
promissory note held by the City. Since
that date, such funds have been kept separate from other investment funds of
the City.
On October 4, 2005, Council approved a report which set out guidelines
for such funds and recommended that the City proceed to establish the City of
Ottawa Endowment Fund (previously defined as the “Fund”). The main objective of
the Fund is capital preservation of the initial contribution while providing an
ongoing source of income to the capital program of the City. It is anticipated
that an annual payment will be made from the Fund as a contribution to the
capital program of the City.
1.04
Governance Structure
The governance structure for the investment of the Fund is illustrated
in Appendix A (Governance Structure).
Section
2—Structure of the Committee
The Committee shall be comprised of persons holding the
following positions:
·
Manager, Treasury;
·
City Treasurer;
·
Chief Corporate Services Officer;
·
City Manager or his or her appointee ;
and
·
City Solicitor or his or her
appointee (collectively, the
“Members”).
In no event, shall
the Committee consist of persons other than those holding the above positions.
In no event, shall the Committee consist of less than three persons.
2.02
Officers
The Chairperson of the Committee shall be the City
Treasurer. The Secretary of the Committee shall be the Manager, Treasury.
2.03
Appointment of Members
Subject to the terms of Section 2.01 above, Council shall
appoint new Members with input from the Committee. It is recognized that one
individual may hold dual positions.
The Secretary shall ensure that new Members receive an
education session explaining the Fund and the duties and responsibilities of
the Committee as set out in this Governance Manual.
A Member may resign at any time by providing one month
written notice thereof to each Member.
Subject to the terms of Section 2.01, Council may replace a
Member at any time with input from the Committee.
A person’s membership on the Committee will automatically
terminate on the person’s death, termination of employment, retirement or
disability which renders him or her incapable of fulfilling his or her duties
and responsibilities as set out in Section 4 (Duties and Responsibilities).
Section 3—Conduct of Meetings
The Committee shall meet at least two times per annum. Subject to Section 3.07(b)(Conflicts of
Interest, Disclosure), the Secretary of the Committee shall provide each Member
with written notice of each meeting at least one month in advance of such
meeting.
The meetings shall be held at the office of the City at 110
Laurier Ave. West or such other place as may be determined by the Committee.
Meetings may also be held by teleconference upon the advance written consent of
each Member.
Subject to Section 3.07(b)(Conflicts of Interest,
Disclosure), the Chairperson shall distribute an agenda and copies of any
material to be considered at a meeting to each Member of the Committee at least
seven business days prior to the
meeting.
Notwithstanding that a Member may hold dual positions, each
Member shall have one vote. Motions shall be carried by majority vote. In the event of a deadlock, the Chairperson
shall have a second and deciding vote.
A quorum shall consist of at least three Members, one of
whom must be the Chairperson.
The Secretary shall record written minutes of each meeting
and distribute such minutes to each Member within two weeks following the
meeting. Each Member shall review the minutes to ensure that they are complete
and accurate. At the next meeting, the minutes will be amended, if necessary,
and approved by the Committee.
The Secretary shall retain a copy of the approved minutes
from each meeting in a designated meeting book.
(a) Generally
No Member shall knowingly permit his or her
interest, monetary or otherwise, direct or indirect, to conflict with the
proper exercise of his or her duties and responsibilities as described in
Section 4 (Duties and Responsibilities).
(b) Disclosure
In the execution of his or her duties, a Member shall
disclose any material conflict of interest relating to him or her, or any
material ownership of securities, which could impair his or her ability to make
unbiased decisions affecting the investment of the Fund.
Further, it is expected that no Member shall make any
personal financial gain (direct or indirect) because of his or her fiduciary
position. However, expenses incurred in
the discharge of his or her responsibilities are permitted if documented and
approved by the City, as applicable.
No Member shall accept a gift or gratuity or other personal
favour, other than one of nominal value, from a person with whom the Member deals
in the course of performance of his or her duties and responsibilities as
described in Section 4 (Duties and Responsibilities).
A Member who believes that he or she may have a conflict of
interest, or who is aware of any conflict of interest, shall disclose full
details of the situation to the attention of the Committee immediately. The Committee, in turn, will decide what
action is appropriate under the circumstances, including calling an emergency
meeting of the Committee to address the potential conflict of interest, but, at
a minimum, will table the matter at the next regular meeting of the Committee.
Notwithstanding the notice requirements in Section 3.01
(Frequency) and Section 3.03 (Agenda), if the Committee determines that it is
necessary to hold an emergency meeting of the Committee to address a potential
conflict of interest of a Member, the Committee shall meet as soon as a quorum
can be constituted.
No Member who has or is required to make a disclosure in
accordance with this section shall participate in any discussion, decision or
vote relating to any proposed investment or transaction in respect of which he
or she has made or is required to make disclosure, unless otherwise determined
permissible by unanimous decision of the Committee.
(c) Register
The Secretary shall maintain a register of any conflicts of
interest. The register shall include a
description of each conflict of interest, the Member to whom the conflict of
interest applied, the date upon which the conflict of interest arose and the
manner in which the conflict of interest was dealt with.
(d) City of Ottawa Code of Conduct
In addition to the obligations set out in this Section 3.07,
each Member, as an employee of the City, shall be subject to the City of Ottawa
Code of Conduct.
(a) Generally
Confidential information includes all information obtained
as a result of duties carried out as a Member of the Committee. This information includes, but is not
limited to, information regarding the funding and investment of the Fund and
any other information not required or permitted to be released to the public
(collectively, “Confidential Information”).
Each Member shall maintain the confidentiality of all
Confidential Information and shall use such information solely for the purposes
of fulfilling his or her duties as a Member of the Committee. A Member shall not disclose Confidential
Information to anyone internal or external to the Company unless such persons
have a legitimate reason to know in order to carry out their duties with
respect to the Fund or unless such information is required by law to be
disclosed.
(b)
City of Ottawa Code of Conduct
In addition to the obligations set out in this Section 3.08,
each Member, as an employee of the City, shall be subject to the City of Ottawa
Code of Conduct.
Section
4—Duties and Responsibilities
Subject to legislative
restrictions, the Committee is responsible for facilitating the prudent
investment of the Fund.
The specific duties and
responsibilities, and limits on authority, of the Committee are contained in
the activity chart in Appendix B (Fund Activity Chart).
4.02
Standard of Care
Each Member, shall carry out his or her duties and
responsibilities, with respect to the Fund honestly and in good faith. Furthermore, each Member, shall act with the
care, diligence and skill that a person of ordinary prudence would exercise in
dealing with the property of another person.
Subject to the
following paragraph, the Committee may delegate certain of its duties and
responsibilities to another person or persons or employ such qualified agents
from time to time as it deems necessary in order to carry out its duties in a
prudent manner. The Committee must be satisfied of the agent’s suitability to
perform the act for which the agent is employed and the Committee shall carry
out such supervision of the agent as is prudent and reasonable. The terms of
reference of each delegation or employment shall be documented in writing and
shall include the frequency and required content of reports to be delivered to
the Committee. The Committee may also terminate such agents as it deems
necessary and as is prudent and reasonable.
Notwithstanding the
preceding paragraph, the City shall be responsible for appointing and
terminating an auditor to review the Fund.
Currently, the
Committee has delegated certain duties and responsibilities to the agents
listed in Appendix C (List of Agents).
In addition, as
required from time to time, the Committee shall appoint a third party to
educate Members of the Committee about the Fund and the duties and
responsibilities of the Committee as set out in this Governance Manual.
The Committee shall prepare a written report not less
frequently than once each calendar year for the Council that outlines the
results of the Committee's activities described in this Section 4 and any
other issues pertinent to the Committee's duties and responsibilities. The
written report shall include, among other matters, a list of the agents that
have been appointed and / or terminated by the Committee during the time period
in question.
Section 5—General Provisions
The City hereby
agrees to indemnify, defend, save, and keep harmless the Committee and each of
its Members from and against any and all liabilities, obligations, losses,
damages, penalties, claims, actions, suits, costs, expenses and disbursements
of any kind or nature imposed on, or incurred by or asserted against the
Committee or its Members as a consequence of any action or inaction by the
Committee or its Members in connection with the performance of their duties in
relation to the Fund, provided, however, that the City shall not be required to
indemnify any such person for the willful misconduct or gross negligence of
such person.
As a Committee of
Council, the Committee and each of its Member’s fiduciary liability will be
insured under the City’s Integrated Insurance program, which includes Municipal
Liability and Errors and Omissions Liability, while performing their duties
hereunder. Details of such coverage can
be provided by the City’s Risk Management Unit.
Members shall not be compensated for performance of their
duties on the Committee but shall be reimbursed by the City, for any normal and
reasonable fees and expenses incurred in the discharge of their
responsibilities which have been documented and approved by the City.
This Governance Manual was originally approved by a
resolution of Council dated .
The Committee may recommend amendments to this Governance
Manual. Such recommendations shall be
in writing and shall be presented to Council for approval. This Governance
Manual may only be amended by resolution of Council.
