Investment Policy Statement

       27 August 2008



Diocesan Investment Committee

 Anglican Diocese of Brisbane
1.     PREAMBLE

The Diocesan Investment Committee (“DIC”) is established as a Standing Committee of the Diocesan
Services...
3. STATEMENT OF RESPONSIBILITIES

The following parties are associated with the operation of the Fund:

3.1 Diocesan Inves...
The Custodian is charged with the responsibility for safekeeping securities, collections and
    disbursement, and periodi...
5. PORTFOLIO CONSTRUCTION ISSUES

        5.1       Portfolio Construction

    In developing the DIC’s views in relation ...
Strategic v Tactical Asset Allocation approaches

    Strategic Asset Allocation

    Strategic Asset Allocation is the pr...
market directions in order to be successful. There is no evidence anyone has been able to do this
consistently over extend...
Managed v Direct Investments

    A very important issue in considering the overall approach to portfolio construction is ...
Growth Assets include such assets as:

•   Shares – both Australian and International
•   Property – both Australian and I...
It has been established that investors have little ability to consistently pick the best asset class or
sub-asset class in...
6 INVESTMENT CLASS GUIDELINES

    6.1       Cash

    Part of the holding may need to be readily available (ie within 30 ...
Duration

The maximum average duration of any investment is 24 months from the date of its purchase.

Recommendations for ...
6.4       Australian Share Investments

The Fund may invest indirectly (via wholesale managed funds) in securities listed ...
6.6        Other Investments

    6.6.1      Options and Futures

    The Fund does not intend to invest directly in any f...
Whilst Hedge (or absolute return) funds can offer investment opportunities they also introduce
    other risks for investo...
8. IRREGULAR INVESTMENT OPPORTUNITIES

    Any investment plan should take into account legitimate methods of enhancing an...
Note that management fees should be taken into consideration when comparing fund performance
to the benchmark.

10.       ...
Appendix A

Proposed Asset Allocations by Risk Profile showing tolerance to benchmark

                                   ...
Appendix B

Risk Profile – Typical Returns

Conservative
Objective                      An emphasis on relative stability ...
Assertive
Objective                         A focus on long term growth with a modest income stream
Horizon               ...
Appendix C

Standard & Poor’ Credit Rating Levels


Shorter Term:

A1+                              Extremely strong capac...
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Investment Policy Statement - Diocese of Brisbane

  1. 1. Investment Policy Statement 27 August 2008 Diocesan Investment Committee Anglican Diocese of Brisbane
  2. 2. 1. PREAMBLE The Diocesan Investment Committee (“DIC”) is established as a Standing Committee of the Diocesan Services Commission (“DSC”) in accordance with clause 25(g) of the Diocesan Governance Canon. The DIC will make recommendations to the DSC relating to the management of Diocesan reserves, to provide the financial resources necessary to support and expand the mission of the church. The DIC will establish an Investment Fund (“The Fund”) to manage a broadly based portfolio of investments for this purpose. 2. STATEMENT OF PURPOSE The purpose of The Fund is to provide income to underpin the Diocesan budget to provide services on an annual basis. The aim of the Fund is to provide an income stream in perpetuity – that is, to generate income while retaining capital that will retain at least its real (i.e. inflation adjusted) value. For example, assuming a long-term annual average return for the fund to be approximately 8%, with an inflation rate of 3%, the Fund would not be able to provide a regular income of greater than 5% per annum in order to avoid decapitalisation over time. The income paid out each year in these circumstances would be able to be indexed each year in line with inflation. 2
  3. 3. 3. STATEMENT OF RESPONSIBILITIES The following parties are associated with the operation of the Fund: 3.1 Diocesan Investment Committee (DIC), the Diocesan Services Commission (DSC) and the Diocesan Council (DC) The DIC: • Is responsible for the management of the Fund; • Is authorised to appoint a professional Investment Consultant(s) to advise on an appropriate strategy for investing in the Fund; • Is authorised to appoint a Custodian to the Fund; • Can approve an Investment Plan; • Create new Funds as may be deemed appropriate from time to time; • Is authorised to remove Investment Consultants and or Custodians. In exercising these powers, the DIC should consult with the DSC. In particular, the DIC should: • Report quarterly on the Investment Plan and its performance to the DSC. 3.2Investment Consultant(s) The Investment Consultant is charged with the responsibility to assist the DIC in: • Developing ongoing investment policy; • Assisting in investment selection • Reviewing investment performance • Assisting the DIC in conducting investment activities associated with the organisation in accordance with FPA standards. The Investment Consultant is to be a third party to the Diocese and must hold an Australian Financial Services Licence (AFSL). All recommended investments must have been researched and approved by the Investment Consultant. All investment decisions must be authorised by the DIC. The Investment Consultant is to develop an Investment Plan and submit it to the DIC for approval. The Plan is to be consistent with the investment policy outlined in the Preamble and the Investment Guidelines set out in this document. Once approved, the Investment Consultant is to be responsible for: • Advising on how to best implement the Plan; • Managing investment funds in accordance with the instructions issued by the DIC; • Reviewing subsequent investment performance; • Providing regular reports on performance (at least quarterly or as required) to the DIC, (special reporting requirements relating to Options and Futures are set out elsewhere in this document). 3.3 Custodian 3
  4. 4. The Custodian is charged with the responsibility for safekeeping securities, collections and disbursement, and periodic statements. 4. OBJECTIVE 4.1 General Investment Objectives • Given the purpose identified in Section 2 above, the DIC recognises the importance of adopting a long term horizon of more than 7 years when formulating investment policies and strategies. • As a result, short-term fluctuations in value will be considered secondary to long-term investment results, and indeed be apart of a long-term approach to investing which will require exposure to growth-oriented investments such as shares and property. • The Diocese is a tax exempt entity and accordingly this should be taken into consideration when developing the investment strategy • The relationship between risk and return is fundamental to the investment strategy of the DIC. • Investments will be managed with a view to ensuring that there will be sufficient liquidity to meet expected cashflow requirements. • Risk exposure is to be managed through prudent investment management and diversification achieved by investing in different asset and sub-asset classes with additional diversification achieved through the use of different fund managers. • The DIC would prefer not to invest directly in property. • Distributions from investments of an income and/or capital nature will be credited to a cash management style trust account for managing cashflow and portfolio rebalancing requirements. 4.2 Specific Investment Objectives • The Fund has a long-term growth profile and its income objective will be reviewed at least annually. • The aim of the Fund is to achieve a long-term return of income plus capital growth that exceeds the Consumer Price Index (CPI) by 5% (?) over rolling 5 year periods (before fees and management expenses), utilising a risk profile to be determined from time to time by the DIC. It is understood that the ability to achieve this objective is directly related to the Risk Profile selected. • The investment time horizon of the Fund is long-term (more than 7 years). 4
  5. 5. 5. PORTFOLIO CONSTRUCTION ISSUES 5.1 Portfolio Construction In developing the DIC’s views in relation to construction of investment portfolios the DIC need to consider a number of issues, including: • Asset Allocation; • Income taken from the Fund and Income reinvested; • Managed v Direct Investments • Passive v Active Management • Strategic v Tactical Asset Allocation • Alternative investment strategies (including Absolute Return Funds) • Income v Capital Growth In constructing portfolios a number of decisions need to be taken and choices made between competing approaches. It is important to follow a structured and systematic process in constructing portfolios which is founded upon the key issues outlined above. The Key steps are outlined in Figure 1 below: Identify Identify Asset Goals Allocation Identify Determine Current Risks Position Develop Review Strategy Regularly Implement Strategy Figure 1 – The Investment Strategy Process 5
  6. 6. Strategic v Tactical Asset Allocation approaches Strategic Asset Allocation Strategic Asset Allocation is the process whereby an initial or benchmark asset allocation decision is made in line with the DIC’s view of the world and risk profile. Once this “benchmark” has been agreed upon, a strategic asset allocation approach often involves rebalancing the future asset allocation back to the benchmark. This is because different asset classes perform differently during an economic cycle. A strategic benchmark approach to asset allocation involves establishing a starting point or benchmark. This will vary from portfolio to portfolio and will inevitably be influenced by the prevailing views on each asset class at the time the benchmark is set. This approach, in theory, effectively involves a process of buying low and selling high, as the outperforming asset class is sold down to top up an underperforming one. An aspect of this approach however is high transaction costs (as the Fund is tax exempt, another feature of this strategy, namely Capital Gains Tax, does not apply). One way to ameliorate returns while reducing transactional costs is to allow a range of tolerance around each asset class benchmark. Such a tolerance provides a slight freedom of movement to allow the funds to react to market movements without the need to micromanage the portfolio. Depending on the asset class, tolerances of between 5% - 15% are appropriate. There are several ways in which a portfolio can be rebalanced: • By switching from one fund to another, or • By utilising surplus cash generated by the investments to add to the underweight funds • A combination of the two The second and third approaches reduce the need to sell down an investment that may continue to perform strongly. Tactical Asset Allocation A pure tactical asset allocation approach involves making regular and shorter-term changes to asset allocation between sectors, based on short-term views of market direction. This may mean having a small or nil exposure to a particular asset class at any one time. Some portfolio managers apply this approach at the portfolio level or use a tactical overlay (specialty manager) to give effect to short term view of market direction. This approach relies on predicting and exploiting short-term inefficiencies in markets to achieve its results. In cases where there are larger movements in underlying assets this approach can involve additional costs. Research undertaken by Mercers indicates that almost no tactical asset allocation managers have added any significant value consistently over time. When adjusted for risk and costs, tactical asset allocation can in fact reduce returns on portfolios. This is not too surprising given that pure tactical asset allocation requires the ability of the manager to consistently predict short-term 6
  7. 7. market directions in order to be successful. There is no evidence anyone has been able to do this consistently over extended periods of time. The DIC has taken the view that the Strategic Asset Allocation approach and rebalancing the portfolios through cashflow is the best approach for the Fund. Some tolerance is required around each asset class within the Fund, and this is shown in Appendix A. Cashflow requirements require the Investment Consultant and the DIC to ensure that cash above the required periodic payments of the Fund be used for portfolio rebalancing and investment purposes. Passive v Active The returns from financial markets are often broken into two key components: Beta – this is the market return of a particular asset class. Alpha – this is the additional return above Beta that a manager can provide through the application of skill and market timing. Passive management involves obtaining the Beta or market return which can be achieved at low cost. Active management involves the seeking of outperformance of market return or alpha by a particular investment. This necessarily involves taking more risk than passive managers due to the holding of concentrated portfolios and being over or underweight in some assets. It is the objective of the active manager to “beat the market”. It is particularly interesting to note the lack of academic literature (and consequently evidence) supporting the perceived skill of active investment management. Rather, the evidence is overwhelmingly in favour of price equilibrium of financial assets in financial markets, which leads the DIC to favour broadly diversified, passively managed, low-cost managed investment funds over direct asset ownership and active investment management. In practice, it is always possible to identify a particular investment or active investment manager that has delivered performance beyond a benchmark or index. However, this is always identified in hindsight, and often the outperformance does not tend to be consistent from year to year. Accordingly it is extremely difficult for investors to profit from trying to identify the next best manager of money, particular after costs are considered. The Fund currently holds direct investments in listed shares. Direct investment is a clear example of “active” management as a concentrated position in each asset class is held. This reality needs to be reviewed in the process of constructing portfolios and balanced with the broader Investment Plan of the Fund. The approach is therefore to only use active investment management as a complement to a core of passively managed investments and where there are demonstrable, research-proven benefits for so doing on an after fees basis. This approach is known as the Core-Satellite approach. 7
  8. 8. Managed v Direct Investments A very important issue in considering the overall approach to portfolio construction is the issue of direct versus managed investments. This is essentially a decision in relation to management and control of investments as well as time and expertise. There are a number of advantages and disadvantages of each approach, which needs to be considered. A summary of some of the issues is as follows: • Liquidity • Who controls decision making • Customising portfolios to meet the needs of the DIC • Cost efficiencies • Diversification • Access to Professional Management • Access to information • Administration and reporting The choice of which approach to use will depend entirely on the requirements of the Diocese. These requirements should be reviewed annually. Taking into account these issues, managed funds would be an appropriate choice for a substantial portion of the portfolio. Some asset classes (eg global equities) are effectively only available via managed funds. We recognise that the Fund holds a significant portion of the portfolio in direct investments. A decision on whether or not to continue to hold these investments is appropriate taking into account liquidity and diversification needs. Diversification Before we discuss diversification, it is important to discuss asset classes. Broadly speaking, there are two types of assets, growth and defensive. Defensive assets are those that do not change significantly in value of themselves, and generally generate income only such as interest. A typical example includes high-interest bank deposits. Growth assets, on the other hand are those that have the potential to increase (and, on occasion, decrease) in value. Such investments include shares and property. Income is generated through the form of dividends or rent, and often has tax credits associated with it. More specifically, Defensive assets include such assets as: • Bank accounts • Term deposits • Fixed interest (both Australian and international) • Debentures 8
  9. 9. Growth Assets include such assets as: • Shares – both Australian and International • Property – both Australian and International Diversification takes many forms: • Across asset classes • Within Asset classes • Across management styles Diversification across asset classes is achieved by including an exposure in an investment portfolio to more than one asset class. As described earlier, the process of diversifying financial assets across different asset classes is referred to as the process of Asset Allocation, and specifically, Strategic Asset Allocation is preferred to Tactical Asset Allocation. Diversification within asset classes is achieved by ensuring a comprehensive spread of individual financial assets in an investment portfolio. Having more than one financial asset in an asset class helps reduce the risk to the portfolio, if an individual financial asset loses value. Often, the best way to diversify within asset classes is to allocate capital to the known sub-asset classes. Numerous academic studies of asset allocation reveal that up to 94% of the variability of investment portfolio returns can be attributable to the asset allocation process alone (Brinson eta l 1986,1990). Subsequent studies regarding passively managed, strategically asset allocated investment portfolios suggest that the impact may be even greater than 94% (Ibbotson 2000). In other words, in general the single biggest decision regarding the likely return on a portfolio is the amount of exposure to growth assets – not the specific assets themselves. As the proportion of growth assets increases within a portfolio, so too does the potential volatility. The tolerance for this portfolio volatility is measured by a Risk Profile. In practice, the desired asset allocation is determined by identifying the Risk Profile of the investor. Measurements of risk profile can be simple, or complex – the more rigorous the measurement, the more accurate the outcome. Matrices developed by Investment Professionals correlate Risk Profile to various asset allocation models. Appendix B shows the effect of return on portfolio constructions of various risk profile. Note that the risk profile of an investor may necessitate a portfolio that might not have the exposure to growth assets required to achieve the investors goals. In this case, one of two things must occur. Either the goals are revised downwards, with consequently lower expectations of returns, or by a process of education the clients risk profile is increased. Often, a combination of the two may be required. Often, the best way to diversify within asset classes is to allocate capital to the known sub-asset classes. Academic research has strongly demonstrated the diversification and performance benefits of this practice. For example, there is compelling evidence that including an exposure to Small and Value companies in an equity portfolio is consistently rewarded. 9
  10. 10. It has been established that investors have little ability to consistently pick the best asset class or sub-asset class in advance. As a result, evidence suggests that a diversified portfolio will reduce risk without necessarily forgoing investment return. The key is lowering the risk of experiencing negative returns over time. Combining all of the Funds exposures, not more than 25% of the issued capital should be held in any one professional Investment Manager. Recommendations for managed funds are to be sourced from/ made by the Investment Consultant. 5.2 Strategic Asset Allocation The Investment Consultant has developed a set of strategic asset allocation models for various risk profiles to be chosen by the DIC. Please refer to Appendix A for this table. Rebalancing The portfolio will be rebalanced within a tolerance of +/- 5% (subject to authorisation) towards benchmark. This will be reviewed annually and take place as appropriate. 10
  11. 11. 6 INVESTMENT CLASS GUIDELINES 6.1 Cash Part of the holding may need to be readily available (ie within 30 days); the balance may be maintained in a managed fund of a cash nature (generally available within one week of processing a redemption request) or a short term deposit offered by an Australian based bank or ANFIN. Both the at-call account and any enhanced cash fund are to be recommended by the Investment Consultant with supporting reasons. Underlying assets within any enhanced cash fund or trust must facilitate reasonable liquidity (up to 5 days) and be rated investment grade or higher. 6.2 Fixed Income Assets The Fund may invest directly or indirectly (via wholesale managed fund/ unit trust(s)) in the following products: • Commercial Bills • Promissory Notes • Floating Rate Notes • Medium Term Notes • Mortgage Backed Securities • Government/ Semi Government Bonds • Hybrids and Income Securities • Inflation Linked Bonds Creditworthiness and Security Individual investments must be rated at least Investment Grade by Standard & Poor’s and/ or Moody’s to be considered. Please refer to Appendix C for details. If no explicit credit rating is available, a determination of a “shadow” rating is determined in assessing the creditworthiness of a specific security. The minimum credit ratings allowable vary depending upon the specific sub asset class, i.e. mortgages, hybrids, term deposits etc. A schedule has been prepared to provide constraints on minimum credit ratings. For individual securities the minimum credit rating that The Fund will accept will be; • Short Term (up to 12 months); A2 [satisfactory capacity to pay] • Medium/ Long Term (beyond 12 months); A [satisfactory capacity to pay] In the event of a downgrade below investment grade and the security is retained – the Investment Consultant should notify and advise the DIC. Mortgage Loans may not be made directly. However, mortgage investments may be made through the utilisation of a wholesale managed fund(s) or funds deposited with ANFIN where there is a conservative loan-to-value ratio on the mortgages granted against property values. 11
  12. 12. Duration The maximum average duration of any investment is 24 months from the date of its purchase. Recommendations for both managed funds and direct securities are to be sourced from/ made by the Investment Consultant Maximum Allocations No fixed individual floats are to be accepted and taken up by the Fund and limits apply to the allocation of sub asset classes under the fixed income exposure of the investment portfolio. The only sub-asset class that has a maximum of 100% is fixed term deposits. These deposits are the highest grade fixed income investment. International Fixed Interest Investments if they become available are subject to the same credit ratings as Australian Fixed Income Assets. 6.3 Property Investments 6.3.1 Property Securities The Fund may invest directly or indirectly (via managed funds) in securities listed and selected from the S&P/ ASX 300 (Property Trusts). It is recommended that The Fund can only invest in listed property trusts and no investment can be made into individual holdings, but must be made via managed funds. The Fund may also invest indirectly in global real estate/ property securities on the provision that it is no more than 20% of the listed property exposure. Therefore no specific direct investment into Global property. In line with the currency hedging policy described below, these wholesale managed funds should be hedged to the Australian dollar to remove currency volatility. 6.3.2 Direct Property Individual investments in Direct Properties are an acceptable investment opportunity, whether it is residential, retail or commercial. However, no property development schemes are to be entered into. 12
  13. 13. 6.4 Australian Share Investments The Fund may invest indirectly (via wholesale managed funds) in securities listed on the Australian Stock Exchange or via directly held individual securities listed on a recognisable exchange such as the Australian Stock Exchange. The managed funds will be those investing predominately in the S&P/ ASX 300 (Top 300 stocks by market capitalisation) and in terms of liquidity, funds will generally be made available within a month. As the use of wholesale managed Australian Equity funds is a further means of diversification, there are no specific restrictions on the market capitalisation limits through the use of such investments. Direct Investment should be limited to companies listed on the ASX with a market capitalisation that places them in the top 200 of the All Ordinaries Index (or successor). Only a professional stock broker or suitably qualified financial adviser can mange a portfolio of direct equities and direct investments can be made outside of the ASX 200 as long as no exposures to these stocks are over 3% of the total Australian Equities exposure. Additionally, direct holdings may not exceed 70% of the Australian equities portfolio in total. This is to ensure that at least 30% of the Australian equities exposure is focused on capturing the market (passive investing). 6.5International Share Investments The Fund may invest indirectly (via wholesale managed funds) in securities listed on International Stock Exchanges. No direct foreign investments shall be made into international companies other than those listed on the ASX. This may also include investments in regional global share funds and/ or global emerging markets funds (up to 15% of the international share component of the portfolio), and global small company share funds (subject to a 20% limit of the international share component). It is also acceptable to invest in countries and sectors as long as they are within the documented constraints and via managed funds only. Inline with the currency hedging policy described below, these wholesale managed funds can use currency hedging to remove currency volatility, can remain fully unhedged or can use partial hedging strategies. Recommendations for managed funds are to be sourced from/ made by the Investment Consultant. 13
  14. 14. 6.6 Other Investments 6.6.1 Options and Futures The Fund does not intend to invest directly in any futures, options or other derivative investments. However, the Funds investment managers may use such futures and options strategies from time to time for limited purposes. Legitimate uses of derivatives by investment managers include hedging to protect the value of the assets against any significant decline in investment markets, and as a means of gaining market exposure while minimising transaction costs. However, the investment managers are not able to use futures, options or other derivative instruments for speculative purposes. 6.6.2 Hedge Funds (Absolute Return Investing) An alternative approach to the traditional methods of investing in different asset classes is the use of hedge funds. The most popular version is these funds are referred to as “absolute return funds”. Hedge funds have emerged to attempt to provide investors with a positive return in all market conditions. Hedge funds can adopt a wide range of strategies to help achieve this absolute return. The three broad categories of hedge funds strategies are; • Relative Value Strategies – Exploiting market inefficiencies between similar securities including arbitrage • Event Driven Strategies – Mergers and corporate restructures • Opportunistic Strategies – An active bet in the movement of a market or security e.g. short selling The approach utilised by these managers typically involves a manager investing in similar asset sectors to traditional managers but incorporating different skill based strategies such as those referred to above. There are a number of important key differences between traditional investment approaches and hedge funds including; • Hedge funds define risk in terms of loss of capital, whereas traditional active managers define risk as deviation from a stated benchmark • Hedge funds managers aim to deliver a total return unrelated to a benchmark or index (unrelated to the direction of the market). Traditional active managers aim to deliver relative returns (outperform a benchmark) and these returns may be negative if the benchmark is negative • Hedge funds tend to have a greater use of derivatives as opposed to directly holding assets in a particular sector. • Hedge funds have different fee structures with a significant portion of fees attributable to performance. 14
  15. 15. Whilst Hedge (or absolute return) funds can offer investment opportunities they also introduce other risks for investors including; • Manager Risk • Lack of transparency • Less liquidity • Greater use of leverage • Greater use of derivatives From the risks shown above the most fundamental risk is the substantial dependence on the skill of the manager to implement their strategy profitably and not diminish the capital. This is clearly contrasted against strategies that aim to capture general movements in markets. It is an accepted fact that unsophisticated investors have considerable difficulty in understanding the complex strategies which often underlie the construction of hedge fund portfolios. Furthermore, due to the range of additional risks, rigorous research and regular review are required. The ability to accommodate these additional risks resides primarily with the major global financial institutions. 6.7 Currency Hedging Currency hedging is not permitted as a stand alone investment strategy for the purposes of speculation. However, where wholesale international equity funds are held, currency hedging is permitted where the dominant purpose is to restrict currency volatility affecting their returns. Wholesale managed funds are permitted to utilise a hedged, unhedged or partially hedged strategy. With regard to international fixed interest and listed property investments, wholesale managed funds are permitted to fully hedge currency exposure. This is usually implemented via forward foreign currency contracts. 7.0 ETHICAL INVESTMENT CONSIDERATIONS The Fund will not invest directly in companies whose core business is: • Gambling • Tobacco • Arms Production In making investment decisions, the DIC will endeavour to adhere to this ethical criteria in all cases. When shares are inherited any which do not comply with the ethical guidelines will not necessarily be sold immediately but as soon as possible. 15
  16. 16. 8. IRREGULAR INVESTMENT OPPORTUNITIES Any investment plan should take into account legitimate methods of enhancing and improving portfolio returns. The Fund as a tax exempt vehicle is able to participate in various capital market transactions that can assist in the enhancement of the portfolio returns. Share Buy Back Arrangements Specifically, the Fund is able to participate in various share buy back transactions as long as this practice remains a viable and legal portfolio strategy. In the event of these transactions becoming non-compliant with other areas of the investment guidelines, then this strategy should cease immediately. Where beneficial, the Fund should attempt to participate in the share buy back programs only of companies listed within the ASX 300 and as advised by the professional broker or qualified financial adviser managing the investment portfolio. Initial Public Offerings (IPO’s) These offerings will be considered by the DIC on a case by case basis. 9. PERFORMANCE AND BENCHMARKING 9.1 Performance The performance of the Fund’s portfolios will be reviewed by the Investment Consultant quarterly to; • Ascertain the existence of any particular weakness in any manager • Allow the Investment Consultant to regularly assess the ability of the managers to successfully meet the Funds objectives • Ensure that performance and investments remain inline with the Funds documented Investment Policy Statement (IPS). In addition, the investment consultant will assess the extent to which the investment objectives are being achieved, on an annual basis. The Investment consultant will report to the DIC every quarter. 9.2 Benchmarking The main objective of the Fund is to achieve a return of CPI plus 5% per annum over a rolling 5 year period. However, each of the individual asset classes will also be compared to specific benchmarks as part of the performance criteria. The benchmarks for individual asset class returns will be determined by the DIC. 16
  17. 17. Note that management fees should be taken into consideration when comparing fund performance to the benchmark. 10. APPROVAL OF INVESTMENT TRANSACTIONS Two properly authorised signatories must authorise any transaction in a pre-agreed manner. 11. PERIODIC REVIEW OF GUIDELINES It is the intention of the Fund to review this IPS periodically as the investment landscape is changing regularly. Following such reviews, the Fund in conjunction with the Investment Consultant should amend the guidelines to reflect any changes in the philosophy or objectives. It is anticipated that the IPS is reviewed at least annually. Signed & Authorised: ______________________ ____________ Name & Position Date ______________________ ____________ Name & Position Date 17
  18. 18. Appendix A Proposed Asset Allocations by Risk Profile showing tolerance to benchmark Risk Profile Asset Class Conservative Moderately Balanced Assertive Aggressive Conservative Cash 20-50% 15-40% 10-30% 0-20% 0-10% Domestic 40-70% 25-50% 15-30% 10-20% 0-10% Fixed Interest International 20-40% 10-30% 5-20% 5-15% 0-10% Fixed Interest Domestic 0-20% 10-25% 15-30% 25-40% 30-50% Equity International 0-10% 5-15% 10-25% 15-30% 20-40% Equity Australian 0-10% 0-15% 0-20% 5-25% 10-30% Property International 0-2% 0-3% 0-4% 0-5% 0-6% Property 18
  19. 19. Appendix B Risk Profile – Typical Returns Conservative Objective An emphasis on relative stability of returns over the short to medium term with the potential for modest longer term growth Horizon Generally shorter to medium term (2 to 4 years or more) Historical returns* 1 year: (–9.0%) to 22.1% pa 7 years: 5.7% to 11.4% pa Estimated long term return** 6.0% to 6.9% pa Capital volatility Low to medium Asset mix 65%–100% defensive assets and 0%–35% growth assets Appeal Investors favouring security but who require some longer term growth with a small appetite for volatility Moderately Conservative Objective To obtain a balance of security, income and growth with security and income ranking before growth in priority Horizon Generally medium term (3 to 5 years or more) Historical returns* 1 year: (–12.4%) to 27.2% pa 7 years: 5.0% to 13.7% pa Estimated long term return** 6.5% to 7.3% pa Capital volatility Medium Asset mix 45%–65% defensive assets and 35%–55% growth assets Appeal Investors still seeking security but balancing that with a combination of income and moderate capital growth from a diversified portfolio Balanced Objective An emphasis on longer term growth using a combination of asset classes to moderate volatility somewhat Horizon Medium to longer term (a minimum of 4 years but preferably longer) Historical returns* 1 year: (–16.9%) to 33.0% pa 7 years: 3.6% to 15.7% pa Estimated long term return** 7.0% to 8.0% pa Capital volatility Medium to high Asset mix 30%–45% defensive assets and 55%–70% growth assets Appeal Investors seeking growth over the medium to longer term and with no need to access a large part of their investment over that time, while at the same time diversifying risk through investing in a spread of asset classes 19
  20. 20. Assertive Objective A focus on long term growth with a modest income stream Horizon Longer term (a minimum of 5 years but preferably longer) Historical returns* 1 year: (–20.6%) to 38.4% pa 7 years: 2.4% to 17.3% pa Estimated long term return** 7.7% to 8.3% pa Capital volatility High Asset mix 10%–30% defensive assets and 70%–90% growth assets Appeal Investors with a long period before they need to access a large part of their investment, who are prepared to accept a high level of volatility but nonetheless want some modest diversification by exposure to lower returning asset classes Aggressive Objective A focus on long term growth above all other considerations Horizon Long term (a minimum of 7 years but preferably longer) Historical returns* 1 year: (–25.1%) to 47.4% pa 7 years: 1.0% to 20.1% pa Estimated long term return** 8.0% to 8.7% pa Capital volatility Very high Asset mix 0%–10% defensive assets and 90%–100% growth assets Appeal Investors seeking to maximise growth, with a long period before they need to access a large part of their investment and who are prepared to accept a high level of volatility * These estimates are based on historical returns and are provided for comparative and illustrative purposes only. The figures show the potential volatility of the various portfolios. ** Note that these are estimates of the returns expected over the long term for the suggested combinations of assets that make up the various portfolios. They are estimates only, are not predictions and are in no way guaranteed and are provided for comparative and illustrative purposes only. 20
  21. 21. Appendix C Standard & Poor’ Credit Rating Levels Shorter Term: A1+ Extremely strong capacity to pay A1 Strong capacity to pay A2 Satisfactory capacity to pay A3 Adequate capacity to pay B Speculative Medium/Long Term: AAA Extremely strong capacity to pay AA+ AA Very strong capacity to pay AA- A+ A Strong capacity to pay A- BBB+ BBB Adequate capacity to pay BBB- Sub Investment Grade BB+ Uncertainties or adverse conditions could lead to BB inadequate capacity to pay BB- Adverse conditions likely to impair capacity to pay B+ B B-0 CCC Vulnerable to default C High risk of default D Default 21

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