Dona Newman

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  • Many governments hire investment advisers GFOA recommends caution and prudence in the selection of investment advisers Benefits Professional portfolio management Risk management Potential audit savings Continuity in the investment function Fiduciary Responsibility Important to remember Responsibility for safety and liquidity of government funds Cannot be delegated to an investment advisor GFOA urges governments to Define and control the procurement process Assure periodic reviews of ongoing advisory services
  • In deciding whether or not to outsource investment management, make the same cost/benefit analysis as used for any outsourcing decision Begin by assessing internal resources Resources Investment software Internal access to financial information providers, such as Bloomberg Time What is your staff currently doing? What could they be doing? Expertise Training and experience level of staff
  • Cash flows determine complexity of investments In-out Lump sum in, constant out Long term – building fund Project related expenses Restricted returns – arbitrage, bond reserves and project funds Amounts and strategies determine fees Generally, investment management services are charged in basis points times invested amounts 100 b.p. = 1% You can estimate costs of staff and tools vs. investment management fees Simple, small amounts can probably be handled internally Complex and larger amounts may be more suitable for outsourcing
  • Continuum of service available Reporting Can outsource preparation of CAFR information Consultation – it sometimes helps to bring in someone from the outside, even if you have an internal staff member handling investments Periodic outside review of Procedures Investment portfolio Permitted investments Investment policy Non-discretionary Adviser must obtain approval before executing any trades Trades must comply with policy Government is involved Often used in new relationships while building trust and relationship Discretionary Adviser can execute trades without prior approval Trades must comply with policy Government is less involved Advisor can be held accountable for the portfolio’s performance
  • Most cities’ and counties’ largest revenue stream is tax receipts Needed to cover operations ST <1year Reserves & Debt Proceeds are LT investments (1-3 years, usually) LGIP provides diversity, safety & liquidity at low cost for ST Low fees Low staff time Need to match LT investments with LT needs May want help with that Especially if done infrequently – occasional bonds Can become complex GIC’s Forwards Interest swaps
  • Within scope of state and local law Procurement process should address: Objective procurement Governing body should appoint consultant or internal review committee Independent of any individual investment advisory firm Clearly defined objectives Competitive analysis Competitive, merit-based process Goal definition Responsibility of investment adviser should be well-defined and communicated Selection criteria should be determined in advance
  • Identifying relevant criteria promotes transparency in the process Assigning weights emphasizes relative importance and helps in ranking firms Adviser’s Understanding Objectives Constraints Background Experience Resources Qualifications of the firm Qualifications of assigned individuals Experience in managing government funds Approach Appropriate for specific government Good match for risk tolerance of organization
  • Risk Control: Because you can’t delegate fiduciary responsibility: Part of the procurement process Prior to final selection Ongoing risk control program Level: non or discretionary Self-dealing: for trade execution, prohibited Trade execution: competitive Trade confirmations: get them Trade settlement: delivery vs payment No adviser custody: independent 3 rd party custody of securities Timely reconciliations: of trade confirmations an custodial statements Monthly reporting: that complies with industry standards & local requirements Compliance reviews: ongoing as well as allowance for independent audits
  • A wide array of services are available. Services desired should be specifically identified. Policy development New Improvement on existing Portfolio management – active trading, passive (advice) Cash flow analysis – liquidity management based on entity provided info Credit analysis of possible investments Reporting Online and/or paper Summary Frequency Key elements Direct presentation Customization – may want in form for inclusion in CAFR Client meetings – with staff, elected officials; in-person and/or by phone Education seminars – don’t for get the 8 hour/year requirements included in LS Stats Ch218.415(14)
  • In order to have flexibility in investment options, the statutes require Municipalities to adopt an investment policy The statues go on to establish what the policy must include at a minimum The continuing education is a requirement
  • Once definition of services is completed, an RFP (Request for Proposal) is most often used to obtain investment advisory services Consultant’s databases – if consultant is assisting with acquisition of services Industry reports and articles Referrals from other governments
  • Check candidates out thoroughly considering the following points Quantitative information – financial stability, performance review Organization structure – including business affiliations Personnel – including turnover rate and single versus team management Investment philosophy and portfolio management strategies Regulatory censure or litigation – current or historic Interviews – with short list/finalists References – local (peers), national, recent accounts Final decisions require an objective compilation and analysis of the results of the RFP process. Most importantly – the investment adviser and services offered must meet the need of the government entity.
  • Written contract should address: Scope of services Appointment of the adviser and fiduciary responsibilities Establishment of account responsibilities Definition of accounts and custody Definition of discretionary or non-discretionary services and limitations Definition of standards (Prudent Person Rule) Establishment of objectives, restrictions, and benchmarks Definition and processing of transaction procedures in accordance with policy, including brokerage limitations Representations by entity and advisor Determination of reasonable liability insurance for errors and omissions Establishment of invoicing and payment Termination procedures by either party Non-discrimination and ethics specifications Certification of government’s policy by adviser Provision for independent audit
  • Common indices SBA, in past, now other LGIP, such as FL SAFE Merrill Lynch 1-3 year index (used by Cape Coral) US Treasury 1 year constant maturity US Treasury 2 year constant maturity Portfolio tiers – Short term, long term Indices selected as benchmarks may not have the same goals Safety, liquidity, then return May be periodic fluctuation Don’t chase returns or pressure adviser to do so Keep big picture in mind
  • Flat or asset-based – may be set periodic fee or based on amount invested Larger accounts – often unit price goes down as amount invested becomes larger Non vs Discretionary – going to cost more for higher level of service Custody costs – may be some savings due to adviser’s “quantity discount” since they handle other investments along with yours
  • Allowed investments – make sure your portfolio remains in compliance with your investment policy and State statutes Objectives – don’t lose sight of investment objectives: Safety, liquidity, and then return Relationship – know your adviser and let them get to know you and your operation for enhanced communication and value-add Stay informed – Remember: you can’t delegate your fiduciary responsibility to your investment adviser Trust, but verify – continuous monitoring and other items on risk control program are a necessary part of your due diligence
  • Next, Steve Moskun, Cash and Investments Manager for the City of Clearwater, will provide some insights on the topic of outsourcing investments and will answer questions that you may have.
  • Dona Newman

    1. 1. Outsourcing Investment Services Dona J. Newman, CIA, CPA, CGFO City Auditor City of Cape Coral May 20, 2008 FGFOA Annual Conference
    2. 2. Introduction <ul><li>Benefits of Outsourcing </li></ul><ul><li>Fiduciary Responsibility </li></ul>
    3. 3. Assess Internal Resources <ul><li>Assess internal resources </li></ul><ul><ul><li>Do you have the resources? </li></ul></ul><ul><ul><li>Do you have the time? </li></ul></ul><ul><ul><li>Do you have the expertise? </li></ul></ul>
    4. 4. Determine Cash Flow <ul><li>Tax Receipts </li></ul><ul><li>Fees for Service </li></ul><ul><li>Assessments </li></ul><ul><li>Bond Proceeds </li></ul><ul><li>CIP Needs </li></ul>
    5. 5. Investment Services Available <ul><li>Services can vary </li></ul><ul><ul><li>Reporting </li></ul></ul><ul><ul><li>Consultation </li></ul></ul><ul><ul><li>Non-discretionary portfolio management </li></ul></ul><ul><ul><li>Full discretionary portfolio management </li></ul></ul>
    6. 6. Outsourcing Options <ul><li>Local Government Investment Pool </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Investment Advisor </li></ul>
    7. 7. Define and Control Procurement Process <ul><li>GFOA Recommended Practice </li></ul><ul><ul><li>Process should address the following: </li></ul></ul><ul><ul><ul><li>Objective procurement </li></ul></ul></ul><ul><ul><ul><li>Competitive analysis </li></ul></ul></ul><ul><ul><ul><li>Goal definition </li></ul></ul></ul>
    8. 8. Selection Criteria <ul><li>Adviser’s understanding of government’s investment program </li></ul><ul><li>Adviser’s background </li></ul><ul><li>Adviser’s recommended approach </li></ul><ul><li>Fee and fee basis </li></ul>
    9. 9. Risk Control <ul><li>Level of adviser discretion </li></ul><ul><li>Prohibitions against self-dealing </li></ul><ul><li>Competitive trade execution </li></ul><ul><li>Trade confirmations </li></ul><ul><li>Delivery vs. payment trade settlement </li></ul><ul><li>No adviser custody </li></ul><ul><li>Timely reconciliations </li></ul><ul><li>Monthly reporting </li></ul><ul><li>Compliance reviews </li></ul>
    10. 10. Definition of Services Desired <ul><li>Investment policy development </li></ul><ul><li>Portfolio management </li></ul><ul><li>Cash flow analysis </li></ul><ul><li>Security selection </li></ul><ul><li>Credit analysis </li></ul><ul><li>Security bidding </li></ul><ul><li>Trade execution </li></ul><ul><li>Reporting </li></ul><ul><li>Client meetings </li></ul><ul><li>Educational seminars </li></ul>
    11. 11. FL Statute 218.415(14) <ul><li>CONTINUING EDUCATION.—The investment policy shall provide for the continuing education of the unit of local government’s officcials responsible for making investment decisions or chief financial officer. Such officials must annually complete 8 hours of continuing education in subjects or courses of study related to investment practices and products. </li></ul>
    12. 12. Selection Process <ul><li>Sources for potential candidates </li></ul><ul><ul><li>Consultant’s databases </li></ul></ul><ul><ul><li>Association databases </li></ul></ul><ul><ul><li>Industry reports </li></ul></ul><ul><ul><li>Marketing materials </li></ul></ul><ul><ul><li>Referrals </li></ul></ul>
    13. 13. Due Diligence on Candidates <ul><li>SEC licenses </li></ul><ul><li>Quantitative information </li></ul><ul><li>Organization structure </li></ul><ul><li>Experience & depth of personnel </li></ul><ul><li>Reporting standards </li></ul><ul><li>Investment philosophy </li></ul><ul><li>Trading process </li></ul><ul><li>Regulatory censure or litigation </li></ul><ul><li>Interviews </li></ul><ul><li>References </li></ul>
    14. 14. Advisory Agreement <ul><li>Objectives and risk parameters </li></ul><ul><li>Allowable investment instruments and strategies </li></ul><ul><li>Required reporting procedures </li></ul><ul><li>All provisions of RFP </li></ul><ul><li>Ongoing review </li></ul>
    15. 15. Prudent Person Rule <ul><li>FL Statutes 218.415(4) </li></ul><ul><li>“Investments should be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived from the investment.” </li></ul>
    16. 16. Benchmarking <ul><li>Performance of the advisor should be assessed annually </li></ul><ul><li>A performance standard, or “benchmark”, should be developed in advance to assess the value-added by the investment advisor </li></ul><ul><li>Many common indices are available </li></ul><ul><li>Benchmark may vary for each tier of a portfolio </li></ul>
    17. 17. Fees <ul><li>Flat fee or asset-based fee </li></ul><ul><li>Economies of scale for larger accounts </li></ul><ul><li>Discretionary vs. non-discretionary </li></ul><ul><li>Can the advisor leverage lower custody costs </li></ul>
    18. 18. Final Thoughts <ul><li>Allowed investments </li></ul><ul><li>Focus on objectives </li></ul><ul><li>Develop relationship with service provider </li></ul><ul><li>Stay informed through education </li></ul><ul><li>Trust, but verify </li></ul>
    19. 19. Source of Information <ul><li>Government Finance Officers Association Recommended Practice Selection of Investment Advisers for Non-Pension Fund Assets (2003 and 2007) (CASH) </li></ul><ul><li>The 2007 Florida Statues </li></ul><ul><li>Notes and comments by Mark Mason, Director of Financial Services, City of Cape Coral </li></ul><ul><li>Investment Practice and Products Training for Public Funds, Presented by PFM Asset Management LLC, February 28, 2008 </li></ul><ul><li>Comments and suggestions by Jeff Larson, D.A. Davidson & Co., and Glenn Scott, Davidson Fixed Income Management </li></ul>
    20. 20. Addition Reference Sources Available <ul><li>GFOA Sample Request for Proposal for Investment Advisory Services, GFOA, 2007. </li></ul><ul><li>An Elected Official’s Guide to Investing , Corinne Larson, GFOA, 1996. </li></ul><ul><li>An Introduction to Investment Advisers for State and Local Governments , M. Corinne Larson, GFOA, 1996. (This publication includes a sample investment agreement.) </li></ul><ul><li>Investing Public Funds , Second Edition, Girard Miller with M. Corrine Larson and W. Paul Zom, GFOA 1998. </li></ul>

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