the investment policy statement: a blueprint for
TRANSCRIPT
The Investment Policy Statement: A Blueprint for Successful Cash Investing
Jon Carlson, CFA Managing Director BofA Global Capital
Management
Walt Boileau Treasurer Polycom
Rue Jenkins Assistant Treasurer
Costco
Alex McDermott Assistant Treasurer
The Shaw Group
For Institutional use only. Not for distribution to the general public.
CA-32/154005-111 11/ARN203M1
For institutional use only. Not for distribution to the general public.
The Panel
Walt Boileau Polycom
Rue Jenkins Costco
Alex McDermott The Shaw Group
NASDAQ: PLCM NASDAQ: COST NYSE: SHAW
Revenue $1.4 billion $78 billion $7.0 billion
Cash $600 million $4.1 billion $1 billion
Debt $0 $2.1 billion $0
Investment Types
DDA Bank Balances DDA Bank Balances Onshore and Offshore Money Market Funds
Government/Agency & Corporate Notes
Government/Agency Bank Time Deposits
CP Fixed Income Portfolios
Fixed Income Portfolios Corporate Notes & Bonds
For institutional use only. Not for distribution to the general public.
Investment policies are more than just allowable investments
Robust investment policies are more than just allowable investments — they specify the objectives, risk management practices, investments and monitoring requirements for the entire investment program.
Objectives Risk Management Investments Monitoring
Investment policy purpose and scope
Investment policy objectives
Maturity and duration limits
Credit quality requirements
Diversification requirements
Liquidity and cash overlay requirements
Allowable investments
Prohibited investments
Performance measurement and benchmarks
Accounting and reporting
Governance and compliance
Ongoing and annual review
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For institutional use only. Not for distribution to the general public.
Your investment policy should cover all liquidity from all legal entities
Objectives Risk Management Investments Monitoring
Investment Policy
Purpose and Scope
Types of Liquidity Operating cash
Short-term cash
Reserve cash
Types of Cash In deposits/sweeps
Internally managed investments
Externally managed investments
Legal Entities Covered Parent company
Domestic subsidiaries
Offshore subsidiaries
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For institutional use only. Not for distribution to the general public.
Clearly articulated investment policies help you meet your investment objectives and avoid risks
2. Maintain Liquidity
3. Deliver
Competitive Returns
1. Preserve Principal
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Credit Quality Establish minimum credit
ratings for all security types utilized
Focus on setting levels appropriate to not create concentration issues
Diversification Concentration limits
based on security type
Treasury/Agency = no limits
5% maximum per issuer (or less)
Maturity/Duration Stability of cash
Investment horizon
Company situation
Liquidity Liquidity required (percentage
or stated amount) Cash flow overlay Investments are liquid
Robust risk management focuses on four key components
Credit Quality Diversification
Maturity/ Duration Liquidity
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
A policy should specify maximum maturity and duration for all allowable securities
Objectives Risk Management Investments Monitoring
Sample Language
Maturity Duration
The portfolio will be invested in issues with effective maturities of no more than 19/25/37/61 months.
The weighted-average maturity will be controlled +/- 50% of the stated 3-month/6-month/12-month/ 18-month duration benchmark.
The weighted-average maturity will not exceed 3 months/6 months/12 months/ 18 months.
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For institutional use only. Not for distribution to the general public.
Credit quality is a key measure to manage risk
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Sample Language
Short-term Long-term Overall
Short-term instruments must be obligations of issuers rated A-1/P-1 or better, or the equivalent by one/two Nationally Recognized Statistical Rating Organizations (NRSROs).
Short-term municipal instruments must be obligations of issuers rated MIG1/VMIG1 or better, or the equivalent by one/two NRSROs.
Long-term instruments (both taxable and tax-exempt) must be obligations of issuers rated A3/A- or better, or the equivalent by one/two NRSROs.
The average weighted credit quality of the overall portfolio should be maintained at a credit quality of AA or higher.
Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Diversification language limits concentration issues and risks
Sample Language
Diversification
No more than 5% of the portfolio will be invested in any one issuer (excluding U.S. Treasury obligations and federal agency obligations including GSEs*).
No more than 50% of the portfolio will be invested in corporate obligations (commercial paper and commercial notes).
No more than 20% of the portfolio will be invested in asset-backed securities.
Money market funds must have a minimum asset size of $5 billion, and the company may not have a position of more than 5% of the total assets of the fund.
*Government Sponsored Enterprise Securities
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Your policy should include investments that align with your investment objectives
Objectives Risk Management Investments Monitoring
Investment Objectives
Provide high degree of liquidity
Create investment diversification
Provide high credit quality
Reduce tax liabilities
Provide attractive yields
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For institutional use only. Not for distribution to the general public.
Allowable investments should reflect your organization’s unique objectives and risk tolerance
Taxable Investments
Obligations of the U.S. Treasury
Obligations guaranteed by the U.S. government other than U.S. Treasuries
Obligations of U.S. federal agencies and government-sponsored enterprises
Repurchase agreements
Certificates of deposit
Bankers’ acceptances
Bank notes and time deposits
Taxable money market funds
Commercial paper
Corporate bonds, notes and floating rate notes
Taxable variable-rate demand notes
Taxable municipal notes and bonds
Asset-backed securities (as appropriate)
Agency-backed collateralized mortgage obligations (as appropriate)
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Allowable investments should include tax-advantaged security types when appropriate
Tax-Exempt Investments
Tax-exempt money market funds
Tax-exempt commercial paper
Tax-exempt variable-rate demand notes
Municipal notes and bonds
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Prohibited investment types should be stated to clarify that they are not acceptable investments
Commonly Prohibited Security Types
Variable net asset funds
Auction rate securities
Mortgage-backed securities (as appropriate)
Equity securities
Complex derivative securities (e.g., inverse floaters, range notes, swaps and options)
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Performance measurement benchmarks should be included to measure risk and return
Performance Management Objectives
Establish baseline to measure asset performance and alpha generated.
Establish baseline to measure risk.
Provide static pool of fixed-income securities to evaluate market dynamics.
Reflect liquidity needs and level of risk aversion.
Allow monitoring of internal and external portfolios.
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Benchmarking performance is critical for both internally and externally managed investments
Common Liquidity Investment Benchmarks
iMoneyNet Money Market Fund Averages (Government, Prime and Tax-Free National)
BofAML 3-Month T-Bill Index
BofAML 6-Month T-Bill Index
Citigroup 1-Year T-Bill Index
BofAML 6–12 Month Municipal Index
Objectives Risk Management Investments Monitoring
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For institutional use only. Not for distribution to the general public.
Accounting and Reporting requirements communicate your organization’s specific needs
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Sample Language for Reporting Requirements
The investment provider/manager will provide detailed statements monthly, showing positions as of a portfolio date, securities bought and sold since the last report, and other agreed upon metrics.
Gain/Loss Limits Security Accounting
Zero
Specified amount
Subject to approval
Hold to maturity
Available for sale
Other
Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Governance and compliance language communicates your firm’s specific requirements
Sample Language
Company must certify on a quarterly basis that the portfolio has remained in compliance with the stated investment policy.
Company must meet quarterly with the investment providers/managers to review the current portfolio structure, asset allocation and investment performance results.
Company must obtain SSAE-16* Type II documentation from its investment providers/managers on an annual basis.
Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization, was finalized by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in January 2010. Essentially, a SSAE‐16 audit offers the service providers’ customers third party validation that the service provider has effective internal controls in place.
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Investment Policy Recommendations
Annual Review and Approval
Implementation and Ongoing Monitoring
Investment Policy
Annual reviews ensure that risks are appropriate to your organization’s evolving business objectives and risk tolerance
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Objectives Risk Management Investments Monitoring
For institutional use only. Not for distribution to the general public.
Benchmarks
The iMoneyNet Money Market Fund Averages. iMoneyNet, Inc. is an independent mutual fund performance monitor. The iMoneyNet, Inc. averages are not intended to represent the past performance of the funds, but do represent the past performance of funds managed in a similar manner, and having similar investment objectives and policies. The iMoneyNet Government Category Average includes all retail and institutional funds: Treasury, Treasury & Repo, Government and Government Agencies. The iMoneyNet Prime Category Average includes all Prime Retail and Prime Institutional funds. The iMoneyNet Tax-Free National Category Average includes all retail and institutional national tax-free and municipal money funds.
The BofAML 3-Month T-Bill Index comprises of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the rebalancing (month-end) date. While the index will often hold the Treasury Bill issued at the most recent or prior three-month auction, it is also possible for a seasoned 6-month or 1-Year Bill to be selected. As of 01/01/2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 3-Month T-Bill Index to the BofAML 3-Month T-Bill Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.
The BofAML 6-Month T-Bill Index is an unmanaged index tracking 6-month U.S. government securities. As of January 1, 2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 6-Month T-Bill Index to the BofAML 6-Month T-Bill Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.
The Citigroup 1-Year T-Bill Index represents monthly return equivalents of yield averages that are not marked to market. The Citigroup 1-Year T-Bill Index is an average of the last three, 1-year Treasury issues. The index was temporarily changed from the 1-year U.S. Treasury Bill to the 6 Month Treasury Bill during 2002, due to the treasury’s discontinuation of the One Year Treasury Bill and until a new index could be identified. The Citigroup 1-Year T-Bill Index was selected as the appropriate replacement to the 1 Year Treasury Bill during 2002. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.
The BofAML 6–12 Month Municipal Index is an unmanaged index that tracks the performance of USD denominated investment grade tax-exempt debt publicly issued by a US municipality in the US domestic market. Qualifying securities must have at least 6 months and less than 12 months remaining term to final maturity, a fixed coupon schedule and an investment grade rating (based on an average of Moody’s, S&P and Fitch). As of 01/01/2009, Merrill Lynch & Co., Inc. is a wholly owned subsidiary of Bank of America Corporation and an affiliate of BofA Advisors, LLC. Effective September 25, 2009, the name of the index changed from the Merrill Lynch 6–12 Month Municipal Index to the BofAML 6–12 Month Municipal Index. The index is provided for comparative purposes only and is not a projection, prediction or guarantee of performance.
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For institutional use only. Not for distribution to the general public.
Disclosures
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your BofA Global Capital Management representative or financial advisor or go to www.bofacapital.com. An investment in money market mutual funds is not a bank deposit and is not insured or guaranteed by Bank of America, N.A. or any of its affiliates or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds. The credit quality ratings represent those of Standard & Poor’s Corporation (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”) . The ratings represent
their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The security’s credit
quality does not eliminate risk. Breakdown reflects information from Standard & Poor’s and Moody’s Ratings. For additional information on ratings, please
see www.standardandpoors.com and www.moodys.com.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will
come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of BofA Global Capital
Management, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other BofA Global Capital
Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or
construed as a recommendation of any security or sector.
This information does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any
particular recipient.
BofA™ Global Capital Management Group, LLC (BofA Global Capital Management) is an asset management division of Bank of America Corporation. BofA Global Capital
Management entities furnish investment management services and products for institutional and individual investors. BofA Funds are distributed by BofA Distributors, Inc.,
member FINRA and SIPC. BofA Distributors, Inc. is part of BofA Global Capital Management and an affiliate of Bank of America Corporation.
BofA Advisors, LLC is an SEC-registered investment advisor and indirect, wholly owned subsidiary of Bank of America Corporation and is part of BofA Global Capital
Management.
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For institutional use only. Not for distribution to the general public.
Disclosures, cont.
Investment Risks:
For investments in ABS, MBS, and CMOs generally, when interest rates decline, prepayments accelerate beyond the initial pricing assumptions, which could cause the average life and expected maturity of the securities to shorten. Conversely, when interest rates rise, prepayments slow down beyond the initial pricing assumptions, and could cause the average life and expected maturity of the securities to extend, and the market value to decline.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Tax-exempt investing offers current tax-exempt income, but it also involves special risks. The value of the fund will be affected by interest rate changes and the creditworthiness of issues held in the fund. When interest rates go up, bond prices generally drop and vice versa. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the alternative minimum tax. Any capital gains distributed are taxable to the investor.
Treasury bills are less volatile than longer term fixed-income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government.
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