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Prudent Investor Update, August 15, 2018

Users Guide: How to Think About Risk

When it comes to investing public funds (or any funds, for that matter) there is always an element of risk. How you think about risk is critical to how you approach and manage investments. Christine Tessier is a member of ONE’s Investment Advisory Committee. As Vice-President, Investments and Treasury at CAA Club Group, she manages the company’s nearly $1B in pension, corporate and insurance assets.

Tessier offered five tips on how to think about risk:
  1. Know your cash flow: You’ll hear this repeatedly because it’s the foundation of all investment decisions. You must know what you need over what time frames. Besides having different buckets (such as for the next one to three years, five years plus and 10 years plus), it’s also about knowing your revenue flexibility. What are projected trends in tax revenue or other sources, based on demographics and other factors? In terms of expenses, what is predictable and what is beyond your control? Learn more from last month’s article about linking cash flow and asset management planning.
  2. Recognize that there is risk in doing nothing: Inflation runs about two per cent per year. Without action, your financial assets will erode. Just using a High Interest Saving Account, over the long run, barely keeps you afloat. It isn’t a solution when you have long-term infrastructure needs. Weigh the risks of investing against the very real risks of doing nothing.
  3. Be open to new advice, but carefully consider who is giving it. The only way to learn about markets and investing is to talk to people about different options, strategies and opportunities. It is critically important to understand where the advice is coming from and how that person is paid. What financial incentives do they have for promoting a certain product or strategy to you? You can learn more about financial service providers in previous articles about their compensation and accountability. Keep in mind that ONE Investment is a non-profit that has focused solely on serving the municipal and broader public sector for 25 years.
  4. Complexity does not equal risk. Investing can be complicated. However, if you learn about financial markets and how they work, risk can be managed, and your municipal government can better meet its financial needs over the long-term.
  5. Consider risk of the total portfolio, not individual products. Tessier says using a core/satellite approach to a portfolio helps balance out the risk. Various investment products respond to markets differently. A balanced approach, like having a core of more conservative products with a smaller “satellite” investment in something like a global equity fund, means that you can benefit when markets are up and buffer losses when they are down.
As part of its structuring for prudent investor, ONE Investment plans to create a customer service team to work with municipalities to provide advice on portfolio structure and investment policies. Comprised of retired municipal treasurers and a CFA charterholder, the team would marry expertise in municipal finance with investment experience. It is all part of a strategy to build on ONE’s track record of providing turnkey investment solutions for the municipal and broad public sector.