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Prudent Investor Update, February 20, 2019

Your Investment Plan

Ontario municipalities are generally aware of the need for an investment policy statement (IPS) and most have one in place. The IPS lays out the parameters for municipal investment decisions by setting risk tolerance and other standards. But that’s just the beginning. How do you actually invest the money? We recommend starting with a plan.

Few municipalities have taken the next step to create an investment plan. Regulations under the Legal List, which had been the only option for municipal investing up until now, do not require a plan.

For prudent investors, the investment plan is mandated. The investment board (IB) or joint investment board (JIB), not the municipality, is responsible for developing and implementing an investment plan based on the IPS. Even on the Legal List, a plan is a good way to guide investment activity. It is also a valuable tool for communicating with council and other stakeholders.

The policy statement is usually based on a 5-year timeframe and reviewed annually, with changes made if needed. On the other hand, the investment plan is usually set with a narrower timeframe of about a year. It is watched closely for potential changes. Unlike pensions and endowment investing, where needs change slowly, municipal funding needs can alter more suddenly due to unexpected events or new projects and Council priorities.

The investment plan lays out exactly how the money will be invested and how any transition needs will be managed, including:
  • Identifying each outcome and its purpose. Municipalities may have multiple outcomes such as long-term growth or stable returns.
  • Identifying the investment managers.
  • Explaining the rebalancing approach and parameters.
  • Explaining how environmental, social and governance guidelines are to be addressed.
Considerations for Prudent Investors
For prudent investors, it is important that the investment board is nimble enough to respond to changes quickly, for example, to provide funds needed or change investment allocations. This means that municipalities are responsible for communicating these changes quickly and keeping the investment board/joint investment board apprised of progress. The goal should be a seamless relationship, just as if the investment board resided internally as your investment department.

For new prudent investors, the transition to a new portfolio is especially important and must also be laid out in the plan. It should consider:
  • How to handle securities in the old portfolio if the municipality prefers not to realize losses
  • How to handle illiquid holdings such as GICs and principal-protected notes that may entail a penalty if liquidated before expiry.
Working with ONE Investment
For prudent investors working with ONE Investment, the investment plan is technically created after you hire the ONE Joint Investment Board. In practical terms, though, you and Council will need an idea of how ONE plans to invest your money before agreeing to hire the ONE Investment JIB.

ONE is therefore aiming to provide you with a draft investment plan to take to staff and Council that provides a framework for the new relationship. This would require a planning session where we would cover:
  • Identifying short- and long-term cash needs. ONE will offer guidance on how to prepare for this meeting. For example, you may not need to determine the timing of every cash need.
  • How to set up an appropriate account structure so that the associated reporting fits your needs.
  • Confirming investment outcomes for each account.
For legal list investors, ONE is investigating ways to offer investment advice and drafting of an investment plan for the municipality to implement.

ONE Investment is dedicated to developing a range of tools and templates to support municipal finance leaders with investments, whether they choose prudent investing or stay on the legal list. The goal is to provide all municipalities, regardless of staff capacity, the ability to benefit from the long-term financial benefits of investment returns.

Did you miss our last article on Investment Policy Statements?

Have you seen ONE Investment’s new website? Click here to take a look.