7. 2008 INVESTMENT AND ENDOWMENT FUND REPORT RAPPORT DE 2008 SUR LE FONDS DE
DOTATION ET L’INVESTISSEMENT |
COMMITTEE RECOMMENDATION
That Council receive this report on the results of the City’s
investments for 2008 as required by Ontario Regulation 438/97 as amended to
Regulation 39/07, Section 8 (1), and the City’s Investment Policy.
Recommandation du Comité
Que le Conseil prenne
connaissance du présent rapport sur les résultats des investissements de la
Ville pour l’année 2008, comme l’exige le Règlement de l’Ontario 438/97,
modifié par le Règlement 39/07, paragraphe 8 (1), et la politique
d’investissement de la Ville.
DOCUMENTATION
1.
City Treasurer’s report dated 5 June 2009
(ACS2008-CMR-FIN-0026)
Corporate
Services and Economic Development Committee
Comité des services organisationnels et du développement économique
and Council / et au Conseil
Submitted
by/Soumis par : Marian
Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource : Gerry Mahoney, Manager, Treasury
Finance
Department/Department Finance
(613)
580-2424 x 21310, Gerry.Mahoney@ottawa.ca
SUBJECT:
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OBJET :
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RAPPORT DE 2008 SUR LE FONDS DE DOTATION ET
L’INVESTISSEMENT |
That the Corporate Services and Economic Development Committee recommend Council receive this report on the results of the City’s investments for 2008 as required by Ontario Regulation 438/97 as amended to Regulation 39/07, Section 8 (1), and the City’s Investment Policy.
Que le Comité des services
organisationnels et du développement économique recommande au Conseil de
prendre connaissance du présent rapport sur les résultats des investissements
de la Ville pour l’année 2008, comme l’exige le Règlement de l’Ontario 438/97,
modifié par le Règlement 39/07, paragraphe 8 (1), et la politique
d’investissement de la Ville.
The City of Ottawa is authorized, under Section 418 of the Municipal Act, 2001, to invest funds not immediately required. Ontario Regulation 438/97, as amended to O.Reg. 39/07, outlines the criteria for eligible investments, which provides for a relatively conservative investment mix.
The City’s
Investment Policy, as approved by Council on 25 June 2003, sets sector, issuer,
credit and term limits, and acts as the governing guideline in the management
of the City’s investment portfolios.
The reporting requirements in the City’s Investment Policy and Section 8
(1) of O. Reg. 438/97 require that a report be submitted to Council each year. The detailed reporting requirements of O.
Reg. 438/97 are set out in Document 1.
Regulation 438/97 was amended on 12
December 2005, by Regulation
655/05. This regulation provides a
wider range of eligible investments in Canadian corporate bonds and equities
for the City's Endowment Fund. The
regulation and the City’s adopted Statement of Investment Policies and
Procedures require yearly reporting on the performance of the Endowment Fund,
which has been included in this report.
The struggling US financial sector in 2007 deteriorated
into a global financial crisis in 2008.
A credit and liquidity crunch culminated into the collapse and/or near
collapse of many of the largest and most established financial institutions in
the world, forming the tipping point to what is being described as the worst
economic downturn in many decades.
Initially, Canada appeared to be immune to the financial crisis due to
our highly regulated conservative banking practices and persistently strong
commodity prices. The S&P/TSX rose
to a record 15,000, the Canadian dollar was below par, inflation was a concern
of the Bank of Canada and commodity prices were at, or approaching, all time
highs. However, the global financial
crisis quickly morphed into a consumer, housing and auto sector crisis as
corporate and household liquidity evaporated.
This resulted in the decline in demand for Canadian commodities and
exports, dragging the Canadian economy into the global recession. Credit spreads gapped wider, the S&P/TSX
declined below 8,000, the Canadian dollar dropped 20%, commodity prices began
to tumble and any inflation concerns were quickly displaced with deflation
concerns. Facing very dysfunctional and
troublesome circumstances, central banks implemented a number of policy
initiatives aimed at stabilizing capital markets around the world. The Bank of Canada responded with a number
of initiatives, including lowering the overnight target rate from 4.50% to
1.5%. The Bank has continued its
aggressive monetary stance into 2009 and has lowered the overnight target rate
to 0.25%, as well as committing to keep rates at these levels for an extended
period of time.
With the extreme volatility and uncertainty prevalent in
the economy, staff adopted a more defensive investment strategy. Credit quality and liquidity were both
enhanced in the portfolios. Increasing
the holdings of Government of Canada T-bills, continuing to refrain from
purchasing Asset Backed Commercial Paper (ABCP) while suspending the purchase of
non-domestic banks and commercial paper (except OMERS Realty Corp.) were the
strategies used to reduce portfolio risk.
The Money Market Portfolio weighting in Canada T-bills was increased
from 20% at the end of 2007 to 30% at the end of 2008. The long–term portfolio weighting in
Government of Canada guaranteed investments was increased from 22% at the end
of 2007 to 27% at the end of 2008.
The
performance of the City’s investment portfolios is summarized below. The investment returns shown below represent
book returns, which include interest income, realized capital gains and losses
and amortized bond premiums and discounts.
These returns are on the same basis as reported in the 2008 Financial
Statements.
Portfolio |
Average
Portfolio Value ($
million) |
Earned
Income ($
millions) |
Investment
Return (%) |
Short-Term
Investments Long-Term
Funds Total General
Funds Sinking Funds All Funds |
844.5 429.8 1,274.3 188.0 1,462.3 |
27.2 19.6 46.8 9.8 56.6 |
3.22 4.56 3.67 5.23 3.87 |
The short-term portfolio includes investments
with maturity dates of less than one year.
The size of the portfolio varies greatly from a low of $441.8 million in
January, before the first tax due date, to a high of $1,225.0 million in July, when the proceeds of the final tax billing
for the year have been received. The
long-term portfolio includes bonds, debentures and other eligible investments
maturing up until 2019. Document 2
provides full details of the distribution of investments by type of issuer, by
rating and by maturity. Although the
maturity profile of the combined short and long-term portfolios remained
consistent from 2007 to 2008, with 88% of investments maturing within five
years, the short-term exposure to schedule II banks and commercial paper was
significantly reduced in response to the developments in the credit and
financial markets at the time. Exposure
to Asset Backed Commercial Paper (ABCP) continued to be avoided in 2008. The City held $50.6 million in longer term
Asset Backed Securities (ABS) in the long-term and sinking fund portfolios at
year-end 2008, which is less than the $64.6 million at year end 2007. During the year, ABS investments having a
value of $11.5 million matured and an additional $2.5 million were sold. All of these ABS holdings have maintained
AAA ratings required by provincial regulation to be eligible for investment by
municipalities.
The City has previously compared its investment
returns to a ONE Fund (a municipal pooled investment program designed
specifically for Ontario public sector organizations overseen by CHUMS
Financing Corporation, a subsidiary of the Municipal Finance Officers
Association of Ontario and Local Authority Services Limited, a subsidiary of
the Association of Municipalities of Ontario) and Government of Canada index
returns. However, changes made to the
composition and term of investments held in these portfolios and different
investment objectives, make direct comparisons invalid. Investment returns for fixed income and
index benchmarks are based on market to market returns, which include
unrealized capital gains and losses (changes in the market value of the
portfolio from one period to another) while City investments are recorded and
reported in the City’s financial statements on an amortized cost basis. Although there are quite a variety of fixed
income indexes available, no single index is available with the same asset mix,
investment objectives and composition of eligible investments for Ontario
municipalities as the City’s investments.
O. Reg. 438/97 4. (1) requires that a municipality shall not invest more than 25 per cent of the total amount in all sinking and retirement funds in respect of debentures of the municipality, as estimated by its City Treasurer on the date of the investment, in short-term debt issued or guaranteed by the municipality.
The City of Ottawa did not issue short-term securities in 2008. In 2008, the Sinking Fund made short-term advances to the City in order to have funds available for anticipated strategic investment opportunities. As the nature of the Sinking Funds portfolio is longer-term, money market instruments are not normally carried on its books, but advances to the City allows the Sinking Fund to participate in the earnings of the City’s Short-Term Investments portfolio. The highest point of Sinking Funds advances to the City in 2008 was $7.2 million, representing less than 1% of all investment portfolios.
At 31 December 2008, the City of Ottawa held $73.9 million or 6% of total investment assets, in its own long-term debentures.
Compliance with Investment Policy
For the year 2008, all investments were made in accordance with the
investment policies and goals adopted by City Council. Details of investments by issuer categories for the
City’s investment portfolios are shown in Document 2.
Limiting investment purchases to high-quality
investment-grade securities controls credit exposure for each of the investment
portfolios. Some exposure, within
approved policy limits, to lower-rated and unrated municipal issuers allows the
City to capture higher yields over higher-rated issuers. As of 31 December 2008, 98% of investments
held in the Short-Term Investments portfolio were rated R-1 mid or better. Details of the credit exposure by rating are
shown in Document 2.
The Long-Term and Sinking Fund portfolios are weighed more heavily towards highly rated federal, provincial and municipal debt. 100 per cent of the assets held in these portfolios are invested in securities rated AA- or higher as at 31 December 2008. Details are shown in Document 2.
There was a moderate change in the term exposure of the
General Funds in 2008, reducing the average term to maturity from 1.8 years in
2007 to 1.2 years in 2008. The main
contributing factor to the shorter term to maturity was the increase in the
Money Market Fund holdings from $705.9 million to $844.5 million while
the Long-Term portfolio remained stable at approximately $430 million. With an average term to maturity of 53 days,
the Money Market fund and 3.2 years for the Long-Term Fund the average term to
maturity declined by 0.6 years to 1.2 years.
Sinking Fund assets were invested in longer-term securities consistent with future commitments, while at the same time capturing higher returns for longer-dated securities. The weighted term-to-maturity of the Sinking Fund portfolio as of 31 December 2008 was 3.1 years.
The City’s portfolio management fees are estimated by measuring the costs associated with the investment section relative to the size of the assets under management. Direct costs include staff salary, custodial services, market information systems, portfolio management software and other miscellaneous expenses.
In 2008, direct costs associated with managing the City’s investments represented 4 basis points on the average total amount of all invested funds including the Endowment Fund of $1.640 billion. These costs compare favourably to the management fees of other comparable investments including the ONE Fund, which has fees of 19 basis points for its Money Market Fund and 40 basis points for its Bond Fund.
Endowment Fund Performance
The Endowment Fund (Fund) was established from the proceeds received from Hydro Ottawa when it completed its refinancing in 2005. The Province broadened the scope of eligible investments for the Fund to include Canadian equities and corporate bonds. Two external investment managers manage investments for the Fund.
The overall return on the Fund was –13.2% for 2008. The target return approved by Council on 14 June 2006 is 6.5%. The market value of the Fund as at 31 December 2008 was $177.4 million. While the total investment income was a positive $7.4 million resulting from interest, dividends and realized capital gains net of realized capital losses the overall return was negative and is attributable to the decline in the market value of the fund’s equity holdings, which corresponds to the worldwide decline in stock market values. Although there is no certainty on when financial markets will return to a more stable environment and economies begin to recover, the market value of the Fund as at 31 December 2008 is not considered to represent a permanent decline in value. Recently, with some economic data indicating that economies may be reaching the end of their recessionary declines and with the prospects of recovery in 2010, equity markets have shown rapid advances with the S&P/TSX up 9.7% for 2009 up to 15 May 2009. This along with further stabilization of fixed income markets has resulted in the Fund’s market value returning to $195.8 million as at 2 June 2009.
As mentioned previously and as extensively reported in the financial press, Canadian equities (S&P/TSX) like all other major stock markets, experienced substantial losses during the latter months of 2008, providing a return of -33% for the year. The ONE Fund Canadian equity fund posted a return of -28.8% for 2008 and OMERS return was -15.3%.
Investments in the Endowment Fund include eligible Canadian equities, Federal, Provincial and corporate bonds and various short-term money market investments. The mandate given to the investment managers is provide a rate of return of 6.5% with a minimum of 20% of the assets of the Fund to be held in bonds. Since placing funds with the investment managers during 2007 each manager has been gradually selecting investments for the Fund’s Canadian equity portfolios. As at 31 December 2008, 49.9% of the Fund’s assets were held in Canadian equities, 49% in bonds and 1.1% in short-term investments. This asset allocation contributed to a more favourable return for the Fund relative to the S&P/TSX. The Funds total equity return was ‑29.9% while bonds returned 6.1%. Average management fees and expenses for the Fund for 2008 represented 28 basis points of the average Fund value.
The current
payout policy was reviewed by the Endowment Fund Investment Committee in view
of the lack of a distribution this year.
The current
policy, which was adopted by Council on 14 June 2006, provides for an amount to
be paid from the Fund to the City, which is the lesser of the earnings in the
year and 6.5% provided that the market value of the Fund is not reduced below
the original investment ($200 million).
Consideration was given to amending this policy to make a distribution
from the Fund of interest, dividends and realized capital gains net of capital
losses notwithstanding that the current market value at any point in time was
less than the original investment.
Ontario Regulation 438/97 amended to 655/05 which provides the eligible
investments for the Fund, also restricts amounts to be withdrawn. For
investments in debt instruments, the principal amount cannot be withdrawn before
seven years from the date invested.
However the interest received on debt investments is not so restricted.
With respect to investments in shares, an amount equal to the amount of the
original investment cannot be withdrawn from the Fund for at least seven years
after the date on which the investment is made. Therefore until the market
value of the equity component returns to at least the value of the original
investment, any distribution from the proportion of the Fund invested in
equities is restricted for seven years.
Since the amount of interest earnings during 2008 was $1.1 million it
was considered more beneficial to retain this amount in the Fund to be
reinvested and contribute to the potential growth of the Fund over time.
The public consultation process is not applicable.
There are no legal/risk management impediments to implementing the recommendation in this Report. Further, this information is required to be provided pursuant to Ontario Regulation 438/97 as amended to Regulation 39/07, Section 8(1) and the City's Investment Policy.
It is the opinion of the City Treasurer that all investments were made during 2008 in accordance with the City’s Investment policy.
Document 1 – Reporting requirements of Ontario Regulation 438/97
Document 2 - Investment portfolios by asset class, term and credit exposure
Following consideration by Corporate Services and Economic Development Committee, this report will be forwarded to Council for its consideration.
Document 1
8. (1) If a municipality has an investment in a security prescribed under this Regulation, the council of the municipality shall require the treasurer of the municipality to prepare and provide to the council, each year or more frequently as specified by the council, an investment report.
(2) The investment report referred to in subsection (1) shall contain,
(a) a
statement about the performance of the portfolio of investments of the
municipality during the period covered by the report;
(b) a
description of the estimated proportion of the total investments of a
municipality that are invested in its own long-term and short-term securities
to the total investment of the municipality and a description of the change, if
any, in that estimated proportion since the previous year's report;
(c) a
statement by the treasurer as to whether or not, in his or her opinion, all
investments were made in accordance with the investment policies and goals
adopted by the municipality;
(d) a record of the date of each transaction in or disposal of its own
securities, including a statement of the purchase and sale price of each security;
and
(e) such other information that the council may require or that, in the opinion of the treasurer, should be included.
Document 2
Investment
Portfolio 2008
ALL FUNDS |
Par Value ($1,000) |
% of Total |
Policy Range (%) |
||
2008 |
2007 |
2008 |
2007 |
||
Cash |
11,769 |
14,554 |
1 |
1 |
|
Federal |
335,862 |
230,777 |
27 |
22 |
20
- 100 |
Provincial |
201,207 |
176,995 |
17 |
17 |
5
- 75 |
Municipal |
136,542 |
139,942 |
11 |
13 |
0
- 50 |
City of Ottawa |
73,915 |
68,894 |
6 |
7 |
0
- 50 |
Schedule I Bank |
399,853 |
234,627 |
33 |
22 |
0
- 70 |
Schedule II Bank |
0 |
66,000 |
0 |
6 |
0
- 25 |
Commercial Paper |
15,000 |
65,000 |
1 |
6 |
0
- 20 |
Asset-Backed Commercial Paper |
0 |
0 |
0 |
0 |
0
- 20 |
Asset-Backed Securities |
50,615 |
64,615 |
4 |
6 |
0
- 25 |
Other |
3,575 |
2,814 |
0 |
0 |
0
- 25 |
Grand Total
|
1,228,337 |
1,064,218 |
100 |
100 |
|
Maturity |
General
Funds (%) |
Sinking
Funds (%) |
||
2008 |
2007 |
2008 |
2007 |
|
Less than 1 year |
63 |
61 |
23 |
12 |
1 - 5 years |
25 |
27 |
55 |
62 |
5 - 10 years |
11 |
11 |
14 |
17 |
10 years or more |
1 |
1 |
8 |
9 |
|
100 |
100 |
100 |
100 |
Rating |
2008
(%) |
2007
(%) |
R-1 High |
71 |
71 |
R-1 Mid |
27 |
29 |
R-1 Low |
2 |
0 |
|
100 |
100 |
Rating |
Long-Term
(%) |
Sinking
Funds (%) |
||
2008 |
2007 |
2008 |
2007 |
|
AAA |
57 |
52 |
54 |
60 |
AA |
42 |
48 |
40 |
40 |
AA- |
1 |
0 |
1 |
0 |
A+ |
0 |
0 |
5 |
0 |
A |
0 |
0 |
0 |
0 |
BBB and Unrated |
0 |
0 |
0 |
0 |
|
100 |
100 |
100 |
100 |