Metodologías basadas en sistemas de referencia

Background

The purpose of the IPS is to define the preferred investment philosophy and practices. In most jurisdictions, the law does not specifically require public funds or retirement systems to have a written IPS. Likewise, the Employee Retirement Income Security Act (“ERISA”)2 _{does not require private sector} pension funds to have a written IPS. The United States Department of Labor (“DOL”), which oversees private sector plans, strongly encourages trustees to create and adopt such statements.

EnnisKnupp believes that having a well-crafted IPS is a best practice for all pension funds, both public and private. There is no uniform standard for the content and no absolute model to follow. However, public retirement industry organizations have provided guidance on this issue.3 _{Based on our} experience, an IPS should include the following:

 Reference to enabling law and the authority of the fiduciary  Applicable standard of care (prudent expert or prudent investor)  Mission and purpose

 Investment philosophy, including risk tolerance and diversification  Investment goals and objectives

 Investment constraints  Liquidity needs

 Roles and responsibilities of key parties (e.g., treasurer, relevant committees or advisory panels, staff, consultants, investment managers, and custodian) and any delegations of authority  Long-term strategic asset allocation targets and allowable ranges

 Definitions and guidelines for each asset class, including prohibited or permissible investments and diversification mandates

 Rebalancing process and triggers

 Investment performance standards and benchmarks for each asset class and the total fund  Investment manager due diligence, search and selection process

 Monitoring process for internally and externally managed portfolios  Reporting requirements

 Various policies regarding fund assets and investment practices, including proxy voting, securities lending, securities litigation, brokerage, and other such programs

It is a common practice for public funds, including large public retirement systems and state investment boards, to have an IPS that does not address all of the areas identified above. Some public funds have extensive investment manager guidelines or detailed contract provisions to supplement policies, or they

2 _{Employee Retirement Income Security Act, 29 USC § 1001-1461.}

3 _{See, for example, Government Finance Officers Association (GFOA) Committee on Retirement and Benefits} Administration, “Investment Policy Checklist for Pension Fund Assets,” May 2003,

may address various areas in separate operational type documents. The best practice is to have clear documentation of what is expected and who is responsible for meeting those expectations.

Findings and Analysis

NCRS has six main investment governance documents, each titled “Guidelines, Policies, and

Procedures” that, when taken together, essentially constitute an IPS. These documents include: a Total Fund Policy, Publicly Traded Equity Policy, Real Estate Policy, Alternative Investments Policy, Long- Term Investment Fund (“LTIF”) Policy, and Short-Term Investment Fund (“STIF”) Policy. These six policies are collectively referenced in this Report as the “NCRS Policies.”

EnnisKnupp reviewed the October 2008 drafts of the NCRS Policies. Since the 2008 documents were created, a Credit Strategies Policy has been drafted, which EnnisKnupp also reviewed. We were informed that the IMD operates pursuant to the NCRS Policies. However, the NCRS Policies have not been formally approved by the prior or current Treasurer. It is our understanding that once the CIO is in place, the IMD plans to finalize and seek approval of the NCRS Policies.

The table below provides a comparison of the NCRS Policies against EnnisKnupp’s best practice checklist for a comprehensive IPS. Noted with a checkmark () are those elements already included in the NCRS Policies. Also noted are those elements which need enhancement. Enhancements include in-depth documentation and clarification related to the specific subject. Best practices do not require that a standard phrase or specific language be included in an IPS, but they do require that the processes and definitions be clear and unambiguous to the readers and users of the IPS.

Table 3.1 – Checklist for a Comprehensive IPS

Best Practice Investment Policy Statement Subject Areas

Introduction NCRS Policies

Reference to state law creating the Fund with specific reference to investment

related sections of the law  Best practice

Reference to the Treasurer’s right to have an investment advisory committee and to

set policy  Best practice

Description of intended beneficiaries of the fund (e.g., the fund is created for certain

employees and their dependents) Needs enhancement

Scope (e.g., limited in application to pension fund assets or may include other

assets)  Best practice

Statement of purpose NCRS Policies

Description of the sole or fundamental purpose of the retirement fund  Best practice Language describing that the fiduciary must act in the sole interest of members and

beneficiaries, and for the exclusive purpose of providing benefits  Best practice

Listing of investment goals that could include: NCRS Policies

Best Practice Investment Policy Statement Subject Areas

Obtain a long-term rate of return (one or two market cycles), net-of-fees, equal to or

in excess of the policy benchmark  Best practice

Clarify how to manage investment risks  Best practice

Establish risks that may be taken to achieve return goals  Best practice

Define policy benchmark and asset allocation targets  Best practice

Reference of the duty to incur only reasonable expenses Needs enhancement

Identification of roles and responsibilities NCRS Policies

Treasurer – general and investment related duties  Best practice

Investment advisory committee – role to make recommendations or final decisions  Best practice Internal staff – general and investment related duties, reporting lines, and

expectations, particularly among the senior investment related staff and others involved (e.g., legal counsel, internal auditor)

 Best practice Investment consultants – duties, reporting lines, expectations regarding the

frequency of communications, and acknowledgement of fiduciary responsibilities  Best practice Investment managers – duties, acknowledgement of fiduciary responsibilities, and

frequency of communication (could incorporate contractual mandates)  Best practice Custodian bank – role as custodian or trustee and role regarding cash management,

performance calculations, etc.  Best practice

Description of other service providers’ duties, such as securities lending and

brokerage4  Best practice

Asset allocation NCRS Policies

Acknowledgement of its primary importance  Best practice

Recognition of the allocation’s purpose, such as to provide an optimal mix of investments to produce desired returns and meet current and future liabilities with minimal volatility

 Best practice Description of frequency and methodology of asset liability modeling and allocation

resetting  Best practice

Minimum, maximum, and target allocation ranges  Best practice

Standards regarding diversification, including limits to a single issuer, single asset

class, economic sector, or country Needs enhancement

Asset class guidelines and benchmarks NCRS Policies

Definition of each asset class and rationale for inclusion in the portfolio Needs enhancement Rationale for selected benchmarks, who sets them, and how often they are revisited Needs enhancement Description of any prohibited investments (e.g., short selling, margin, and

investments precluded by law or regulation)  Best practice

4 _{If and when other service providers are hired (such as for proxy voting, evaluating trading efficiency, and portfolio}

Best Practice Investment Policy Statement Subject Areas

Detailed overview of allowable credit risk in the portfolio (e.g., minimum credit rating for any fixed income investment as determined by a nationally recognized credit rating agency)

 Best practice

Rebalancing policy NCRS Policies

Statement of the purpose of rebalancing (i.e., to ensure that the investment program

adheres to its strategic asset allocation)  Best practice

Description of the method used to rebalance (e.g., most cost effective manner, use of

excess cash, index strategies as a source, or liquidation of over funded managers) Needs enhancement

Frequency of the portfolio reviewed for rebalancing  Best practice

Monitoring and reporting NCRS Policies

Statement of purpose for monitoring and reporting (i.e., to ensure compliance with

the IPS and applicable law, to manage risk, and to assess manager performance)  Best practice Description of quarterly reporting for both external managers and other external

investment professionals (can include an outline of current strategy and investments, performance vs. benchmark, and portfolio composition relative to the asset allocation policy)

 Best practice Purpose and scope of annual and more frequent reporting Needs enhancement

Shareholder activities NCRS Policies

Description of the proxy voting policy and how votes are cast and recorded Needs enhancement Statement of the circumstances under which the Treasurer will sign on to or initiate a

shareholder proposal Needs enhancement

Statement of how (or if) a focus list of underperforming companies is identified and

what communication the Treasurer takes to engage companies in dialogue  Best practice Description of the process of opting in and out of shareholder class actions Needs enhancement Identification of core principles of corporate governance (board independence, CEO

compensation, access to the proxy, audit committee, etc.) Needs enhancement

Delegation NCRS Policies

Statement of any delegations to the staff (could incorporate by reference the position

descriptions for key senior staff members)  Best practice

Alignment of the strategic plan with the annual plan for investments  Best practice

Requirement to annually review IPS Needs enhancement

The NCRS Policies thoroughly cover many areas commonly found in other best practice IPS documents. In particular, the NCRS Policies clearly address the standard of care, investment objectives, roles and responsibilities, risk tolerance and diversification. The NCRS Policies contain a description of the Total Fund benchmark and each asset class benchmark. The NCRS Policies do not include a rationale for the inclusion of allowable asset classes in the portfolio, which would lend additional transparency to the decision-making. The topic of rebalancing is documented, but could be enhanced by clarifying whether each asset class will be rebalanced to the target range or to the edge of the range. [Rebalancing is discussed later in this Section (3.II.C).]

Conclusion

The NCRS Policies have many of the key elements of best practices. While it is not imperative that all the NCRS Policies be consolidated into one comprehensive IPS, such a consolidation would

eliminate some redundancies and may be more useful for those who have responsibility beyond one asset class and for those who want an overall understanding of the investment program. If the NCRS Policies are maintained as separate documents, care must be taken when the documents are revised to ensure consistency among them.

There were no material gaps between the stated operations of the NCRS as explained to EnnisKnupp by the staff and the requirements of the governing policies.

Recommendations:

1. Complete a review of the NCRS Policies and the enhancements noted in this Report, make modifications as necessary, and seek formal approval from the Treasurer.

2. Develop a systematic process to regularly monitor and report on policy compliance to the Treasurer.