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Staff Report
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Report To: General Government Committee
Date of Meeting: October 15, 2019 Report Number: FND-028-19
Submitted By: Trevor Pinn, Director of Finance/Treasurer
Reviewed By: Andrew C. Allison, CAO Resolution#: GG-479-19, C-367-20,
GG-414-20
File Number: By-law Number:
Report Subject: Prudent Investor Standard for Municipal Investments — Update and
Options Analysis
Recommendations:
1. That Report FND-028-19 be received;
2. That Staff continue to work with ONE Investment to bring information back to Council
related to a new Investment Policy Statement (IPS) and agreements associated with
establishing a new Joint Investment Board (JIB) and implementing the Prudent
Investor (PI) regime; and
3. That all interested parties listed in Report FND-028-19 and any delegations be
advised of Council's decision.
Municipality of Clarington
Report FND-028-19
Report Overview
Page 2
This report outlines the benefits of investing under the Prudent Investor regime as well as
options for implementing a change in investment regime. This report is a second step and
update to Council on the process to move to the Prudent Investor standard for investing.
1. Background
Initial Direction to Explore Prudent Investor Standard
1.1. Investing under the Municipal Act, 2001 and O. Reg. 438/97 (the "Regulation") is
divided into the prescribed list of securities (the "legal list") and the recently added
Prudent Investor regime ("PI").
1.2. The new PI regime removes restrictions on municipal investments but also includes a
legislated governance model. Control and management of money not required
immediately under the new PI regime is to be given to a municipal service board
referred to as an Investment Board ("IB") or a Joint Investment Board ("JIB") for
investment on behalf of the municipality.
1.3. Report FND-014-19 provided Council with additional information on the recent changes
to municipal legislation allowing for municipalities to move to the PI standard. The
report also detailed the differences between the current "Legal List" approach and the
new "Prudent Investor" approach.
1.4. At the GGC meeting of May 6, 2019 Council approved option A which included direction
to Staff to develop an agreement to establish ONE Joint Investment Board ("ONE JIB"),
together will all related matters such as codes, policies and appointments and to adopt
the prudent investor regime when these items are in place.
1.5. It was initially expected that the establishment of the ONE JIB would be completed by
December 2019; however, at a recent meeting of potential founding members it was
determined that an establishment date of April 2020 was more realistic and preferable.
1.6. At the time of Report FND-014-19, the only municipality with the Prudent Investor
Standard adopted was the City of Toronto under the City of Toronto Act. As at the date
of this report, there are no municipalities in Ontario which have adopted the Prudent
Investor Act under the Regulations.
Municipality of Clarington
Report FND-028-19
Benefits of Prudent Investor (PI) Regime
Page 3
1.7. The PI regime expands municipal investment opportunities which may enable better
risk -adjusted returns meaning that risk can be carefully balanced with returns.
1.8. The restrictions placed on legal list investments can create concentration risk into the
investment portfolio. The legal list currently restricts investments to deposit instruments
at Canadian chartered banks, certain Canadian corporate bonds rated A or better (ie.
banks), municipalities and senior levels of government. The impact is that realistically a
municipality's investments are heavily concentrated in Canadian banks which does not
allow for appropriate diversification.
1.9. The diversification of available investment products and the removal of geographical
limitations which are only available under the PI regime may mitigate concentration risk.
2. Risks, Returns and Diversification
Risk Adjusted Returns
2.1. In general, for municipalities as stewards of public funds, preservation of capital is a key
priority that needs to be balanced with the need for returns. Municipal budgets are
under tremendous pressure to maximize revenues while minimizing the need for
property tax increases. As municipalities seek to diversify revenues to put less pressure
on property taxes, investment revenue becomes more important as an underused
alternative revenue stream. Figure 1 below demonstrates the effect of "safe
investments" on return potential. It shows the percentage returns on a rolling 1-year
basis for Canadian stocks (red), Canadian Fixed Income (green) and short-term
treasury bills (blue). When a municipality puts a heavy priority on capital preservation, it
will often invest in short-term treasury bills, guaranteed investment certificates (GIC),
term deposits, or High Interest Savings Accounts (HISA), which ensures little to no
losses due to the lack of volatility. However, you will note from Figure 1 below the low
returns on short-term investments which over the 10-year time -period did not even keep
up with inflation. Average annual inflation from 2008-2018 was 1.97% using the
Consumer Price Index (2.55% using the Non -Residential Building Construction Price
Index.)
Municipality of Clarington Page 4
Report FND-028-19
Figure 1: Rolling 1-Year Returns Across Asset Classes
50
40
30
20
10
-10
-20
-30
-40
% Rolling 1-Year Returns
September 2008 to February 2019
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
FTSE TMX Canada 91-Day T-Bill Index FTSE TMX Canada Universe Bond Index
S&P/TSX Canadian Composite Index
Sources: S&P, FTSE
Diversification
2.2. By removing investment restrictions, the PI regime allows the municipality to better
diversify its investments. Concentration risk arises when investments are made in
closely related securities; this can be by asset class, geographic location, or sector.
Where a portfolio has many securities of the same type, the whole portfolio can be
exposed to a single risk event. Research shows that when investing over longer time
frames diversification allows investors to better manage portfolio risk.' By investing
funds in multiple different markets, sectors and products a municipality can better
protect itself from losses incurred in one of its investments.
1 Asness, Clifford S., Isrealov, Ron, and John M. Liew. (2011). "International Diversification Works (Eventually)" Financial
Analysts Journal Volume 67, Number 3.
Municipality of Clarington Page 5
Report FND-028-19
Diversification by Asset Class
2.3. The PI regime will enable the Municipality of Clarington to invest in a broader array of
investment products facilitating the building of a more diversified investment portfolio.
This concept of diversification is one of the basic principles used to reduce overall
portfolio risk. Figure 2 shows the risk -mitigating effect of diversification by asset class or
product type. The figure looks only at periods when Canadian stock returns fell below
negative 5%. Between 2008 and 2018, the Canadian stock markets (red bars)
experienced six periods where values declined by greater than 5%; however, in each of
those periods fixed income products (green bars) experienced positive returns. If an
investor held both Canadian stocks and fixed income during these periods the total
decline in stocks would have been partially or potentially fully offset by a positive return
on fixed income
Figure 2: Offsetting effect of portfolio diversification by asset class
Periods When Rolling 1-Year Equity Returns < -5%
10
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-20
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Jan 02 May 03 Aug 09 Jul 12 Apr 16
■ Canadian Equities ■ Canadian Fixed Income
Geographical Diversification
2.4. The PI regime allows the Municipality to invest in the Global markets. Securities prices
in equities and fixed income markets outside of Canada will be influenced by a different
set of factors than apply to Canadian securities. Typically, different economic
fundamentals and political circumstances drive returns from investments outside of
Canada. For this reason, the pattern of returns from Global stocks and fixed income will
be differentiated in comparison to returns for Canadian securities, which provides a
basis of diversification benefits, which in turn tend to reduce overall portfolio risk. Under
the current legal list, the Municipality can only buy Canadian equities (which are only
Municipality of Clarington
Report FND-028-19
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available through ONE Investment) which exposes municipalities to the risk of a
downturn in the Canadian market. The Canadian economy is highly exposed to global
demand for, and the prices of, certain primary commodities (e.g. oil & gas, metals,
agriculture). It is also dependent on exports and trade, particularly with the United
States.2 Canadian equity markets represented less than 3% of global equity markets at
the end of 2018.3
2.5. In looking at historical data (10, 20, and 40-year time periods) using different levels of
geographic diversification, investors would have experienced less volatility if they held
an asset mix that included both Global and Canadian stocks. Volatility is a common way
to measure risk in investments — it represents swings in market value — so the higher
the number the less stable the investment4. Figure 3 below shows the volatility of five
different levels of geographic mix. The 100% Canadian stock mix was the most volatile,
or risky, investment in all three time periods. The least volatile geographic mixes were
those that had a combination of Canadian and Global stocks in most instances (See
Appendix 2 for more detail on this analysis).
z Source: See remarks of Stephen S. Poloz, Governor, Bank of Canada "Opening Statement", January 9, 2019 and Bank of
Canada Monetary Policy Report July 2019, "Key inputs to the base -case projection."
3 Source: The World Bank. Canadian equity markets had total market capitalization of USD $1.938 Trillion, vs total world
market cap of USD $68.654 Trillion.
a The measure of volatility used throughout this document is standard deviation.
Municipality of Clarington
Report FND-028-19
Figure 3: Volatility and Geographic Diversification
IMPACTS OF GEOGRAPHIC DIVERSIFICATION ON
RISK (VOLATILITY) OVER THREE DIFFERENT
TIME PERIODS
Page 7
■ 100% Canadian ■ 100% Global ■ 75% Canadian/25% Global
■ 50% Canadian/50% Global ■ 25% Canadian/75% Global
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10-YEAR VOLATILITY 20-YEAR VOLATILITY 40-YEAR VOLATILITY
Higher -yield Securities
2.6. If a municipality can better manage risk through diversification it can use that tool to
pursue greater returns by tolerating a greater level of risk over a small portion of its
investments. Over a longer period, small differences in returns can have significant
impacts. For example, while the difference of a 0.5% return may not sound like a lot,
over long periods of time the financial impact in dollars can be substantial. Table 1
shows how 0.5% in returns compounds into dollars over ten years, depending on the
starting value. The compounding effect of a 0.5% return over a 10-year period for
$5 million would contribute $256,000 in additional revenue. For a $100 million
investment that additional 0.5 % would contribute $5,114,000 to the municipality.
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Report FND-028-19
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Table 1: Compounded Value of 0.5% (50 bps) over 10 Years
Starting Investment
Value
Incremental
Return
$5 million
$256,000
$20 million
$1,023,000
$50 million
$2,557,000
$100 million
$5,114,000
$250 million
$12,785,000
$500 million
$25,571,000
$1 billion
$51,140,000
2.7. Increasing returns by an amount as small as 0.5% over a 10-year period can have
major impacts on a municipality's budget.
2.8. There are two ways to attain higher returns:
Identify inefficiencies in the market (i.e., identify mispriced investment
opportunities); and
2. Accept a higher level of risk.
2.9. Portfolio managers often try to identify inefficiencies in the market. They conduct
research and analysis to identify investments they believe are incorrectly valued or
identify themes that are not correctly reflected in securities prices. They then position
their investments accordingly.
2.10. Changing investment allocations typically is done with the intent to achieve higher
returns, but any change in investment allocations also changes the level of risk in the
portfolios. It is for this reason that evaluating investments based on return potential
alone is not prudent. Investment managers should always keep overall portfolio risk in
mind. Often, they will focus on risk -adjusted returns in their analysis. The risk -adjusted
return refers to the ratio of percentage returns to the percentage risk (volatility). This
measure will help identify whether the amount of additional return that they expect by
purchasing a security is worth the incremental risk involved.
2.11. Figure 4 — Risk Adjusted Returns Over a 10-Year Period compares the different levels
of geographic diversification over a 10-year time frame. A 100% holding in Global
stocks would have produced the highest return (13.42%); however, except for the 100%
Canadian holding, it had the highest level of volatility during the period. The three
diverse mixes have lower levels of volatility. The increased returns come at a cost of
increased risk. If investors consider only the risk, they may miss out on potential returns.
If investors consider only returns, they could expose themselves to significant risk. If we
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Report FND-028-19
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look at the two together (risk -adjusted returns) we get a more complete picture of which
is the better investment, or how much the returns cost in terms of risk. Of the levels of
geographic diversification, an investor would have achieved a better risk -adjusted return
(1.37%) during this time period by using the 25% Canadian: 75% Global stock mix —
while it would have achieved slightly lower returns, it would have done so at a lower risk
exposure. The goal here is to maximize the upside while minimizing the downside.
Figure 4: Risk Adjusted Returns Over a 10-Year Period
RISK AND RETURN OF DIFFERENT EQUITY
MIXES OVER A 10-YEAR PERIOD
■ 100% Canadian ■ 100% Global 75% Canadian/25% Global
■ 50% Canadian/50% Global ■ 25% Canadian/75% Global
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-ADJUSTED RETURN
2.12. Many of the risks outlined above can be managed or mitigated depending on the
mechanism or avenue through which the municipality chooses to implement the PI
regime. These mechanisms and avenues will be examined in the options analysis
below.
Comparing Legal List vs Prudent Investor under ONE
2.13. ONE Investment's PI offerings will be a mix of its current Legal List options and two new
funds that will only be available to PI investors — a Global Equity fund and a Global
Bond fund. The sample allocation provided is a relatively conservative mix of 80%
bonds (fixed income) and 20% stocks (equities). Modelling data provided by ONE
Municipality of Clarington
Report FND-028-19
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Investment and conducted by AON Hewitt show that under these asset allocations at
the same risk level (-5.0% worst case annual return), the expected annual return for PI
is 1.3% higher than under legal list: 4.3% vs 3.2% respectively (Table 2).
Table 2: Modelling expected returns of ONE Offerings5
Money Market Portfolio 45%
Bond Portfolio 15% 20%
Unconstrained Global Bonds 60%
Universe Corporate Bond Portfolio 20%
Total Fixed Income 80% 80%
5 Modelling conducted by AON Hewitt and data provided by ONE Investment
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(Canadian) Equity Portfolio 1 20% 1 5%
Global Equity 1 15%
Total Equity 1 20% 20%
Expected return before value add 2.90% 3.80%
Expected value added by managers 0.30% 0.50%
Expected return 3.20% 4.30%
Expected worst case annual return --5.0% --5.0%
2.14. Because the two new PI offerings have an existing client base and track record, it is
possible to compare the actual past performance of a PI asset allocation to a
comparable legal list asset allocation. Comparing past performance of the funds (figure
5), over a five-year period from 2014 to 2018 the PI option would have outperformed the
legal list option in four of the five years. In 2015, the PI option would have outperformed
legal list by almost 7%. The average annual difference over the five years would have
been a 2.69% in favour of the PI option. However, it should be noted that in 2018 the
legal list option would have outperformed PI by 0.12%. This demonstrates that moving
to PI does not guarantee better returns year over year and that past performance is not
always a reliable indicator of future performance.
Municipality of Clarington Page 12
Report FND-028-19
Figure 5: Historical Rates of Return for ONE Investment Offerings (2014 - 2018) 6
2018
2017
2016
2015
2014
1.65%
1.95%
1.60%
-1.90`
-0.50%
5.70%
0.97%
0.95%
0.94%
0.32%
2.62`;6
10.76%
4.60%
19.10%
3.10%
6.23%
0.70%
1.17`r5
2.24%
15.29`r6
5.40%
0.90%
4.00%
4.37%
0.94%
2.29%
3.70 cA
0.29%
7.70%
23.10%
1.56%
B.S5%
1.11%
3.45%
9.35%
20.24%
9.90%
15.90%
6.94%
10.03%
Mvestment Allocations
PI 1 120.00%15.00%160.00%115.00%
LL 145.00%1 15.00%1 20.00%1 20.00`
2.15. Staff believes that when taking the projected future modelling results in conjunction with
the past performance comparisons, that the PI option offers greater opportunity for
increased returns while more effectively managing concentration risk.
3. PI Governance Options
3.1. Municipalities that decide to adopt the PI regime must transfer control and management
of their investments to an IB or JIB. There are three available options:
• Establish an independent investment board (IB);
Establish a joint investment board (JIB) with one or more municipalities with ONE
Investment; or
• Join an existing IB or JIB.'
6 Historical data provided by ONE Investment
This option is not currently available as to date the City of Toronto is the only municipality that has established an IB and it
is not currently prepared to have its 113 invest for other municipalities.
Municipality of Clarington Page 13
Report FND-028-19
Establish a Municipality of Clarington Investment Board
3.2. Under the Act a municipality can create its own IB if it has, in the opinion of the
treasurer, at least $100M in money and investments that it does not require
immediately, or $50M in net financial assets.
3.3. As the Municipality of Clarington, does not currently meet either of these requirements,
this option will only be briefly described.
3.4. An IB is a municipal service board as defined by the Act and is governed by the
procedural requirements of the Act (sections 194 to 202). All the required services
provided to a municipal service board would need to be provided to the IB (e.g.
committee secretary, closed meeting support).
3.5. As municipalities are required to delegate their investment powers to the IB, a high
priority must be placed on appointing qualified experts, which will come at a cost.
Additionally, as staff does not possess the in-house expertise required, it would be
necessary to acquire that expertise either on a full-time basis from an employee of the
municipality or seek expert advice externally. These cost factors are explored below,
along with the option of founding a JIB.
3.6. To date, the City of Toronto is the only municipality to establish its own IB. Toronto has
invested under the PI regime under the City of Toronto Act, 2006, for a full year before
the option of investing under the PI regime was extended to other municipalities that are
subject to the Municipal Act, 2001. The City has yet to transition all its investments to its
IB.
Municipality of Clarington
Report FND-028-19
Establish a Joint Investment Board
Page 14
3.7. As noted in the previous report to Council ONE Investment is the only organization
which is actively working to establish a JIB. While the establishment of another JIB may
be available in the future, this option does not exist today and hasn't been included in
the options analysis. Staff have been working with ONE Investment staff and seven
other municipalities, listed below, to become founding municipalities of a JIB.
Municipality of Clarington
Town of Whitby
County of Essex
Town of Bracebridge
District of Muskoka
Town of Innisfil
Town of Huntsville
Town of Aurora
City of Kenora
City of Thunder Bay
3.8. There are several factors to consider when evaluating the two available options which
are outlined in Appendix 3 — Detailed Comparison of Prudent Investor Options. This
analysis will focus on the cost structure. Establishing an IB or JIB can be costly both in
terms of the initial set-up and ongoing costs both direct and indirect. Costs include legal
fees, (J)IB member remuneration, fund manager research, consultants for investment
expertise and other investment services (e.g. asset allocation studies), committee
secretary, closed meeting support.
3.9. Table 3 shows the costs incurred by both the City of Toronto and ONE Investment to
date. ONE Investment has not yet established its JIB but expects to do so by April 2020.
The City of Toronto spent over $1.1 M setting up its IB and is still incurring set up costs.
ONE Investment has spent approximately $1.9M to date setting up its JIB — this higher
number is due to the coordination and legal complexity of dealing with many
municipalities; however, once it is set up the ongoing maintenance costs are expected
to be lower and will be shared among all municipalities that invest under the PI regime
through ONE JIB.
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Report FND-028-19
3.10. Expert advice would also be required to guide staff and Council on appropriate
investment strategies. Additionally, the staff and Council would require expert
investment advice and potentially legal advice when developing an investment policy.
These items would add to the set-up costs of an IB. ONE Investment has received an
exemption from the Ontario Securities Commission (OSC) that allows them to provide
s Costs provided by Director, Capital Markets - City of Toronto
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Report FND-028-19
that expert advice. ONE Investment has also hired a Chartered Financial Analyst with
over 25-years of experience in institutional investing.
3.11. ONE Investment has prepared a report (Appendix 4) detailing the process for
establishing ONE JIB, the roles of the municipality and ONE JIB, and the benefits and
risks of being a founding municipality. The document notes that many of the risks are
mitigated through processes and procedures developed for ONE JIB.
Joining an Existing IB or JIB
3.12. At present this option is presented for information purposes only because there are no
existing IBs or JIBs through which a municipality can invest. 9
Risks and Potential Drawbacks of the Prudent Investor Regime
3.13. The new governance structure for the PI regime has some associated risks. A
municipality that passes a by-law to adopt the PI regime cannot revoke that by-law. This
means that municipalities who adopt the PI regime cannot go back to investing money
that is not required immediately in accordance with the legal list unless a regulation
authorizing the municipality to do so is made by the Lieutenant Governor in Council.
3.14. Additionally, a municipality must delegate its powers to investment money not required
immediately to an IB or JIB. As per the Regulation, Councillors and municipal staff
cannot be appointed as members of the IB or JIB, except for treasurer(s) provided that
the treasurer(s), does/do not make up more than 25% of the members of the IB or JIB.
3.15. These control risks, however, are mitigated by the investment policy statement (IPS),
which allows Council to define its "objectives for return on investment and risk
tolerance" and its "need for liquidity." Council must review and, if necessary, amend the
IPS at least once per year. Through the IPS, Council maintains strategic control over its
investments.
3.16. If Council decides to proceed with the PI regime, staff will need to determine what
constitutes "money that it does not require immediately" and control and management of
that money must be given to the IB or JIB for the purposes of investing. Any money that
remains with the municipality will remain under the control and management of the
' The City of Toronto is not currently prepared to have its 113 invest for other municipalities.
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municipality. The City of Toronto, in its investment policy, established a time -based
threshold of 18 months to determine the money that it does not require immediately.10
3.17. There is no guarantee of better returns as a result of investing under the PI regime. A
broader array of investments exposes the investor to a broader array of risk and past
performance is not indicative of future results. Moreover, there is no assurance that
better performance will offset the initial cost of transitioning to the PI regime and any
ongoing costs after a municipality adopts the PI regime.
3.18. Under the PI regime the municipality gives up management and control investing money
not required immediately. The municipality is relying on the expertise, experience, good
faith and diligence of ONE JIB and ONE Investment staff. Municipal staff believe that
these individuals have the requisite experience and expertise, and such individuals are
required to act in good faith and in the best interests of the municipality.
3.19. Staff believe, based on the available evidence, that moving to the PI regime is the
preferred course of action.
4. Steps to Adopt the PI Regime as a Founding Municipality via
ONE Joint Investment Board (ONE JIB)
4.1. The Municipality of Clarington is one of several municipalities which are working on
forming a joint investment board ("JIB") in order to mutually enter into adopt the Prudent
Investor Standard. It is not financially feasible for the Municipality to establish its own
investment board nor are there any other JIBs being contemplated.
4.2. The combined balances from the above municipalities would meet the $100 million
threshold for establishing the ONE JIB. Once established other municipalities may,
subject to the JIB agreement, join the ONE JIB.
10 Statement of Investment Policy and Procedures for the City of Toronto Investment Funds.
https://www.toronto.ca/legdocs/mmis/2018/ex/bgrd/backgrou ndfile-116242.pdf
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4.3. The Municipality of Clarington will pass an authorizing by-law ("Authorizing By -Law"),
the passage of which will be co-ordinated with the passage of an Authorizing By -Law by
the other founding municipalities.
4.4. The Authorizing By -Law will authorize:
(i) the entering into of an initial formation agreement establishing ONE JIB;
(ii) the completion of the Municipality of Clarington's Municipal Client Questionnaire;
(iii) the adoption of the Municipality of Clarington's Investment Policy Statement; and
(iv)the entering into of an agreement with ONE JIB and the other founding municipalities
under which ONE JIB will invest the money and investments of the founding
municipalities under the PI regime and of other municipalities that may subsequently
agree to invest through ONE JIB (the "ONE JIB Agreement").
4.5. After all the founding municipalities have passed an Authorizing By -Law and signed and
completed the various documents authorized by such by-law, ONE JIB will hold a
meeting and sign the ONE JIB Agreement. Thereafter, each founding municipality can
pass its prudent investor enabling by-law (the "Prudent Investor Enabling By -Law") to
officially opt into the PI regime as at the effective date set out in its Prudent Investor
Enabling By -Law.
4.6. It is anticipated that an Authorizing By -Law will be passed by all the founding
municipalities before the initial ONE JIB meeting in mid -March 2020. After the ONE JIB
meeting, Council can pass its Prudent Investor Enabling By -Law in May 2020.
5. Concurrence
Not Applicable.
6. Conclusion
6.1. It is respectfully recommended that given the opportunity for risk reduction and greater
returns, the PI regime is an opportunity that the Municipality should pursue. ONE
Investment is in the process of establishing ONE JIB, so the costs of set-up to the
Municipality are greatly minimized.
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6.2. The Municipality of Clarington, through cost sharing with other municipal investors,
would have access to the necessary expert investment and municipal finance advice.
Additionally, the ongoing maintenance costs would be shared with all municipal
investors making it an affordable option.
6.3. Being a founding municipality would give the Municipality access to benefits that it
would not get if it waits to adopt the PI regime until after ONE JIB is established. There
is a trade off as the Municipality would be an early adopter and would not have the
benefit of other municipalities' experiences with the adoption process.
Staff Contact: Trevor Pinn, CPA, CA, Director of Finance / Treasurer, 905-623-3379 x.2601 or
tpinn@clarington.net.
Attachments:
Attachment 1 — Impacts of Diversification on Risk
Attachment 2 — Detailed Comparison of Prudent Investor Options
Attachment 3 — ONE Investment Detailed Update
Interested Parties:
The following interested parties will be notified of Council's decision:
6.4. Municipal Finance Officers Association of Ontario (MFOA)
6.5. Association of Ontario Municipalities (AMO)
6.6. ONE Investment
Appendix 1 — Impacts of Diversification on Risk
The following analysis, using data up to February 2019, demonstrates the potential
benefits of a diversified approach in the stock markets. The analysis uses the S&P/TSX
composite index as a proxy for the performance of the Canadian stock markets and the
MSCI World index as a proxy for the performance of the Global stock markets in
developed countries. The analysis assumes four different asset mixes (100% Canadian;
100% Global; a 75:25 Canadian to Global ratio; a 50:50 ratio; and a 25:75 Canadian to
Global ratio) over three different time periods (10, 20, and 40 years). For each asset mix
and time period, the analysis calculates total returns as an annualized percentage, and
volatility' (a common risk measure) as an annualized percentage.
The 10-year time frame
In the 10-year time frame, the 100% Canadian mix (S&P/TSX) experienced the lowest
returns at the highest levels of risk. The 100% Global mix (MSCI World) experienced
the highest returns and the second highest levels of risk. As expected, the three
diversified asset mixes experienced returns somewhere between the two with greater
returns showing for those with a heavier weighting of the Global index. However, all
three diversified asset mixes experienced less volatility (risk) during the time -period with
the 50:50 asset mix showing the least volatility. The 25:75 Canadian to Global mix yield
the highest risk -adjusted return (return divided by risk) at 1.37. For the purposes of
comparing to other time -periods, it should be noted that during this 10-year time frame
the market did not experience any extreme economic events.
Table 1: Risk and return of different equity mixes over a 10-year period
(Annualized
100%
100%
75%
50%
25%
percentages)
Canadian
Global
Canadian /
Canadian /
Canadian /
25% Global
50% Global
75% Global
Return
10.21
13.42
11.10
11.94
12.71
Volatility
10.77
10.08
9.66
9.13
9.28
Risk -adjusted
0.95
1.33
1.15
1.31
1.37
return
The 20-year time frame
In the 20-year time frame, the 100% Canadian mix experienced both the highest level of
returns and the highest level of risk. The 100% Global mix experienced the lowest
returns and was in the middle of the asset mixes in terms of risk. In terms of the
diversified mixes those that favoured Canadian stocks offered greater returns but also
greater levels of risk, whereas those that favoured Global stocks produced lower returns
at a lower risk. During this period, the asset mixes that favoured Canadian stocks
offered the greatest risk adjusted returns with the 75:25 Canadian to Global mix offering
Volatility is measured by standard deviation throughout this document
- 1 -
a slightly higher risk adjusted return (0.541) than the 100% Canadian mix (0.538). It
should be noted that this period covers the 2008 financial crisis, one of the most
significant market collapses since the Great Depression. Additionally, the Global index
incorporates US stocks, which were heavily impacted by the 2008 financial crisis.
Table 2: Risk and return of different equity mixes over a 20-year period
(Annualized
100%
100%
75%
50%
25%
percentages)
Canadian
Global
Canadian /
Canadian /
Canadian /
25% Global
50% Global
75% Global
Return
7.37
4.25
6.70
5.96
5.14
Volatility
13.69
11.85
12.37
11.57
11.38
Risk -adjusted
0.54
0.36
0.54
0.52
0.45
return
The 40-year time frame
In the 40-year time frame, the 100% Canadian mix experienced the lowest returns and
the highest levels of risk. The 100% Global mix experienced the second -highest level of
returns and was in the middle of the asset mixes in terms of risk. Of the three diversified
mixes the 25:75 Canadian to Global mix offered both the greatest returns and the
lowest level of risk. The mixes that leaned more heavily on Global stocks offered greater
returns and lower levels of risk. The diversified mixes that were weighted equally or
more heavily toward Global stocks yielded greatest risk adjusted returns. In addition to
the financial crisis in 2008, this period also encompasses the dot-com bubble of the mid
1990s to early 2000s, and the high interest rates in the 1980s and volatile oil prices of
the 1970s and 80s.
Table 3: Risk and return of different equity mixes over a 40-year period
(Annualized
100%
100%
75%
50%
25%
percentages)
Canadian
Global
Canadian /
Canadian /
Canadian /
25% Global
50% Global
75% Global
Return
9.38
9.80
9.64
9.79
9.85
Volatility
15.35
12.83
13.78
12.76
12.43
Risk -adjusted
0.61
0.76
0.70
0.77
0.79
return
What we can see from this analysis is that, through each time period, Global
diversification generally offered a lower level of risk than relying on Canadian stocks
alone. Apart from the 20-year time period, Global diversification also delivered greater
rates of return and risk -adjusted returns. The 20-year time period demonstrates that
significant economic events in a market can have a noticeable impact on returns but
that the level of diversification still offers a lower overall exposure to volatility.
-2-
Performance by Asset Class
(percent, CAD basis)
14
AL MSCI World
13
AL 25% TSX1T5% MSCI World
1 j 50% TSX150% MSCI World
11 AL 75% TSX125% MSCI World
1 AL &PrrSX
9
Last 40 }ears
■ Last 20 Years
A Last 10 Years
25% TSXf75% MSCI World
MSCI World
75% TSXl2596 MSCI 451orld
50% T-SMO MSCI World &PITS
o
&PjSX
75% TSXl25% MSCI World
6 50% TSX150% MSCI World
5 25% TS7{175% MSCI World
4 MSCI World
9 10 11 12 13 14
Volatility (annualized %)
Source: Bloomberg, Guardian Capital
-3-
15 1
Appendix 2 — Detailed Comparison of PI Options
Control ove
investments
•
•
High level of
control over
narrow range
of investments
Limited ability
to set own risk
tolerance,
otherwise
dictated by
Province
•
•
•
Strategic control
through investment
policy
Full control over short-
term investments
through definition of
money not required
immediately
Ability to set own risk
tolerance
•
•
•
•
Strategic control through
investment policy
Partial control over
governance through rotating
term for treasurer on ONE
JIB and committees
Full control over short-term
investments
Ability to set own risk
tolerance
Cost
•
Status quo
•
Costs of establishing
•
Maintenance costs shared
are high. Toronto's
among all members through
budget during their set-
ONE fees.
up year was —$560K.
•
Average fees are slightly
•
Ongoing maintenance
higher than legal list as
of the Toronto IB is
manager fees for PI products
estimated at $1 M
are higher due to complexity
annually.
of offering.
•
Fees are likely to be
•
Fees are charged to
slightly higher than legal
investment funds so there
list due to greater
are no direct budget
product complexity and
implications.
required level of active
management.
•
Establishing an IB and
ongoing maintenance
would have a direct
budget impact.
Risks
•
Lower
•
No alternative IB / JIB
•
JIB agreements can make it
potential
at present if IB fails or
slightly more difficult to
return on
proves too costly to
switch to other IB or JIB
investment
justify over long-term
option in future; though ONE
•
Concentration
has developed clear
risk
procedures for founding
municipalities to exit the JIB
•
No alternative IB / JIB at
Opportunities • N/A • Potential for improved • Potential for risk -adjusted
risk -adjusted returns returns
• Fee rebates for founding
municipalities
• Expert advice of an CFA
charterholder is a part of the
turnkey solution
• ONE has developed IPS
templates and investment
plan templates that are in full
compliance with the
Municipal Act.
• Set up costs have already
been absorbed by ONE
Investment.
Feasibility • High • Moderate / Low • High
APPENDIX 3
N V E S T M E N T
Update on ONE Investment's Turnkey Solution of Prudent
Investor
13422209.2
Contents
The ONE Investment Turnkey PI Solution.................................................................................. 3
EstablishingONE JIB................................................................................................................. 3
Roles and Responsibilities...................................................................................................... 4
Council................................................................................................................................ 4
MunicipalStaff.................................................................................................................... 5
ONEInvestment.................................................................................................................. 5
ManagingInvestments............................................................................................................... 6
Roles and Responsibilities...................................................................................................... 6
Council................................................................................................................................ 6
ONEJIB.............................................................................................................................. 7
ONEInvestment.................................................................................................................. 8
MunicipalStaff...................................................................................................................10
Figure 1:Typical Roles and Responsibility of ONE's Turnkey PI Solution* .............................12
Benefits and Risks of a Founding Municipality..........................................................................13
Benefits of Founding Municipality Status...............................................................................13
Risks of Founding Municipality Status...................................................................................13
Appendix A - Investment Advisory Committee Biographies.......................................................15
Appendix B - STEPS TO ESTABLISH ONE JOINT INVESTMENT BOARD (ONE JIB) ............18
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13422209.2
The ONE Investment Turnkey PI Solution
ONE Investment is a non-profit corporation founded by LAS (a corporation of the Association of
Municipalities of Ontario) and CHUMS Financing Corporation (a subsidiary of the Municipal Finance
Officers' Association of Ontario). Its purposes are to:
• "facilitate investment by municipalities and public sector bodies in investment products and
vehicles
• to make available, and lower the cost of, such products and services in a manner consistent
with the investment objectives of such municipalities and public sector bodies."
ONE Investment has long offered investment options for municipalities that are compliant with "legal list"
requirements. ONE Investment has more than 25 years experience serving the municipal sector.
Two challenges noted by the Institute for Municipal Finance and Governance in its report on Ontario's
prudent investor (PI) standard are that it:
(1) is costly, requiring outside expertise and additional institutional layers for management and
monitoring, and,
(2) requires expertise on the part of public officials and a more "hands on" approach to investing.
It is ONE Investment's goal to meet its purposes for municipalities who wish to partake in the PI regime,
to reduce costs by pooling funds and to facilitate investing in a manner that is consistent with the
municipality's objectives. To do so, it is in the process of developing standardized templates and working
through the complex legal issues and governance structures to develop processes that will be simple,
understandable and flexible for municipalities while also meeting the requirements of the legislation.
The following sections of the document will detail the planned processes, roles and responsibilities for:
(1) establishing the ONE Joint Investment Board (ONE JIB)
(2) ongoing management of investments with ONE JIB
Establishing ONE JIB
In order to take advantage of the potential opportunity afforded by the PI regime, municipalities that meet
the financial thresholds set out in O. Reg. 438/97 (Regulation) can establish an authorized investment
board, like ONE JIB, through which they can invest their money that they do not require immediately.
After ONE JIB is established by the founding municipalities (Founding Municipalities) and after they fulfill
other requirements which include adopting an investment policy statement (IPS) and entering into an
agreement with ONE JIB and all of the Founding Municipalities pursuant to which ONE JIB agrees to
invest on their behalf under the PI regime, Founding Municipalities can pass a by-law to opt into the PI
regime under section 418.1 of the Municipal Act, 2001 (Act). The PI regime will apply to each Founding
Municipality as of the effective date set out in its by-law. This by-law is irrevocable: once a municipality
passes the by-law, it will not have the ability to opt out of the PI regime and go back to the Legal List (LL)
for the investment of its money that it does not require immediately without a regulation by the Lieutenant
Governor in Council approving the transition.
Once the effective date has passed and Founding Municipalities are subject to the PI regime, any future
investment of monies not required immediately will be made through ONE JIB.
ONE Investment cannot establish an investment board (IB) or a joint investment board (JIB) on its own,
as the Regulation only permits municipalities meeting the prescribed financial thresholds to establish an
IB or JIB. To establish ONE JIB, ONE Investment is actively recruiting Founding Municipalities who will
jointly establish a JIB that will act as the cornerstone for offering all municipalities in Ontario an affordable
cost -shared PI solution. Under the Act, all municipalities whether or not they meet the prescribed financial
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13422209.2
thresholds are eligible to delegate their investment powers to previously established IBs or JIBs allowing
them to opt into the PI regime.
The following section details how municipalities can become Founding Municipalities and help establish
ONE JIB. It is organized by roles and responsibilities. See appendix B for the steps to establish ONE JIB,
organized chronologically.
Roles and Responsibilities
Council
Council in this instance refers to a municipal council considering jointly establishing ONE JIB as a
Founding Municipality. Council's role in establishing ONE JIB as a Founding Municipality is important
because the Founding Municipalities are the decision -makers with the authority to provide input in respect
of the terms and conditions of the agreement establishing ONE JIB and the agreement allowing ONE JIB
to invest under the PI regime on behalf of the Founding Municipalities and of other municipalities that may
subsequently agree to invest through ONE JIB (ONE JIB Agreement). Council's primary role in the
process created by ONE Investment is to formally establish ONE JIB.
Role
Responsibility
• Enter an Initial Formation Agreement
Pass the "Authorizing By-law" which
establishing ONE JIB
authorizes: (i) the entering into of the
• Complete the Municipal Client
Initial Formation Agreement; (ii) the
Questionnaire
completion of the Municipal Client
• Adopt an Investment Policy Statement
Questionnaire; (iii) the adoption of an IPS;
(IPS)
(iv) the approval of a draft investment
• Approve a draft investment plan
plan; and (v) the entering into of the ONE
• Enter into the ONE JIB Agreement
JIB Agreement
• Formally opt into the PI regime
Pass the Prudent Investor Enabling By-
law
Passing the Authorizing By-law and the Prudent Investor Enabling By-law
Municipalities will be able to enter into the Initial Formation Agreement establishing ONE JIB, adopt their
IPS, enter into the ONE JIB Agreement and fulfill other requirements through an Authorizing By-law. ONE
Investment has been consulting with legal experts to draft a single Authorizing By-law document that is
compliant with legislation.
Once council and staff are comfortable with the guidelines
and parameters they have set out in their IPS (see section
below on Managing Investments for more details), council
can pass the Authorizing By-law to establish ONE JIB. This,
however, has one important caveat; the Authorizing By-law
authorizes the entering into of an agreement with other
Founding Municipalities to establish ONE JIB. The other
Founding Municipalities must be prepared to enter into the
agreement at that time as well and the total of all municipal
money or investments not immediately required, in the
opinion of the treasurers, at that time must be at least $100
million (collectively).
Council are the ultimate decision -
makers in becoming a Founding
Municipality that establishes ONE JIB.
Being a Founding Municipality for
ONE JIB is a significant decision to
lead the sector not only as an early
mover on PI investing but in
establishing a framework for the
benefit of all municipalities in Ontario
In order to opt into the PI regime council must pass a Prudent Enabling Investor By-law which provides
that section 418.1 of the Act applies to the municipality.
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4
Municipal Staff
Municipal staff will play an integral role in guiding council throughout the process of opting into
the PI regime.
Role
Responsibility
• Perform due diligence to ensure Council
Ongoing updates and reports to council
has the information it requires and
recommendations that it can consider on:
o the PI regime
o the ONE Investment PI option
• Prepare the Authorizing By-law based on
Present the Authorizing By-law to Council
the template provided by ONE Investment
• Prepare the Prudent Investor Enabling
Present the Prudent Investor Enabling By -
By -law based on the template provided by
law to Council
ONE Investment
While ONE Investment will provide regular updates on the
progress towards establishing ONE JIB, municipal staff will
need to conduct its own independent due diligence.
Once a council directs staff to work with ONE Investment to
become a Founding Municipality, ONE Investment will
provide template copies of all necessary documentation to
and work with staff to prepare an Authorizing By-law and a
Prudent Investor Enabling By-law. During this period,
municipal staff will also be working with ONE Investment to
develop a draft IPS (further details in section on Managing
Investments) which will be required before the Authorizing
By-law can be passed.
ONE Investment
ONE Investment's PI turnkey services
are designed to assume as much as
possible of the municipality's
workload. ONE Investment takes
care of the administrative work
while leveraging staff and council for
their unique municipal insights for
customization. All key decisions
remain with the municipality
ONE Investment's role through the process is to aid and provide information. ONE Investment began
conducting its research and analysis of the PI regime when the legislation was first introduced in late
2016 and has developed a lot of knowledge and expertise in PI implementation during that period.
Role
Responsibility
• To support staff and Council through the
0 Provide ongoing updates and reports to
due diligence process
staff on the progress of establishing and
organizing ONE JIB.
• To facilitate the Authorizing By-law
0 Develop and provide templates to staff
process by providing a standardized,
0 Provide municipal staff advice in
legislatively compliant template
customizing templates
• To facilitate the Prudent Investor Enabling
0 Ensure legal compliance of
By-law process by providing a
documentation
standardized, legislatively compliant
template
ONE Investment's responsibilities will leverage the knowledge and expertise acquired over the last three
years of performing its due diligence on PI - helping staff guide council through the process of
establishing ONE JIB and opting into the PI regime. As such, ONE Investment is available to answer
[Publish Date] 5
13422209.2
questions that may arise during the process whether they be related to due diligence or process and
implementation expertise. ONE Investment with legal counsel has developed legislatively compliant by-
laws and IPS templates.
As part of its support for municipalities during this process, ONE Investment will consult with legal counsel
to ensure that the documentation is customized to meet the needs of the municipality and is compliant
with legislation before the documentation is submitted to council for approval.
Managing Investments
Once ONE JIB is established and the Founding Municipalities have passed the Prudent Investor Enabling
By-law, responsibility for managing the day-to-day investments of the municipality will be the responsibility
of ONE JIB with assistance from ONE Investment staff and municipal staff; however, council retains
ultimate control over the strategic direction of its investments through the IPS. The following section will
detail the roles and responsibilities of each party in the ongoing management of investments.
Roles and Responsibilities
Council
Role
Responsibility
• To provide overall strategic direction on
0 To direct municipal staff to complete the
investments
Municipal Client Questionnaire
• To adopt and maintain an IPS and to
review it at least annually, and update it
as necessary
Council establishes and maintains control of the strategic direction of its investments through
development of its IPS. The IPS is a requirement under section 18 of the Regulation.
Subsection 18(2) of the Regulation details the requirements of the IPS which are:
- The municipality's objectives for return on investment
- The municipality's risk tolerance
- The municipality's need for liquidity including, for greater certainty, the municipality's anticipated
needs for funds for planned projects and the municipality's needs to have funds available for
unanticipated contingencies
In addition, subsection 18(3) allows municipalities to include "other requirements with respect to
investment matters that council considers to be in the interests of the municipality."
Subsection 18(4) requires that council review the IPS, and
update it if necessary, at least annually. This ensures that
the IPS remains aligned with council priorities and
provides council with the flexibility to update it at any point
should circumstances require.
ONE Investment has prepared an IPS template and will
provide detailed guidance on all decision points in a future
update.
As mentioned in the previous section, Establishing ONE
JIB, a Founding Municipality's council will adopt its IPS by
enacting the Authorizing By-law.
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The Investment Policy Statement
(IPS) is a document required by
legislation that ensures that a
municipality's funds are invested to
meet its specific needs at its
accepted level of risk. It is through
this policy that council retains
ultimate control of its investments.
0
ONE JIB
A Joint Investment Board is a "municipal service board that is established under section 202 of the Act by
two or more municipalities for the purposes of enabling municipalities to invest in accordance with the PI
regime'. ONE JIB is a Joint Investment Board that is
established by the Founding Municipalities, in accordance ONE JIB will have a representative
with Part II of the Regulation. municipal perspective through the
ONE JIB will be primarily comprised of highly qualified
independent investment professionals. As per the
Regulation, no councillors are permitted to sit on ONE JIB.
As stipulated in the Regulation, the only staff allowed to sit
on an IB is the municipal treasurer or, in the case of a JIB,
several treasurers provided they do not comprise more
than 25% of the JIB.
appointment of municipal treasurers.
NOTE: As per the Regulation, no other
members of municipal staff or
councillors are permitted to sit on ONE
JIB.
See appendix A for a description of the inaugural ONE JIB and brief biographies of its proposed
members.
Role
Responsibility
• To exercise the municipality's investment
Establishing and maintaining an
powers in a manner that is compliant with
investment plan that is informed by, and
the relevant section (418.1) of the Act.
in compliance with, the municipality's IPS
(Investment Plan). This includes
reviewing the Investment Plan to ensure
alignment following a Council IPS review
(at least once per year).
• Providing an annual report to Council that
is compliant with the Regulation
• Making decisions regarding investment
managers
• Reporting any breaches to the
municipality
As per the Regulation, the Investment Plan deals with how ONE JIB will invest the municipality's money.
Consistent with legislation, the municipality's Investment Plan will be developed with consideration for:
(1) General economic conditions
(2) The possible effect of inflation or deflation
(3) The role that each investment or course of action plays within the municipality's portfolio of
investments
(4) The expected total return from income and the appreciation of capital
(5) Needs for liquidity, regularity of income and preservation or appreciation of capital.
(6) Any other criteria that are relevant to the circumstances
See table 5 for an example of what an investment plan will include.
10. Reg. 438/97 Section 13.
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13422209.2
Table 1: Proposed sections of the ONE JIB Investment Plan
Section
Description
Purpose of the Investment Plan
This section establishes how ONE JIB will invest the municipality's
money that it does not require immediately (Long -Term Funds)
Responsibility for the Investment
This section will detail the actions in an Investment Plan and
Plan
provide detail for who will be responsible for execution
Custodian
This section will detail the financial institution(s) that hold the
municipality's investments
Portfolio Overview
This section will detail the objectives, risk tolerance and liquidity,
and time horizon for investments on an account -by -account basis.
Investment Goals and Objectives
This section will provide a more detailed account of how the IPS
has shaped the decisions within the Investment Plan, including
the account structure, asset allocations, and asset mixes
Constraints
This section will detail any additional constraints placed on
investments and may authorize the consideration of Environment,
Social, and Governance (ESG) factors and securities lending
ONE Investment External
This section will provide details of the chosen investment
Investment Managers
managers for assets the municipality will invest in
Rebalancing Provisions
This section will detail the processes and mechanisms for
rebalancing the portfolio should interest, dividends paid, or a
change in the value of securities alter the overall asset allocation
from the Investment Plan.
Additionally, ONE JIB is also responsible for providing an annual report to municipalities. This report will
contain, at minimum:
A statement about the performance of the municipality's portfolio of investments during the period
covered by the report;
A statement by the treasurer of the municipality as to whether or not, in the opinion of the
treasurer, all investments are consistent with the municipality's IPS, and the Investment Plan.
Such other information that the council may require or that, in the opinion of the treasurer, should
be included.
This will be in addition to the ongoing detailed performance reporting and communication provided by
ONE Investment.
ONE Investment
ONE Investment is assisting in the establishment of ONE JIB to provide access to the PI regime
for municipalities that do not qualify for the standard on their own or for municipalities that do not
wish to incur the up front and ongoing maintenance costs associated with the prescribed investment
governance model on their own.
Role
Responsibility
• Hands-on Investment Advice & Support
0 Investment advice
• Support ONE JIB, including providing
secretary functions
• Assist municipalities in writing their IPS
• Support ONE JIB in creating municipal
Investment Plans
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13422209.2
• Provide robust reporting to municipalities
on investment performance
• Investment Education and Training
Provide advice on how to integrate the
municipality's investment program with all
facets of municipal finance
• ONE Investment will build on education
and training currently delivered through
MFOA and LAS
• Training has included courses on
investment basics, the impact of interest
rate changes on bond prices as well as
municipal finance training on linking
investment programs to capital budgets
• ONE Investment will meet with municipal
finance staff to discuss investment
options
ONE Investment is designed to augment municipal staff by pooling investor resources to make available
the investment and municipal finance expertise municipalities require for decision making purposes. ONE
Investment will accomplish this in two ways: (1) by relieving some of the burden of the technical workload
from staff through hands-on investment advice and support, and (2) by ensuring municipalities
understand the municipal finance implications of investment decisions through education and training.
ONE Investment has received an exemption from the Ontario Securities Commission (OSC) to enable it
to perform certain advisory and other functions without registration. This enables ONE Investment to
provide expert advice to municipal investors, bridging the worlds of municipal finance and financial
markets. As few municipalities have the resources to hire in-house expertise or contract an expert
consultant, ONE Investment is developing a delivery model whereby a CFA charterholder and a municipal
finance expert will be available to provide advice to municipal clients — a solution that is made affordable
to all through pooled resources.
It would usually be the case that support for a joint municipal service board would be the responsibility of
the municipalities establishing the joint board. In the case of ONE JIB, significant and specialized advice
will be required to support its activities. Support can range from arranging and running meetings,
preparing reports, crafting Investment Plans, obtaining expertise to advise ONE JIB when needed,
remunerating members and keeping participating municipalities fully informed of ONE JIB activities and
decisions. It is assumed that municipalities considering investing under the PI regime would find it difficult
to provide this level of support to ONE JIB. Consequently, ONE Investment fully expects to provide these
various support functions to ONE JIB and will enter into agreements with participating municipalities to
permit it to do so.
Under ONE Investment's turnkey PI solution, ONE Investment will be the municipality's primary service
provider in addition to providing all necessary support functions for ONE JIB. In its role as primary service
provider for the municipality ONE Investment will design the composition of ONE JIB in accordance with
the legislation. ONE Investment has already developed and initiated the recruitment process for the
independent investment experts who will sit on ONE JIB and will also initiate the recruitment of treasurers
from the Founding Municipalities who will also sit on the board. However, the Founding Municipalities will
decide who are the members of ONE JIB. As part of the turnkey solution, ONE Investment will make
recommendations for the initial members of the board of ONE JIB and will support future recruitment. As
noted previously the Regulation limits the participation of treasurers on the board of ONE JIB to no more
than 25% of the board composition.
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13422209.2
In its duty as primary service provider to municipal clients, ONE Investment will work with municipalities to
develop drafts of their IPS. To do so, ONE Investment will work with municipal council and staff to
complete a Municipal Client Questionnaire. ONE Investment will then use the responses provided in the
questionnaire to pre -populate a draft of the IPS that is aligned with the municipality's goals and level of
risk tolerance. ONE Investment will provide ongoing advice and support to municipal council and staff as
they work through ensuring the draft IPS is truly reflective of the municipality's needs.
Once the IPS is approved, ONE Investment will work with staff on developing a draft Investment Plan that
is reflective of the municipality's IPS. As municipal investing authority is delegated to ONE JIB, it is
ONE JIB who will make the final adjustment and have final approval of the municipality's Investment Plan.
Once the plan is finalized, ONE Investment will fulfill the role of implementing the plan, as directed by
ONE JIB.
On an ongoing basis, ONE Investment will act as a primary point of contact for clients and ensure that
any necessary communication with ONE JIB is established in a timely fashion. It will fulfill all monitoring
and reporting requirements. This includes but is not limited to:
• regular reporting to the municipality
• reporting to the Ontario Securities Commission
• regular reporting to ONE JIB on client holdings
• monitoring the performance of the Investment Manager
ONE Investment will also coordinate with municipal staff in preparation of the annual investment report to
council. It will compile the information required for ONE JIB to provide appropriate commentary, and it will
work with the municipality's treasurer to incorporate the treasurer's opinion into the annual investment
report.
See Figure 2 for a detailed flow -chart of the roles and responsibilities and how ONE Investment manages
all the coordination work required under the PI regime.
Municipal Staff
As noted in the previous section, ONE Investment provides all the support functions for ONE JIB. The
municipal staff's role in ONE's turnkey PI solution is to work with ONE Investment staff to provide council
and ONE JIB with the information they require to make key decisions. Staff will also be required to report
on investments to council.
Role
Responsibility
• Ensure Council and ONE JIB have the
0 Work with Council to complete the
information they need to perform their
Municipal Client Questionnaire
roles under the PI regime.
0 Work with ONE Investment to develop a
draft IPS
• Work with Council to modify the draft IPS
so that Council can formally approve the
IPS.
• Work with ONE Investment on the draft
Investment Plan to ensure that it is
aligned with the IPS.
• Reporting on investments to council
0 Provide treasurer's opinion for ONE JIB's
annual report
• Notify Council a soon as it learns of any
investments or investment issues that, in
the treasurer's opinion, fail to comply with
the IPS.
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Role Responsibility
Ensure Council and the ONE JIB hove the information they need to perform their roles under PI.
The responsibilities entailed in this role include providing the information council requires to make
decisions regarding its IPS and using its knowledge of the IPS and council's objectives to help develop
the initial draft of the Investment Plan.
This will entail working with council and ONE Investment to complete the Municipal Client Questionnaire
annually. Once the questionnaire is complete, staff will work with ONE Investment on the development
(or revision) of a draft IPS. Once the draft IPS is reflective of the Municipal Client Questionnaire,
municipal staff will work with council to make any refinements necessary for council to approve the
adoption of its IPS.
Once the IPS is adopted and shared with ONE Investment and ONE JIB, municipal staff will work with
ONE Investment to develop a draft Investment Plan. As outlined in the previous section, ONE Investment
will carry out the majority of the activities in drafting the Investment Plan for ONE JIB, but municipal staff
will provide support where necessary to ensure interpretive alignment with the municipality's IPS. ONE
JIB will have ultimate responsibility for approval of municipal Investment Plan.
Reporting on investments to council
Additionally, municipal staff will play an ongoing role in reporting on investments to council. Outside of
any council direction to report on investments, the treasurer has a legislative role in reporting on
investments. In particular, the treasurer is required to provide an opinion for the annual investment report.
This opinion will include a statement on whether the investments are consistent with the municipality's
IPS and Investment Plan. This is similar to the treasurer's opinion required under the current legal list
regime.
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Figure 1:Typical Roles and Responsibility of ONE's Turnkey PI Solution*
Client
Questionnaire
Draft Investme
Policy
Investment <
Policy
Statement (IPS)
Legend
= Process
= Document
= Reporting
<>
= Advice !
Support
Reporting to �eporting to
0 E JIB on Municipalifies
Client Holdings on Breaches
*Division of responsibilities between council and staff may vary by municipality
Responsibilities
0 = Council
0 = Municipal Staff
* = ONE JIB
= ONE Investment
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Benefits and Risks of a Founding Municipality
The PI standard for municipalities in Ontario is, other than in the case of the City of Toronto, untested.
The legislation for establishing an IB or JIB to take advantage of PI is complex and requires a lot of
upfront work with only the City of Toronto to learn from. Once a municipality puts in the effort to clear
these obstacles (with ONE Investment's guidance and assistance), and passes a by-law opting into the PI
regime, the municipality can take advantage of a much wider array of investments for the money that it
does not require immediately, but the municipality also does not have the option to revoke the by-law to
revert to the Legal List legislation in respect of such money. The Lieutenant Governor in Council does
have the power to make a regulation to have the PI regime no longer apply to a municipality.
ONE Investment firmly believes that all of Ontario's municipalities making investments will eventually opt
into the PI regime. Those who lead the sector and opt in early are demonstrating their commitment to
leading the sector by working to establish a governance structure that all other municipalities could use to
maximize their risk -adjusted returns in the future.
Benefits of Founding Municipality Status
To reward Founding Municipalities for being first movers and taking a leadership role in the sector, ONE
Investment is offering a few incentives.
Fees reduction
The first incentive involves a reduction in basis points in the fee charged by ONE Investment. The
reduction of 2 basis points in the fee charged by ONE Investment on all prudent investor offerings for a
period of at least 10 years.
ONE JIB Representation
Additionally, the two municipal treasurer representatives on ONE JIB will be selected from the Founding
Municipalities; Founding Municipality treasurers will serve rotating two-year terms so each Founding
Municipality will eventually have its treasurer as a member of ONE JIB.
This role is particularly important in the formative years of ONE JIB and Founding Municipalities can
shape how ONE JIB operates for years to come. Treasurers who sit on ONE JIB will also be eligible to sit
on any of ONE JIB's committees.
Table 2: Potential ONE JIB Committees
Committee Purnnnp
Nomination Advises on the membership & structure of ONE JIB, recommended IPS
template, Investment Plan, among other things.
Client service Advises on media and content for reporting, newsletters, seminars,
education, complaints process, service standards, and relationship
practices
New Products Advises on investment strategies, features of current offerings and
preferred new offerings.
Audit and Risk Oversees strategies for monitoring financial management and reporting,
risk management strategies, IT systems, internal controls, etc.
Risks of Founding Municipality Status
As noted previously, one of the most important considerations for municipalities conducting their due
diligence on adopting the PI regime is the limitation around revoking the Prudent Investor Enabling
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By-law. Once a municipality adopts the PI regime, it cannot go back to the LL for the investment of its
money that is not required immediately without a special regulation. This, however, applies to all
municipalities adopting the PI regime. There are specific risks worth considering that would only apply to
those who partner to establish ONE JIB. Table 3 below identifies many of these risks; ONE Investment
has carefully considered each of these risks and, where there are no mitigating factors already built into
the legislation, has developed plans to deal with these situations should they arise.
Table 3: Risks to becoming a founding municipality and mitigating factors
-—Mitigating Factor
A Founding Municipality leaves Not an issue if remaining Founding Municipalities'
investments remain >$100M; otherwise, new JIB
must be struck
Founding Municipalities holdings fall below
$100M
Disagreement among Founding Municipalities
Political change of heart
Not an issue unless they fall because a Founding
Municipality leaves
Dispute resolution process is included in the
ONE JIB Agreement
ONE Investment expects to invest substantially in
municipal staff, Council education to manage this
risk. Council provides direction to the ONE JIB via
the IPS which can adapted to reflect updated risk
tolerance
Change in council policy regarding long-term I Council education is the first step, ONE will
reserves
Desire to exit ONE JIB
ONE Investment business or its PI offerings
fail
Poor market: many members exit at once
while returns are weak
Cost escalation
support municipal staff in communicating the
trade-offs and impacts to the IPS.
Any municipality leaving must have another IB/JIB
to move to or must receive a provincial regulation
allowing them to return to the Legal List, as per
the Act and the Regulation
ONE would work to settle clients with a new
provider.
Legislative governance was designed to minimize
this risk by placing the control and management of
the funds with an IB or JIB
ONE Investment is a non-profit corporation
founded by LAS (a corporation of AMO) and
CHUMS (a subsidiary of MFOA). ONE Investment
is committed to adjusting its fees on a regular
basis and adjusting them to ensure fee revenues
are closely aligned to budgeted projections
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Appendix A - Investment Advisory Committee Biographies
The ONE JIB will be comprised of the six members of ONE's current Investment Advisory Committee
(IAC) plus one additional member, as well as two Treasurers from ONE JIB's founding member
municipalities. The IAC has been working with ONE since November 2016 to support the Legal List
offering and to prepare for Prudent Investing. In summary:
• This group of five institutional investment experts has developed an understanding of
municipal finance through coaching by ONE staff and by its expert municipal finance
member, Bill Hughes.
• In total, they have 155 years of investment and municipal finance experience, an average of
26 years per member.
• Except for Bill Hughes, they are all Chartered Financial Analyst (CFA) charterholders with
distinguished careers either directly managing institutional investments or consulting to
institutions on their investments.
• Bill Hughes is a recognized expert on municipal finance who teaches the subject at University
of Toronto's Munk School of Global Affairs.
The IAC has worked with ONE to define an appropriate investment offering for all of Ontario's
municipalities with effective implementation. To date, their work has included the following:
• Regular review of current ONE offerings;
• Confirmation of desired investment outcomes that meet municipal needs and for which
prudent solutions should be designed;
• Advice on the appropriate asset classes to generate those solutions and the asset allocations
for the solutions;
• Advice on the managers to fill those mandates;
• Review of the documentation required to fulfill prudent investor offerings, including the Client
Questionnaire, template Investment Policy Statement and Investment Plan.
James C.L. Clark (CPA, CA, CFA) is the President of Dunhelm Consulting
and has more than 25 years of broad pension experience in pension fund
management, investment consulting, marketing, sales and client service. A
former manager of a $1 billion pension plan with the Bank of Montreal, he
currently provides investment and communication consulting services to
institutional investors and investment managers. Mr. Clark also serves on
the University of Ottawa's Treasury Committee and on several other boards
and committees dealing with investment and portfolio management issues.
He has lectured for York University's MBA program and contributed to
numerous pension industry publications.
Jennifer Dowty (CFA) is an equities analyst and business reporter at The
Globe and Mail. She has approximately 18 years of experience working in
the financial industry, of which nearly 14 years was at Manulife Asset
Management. While at Manulife, Jennifer was a portfolio manager
overseeing Canadian and global equity mutual funds, institutional funds,
and pension plans.
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James G. Giles (CPA, CFA) retired from his role as Chief Investment
Officer of Foresters Financial (Foresters), where he directly oversaw over
$6 billion of investment assets, including international insurance and
Canadian pension funds. James broadened the asset exposure of
Foresters and hired external managers, where necessary. Prior to that, he
managed real estate income trusts and preferred shares, as well as
investment accounting. With over 25 years in the financial sector, he has
lectured students seeking the Chartered Financial Analyst designation and
the then Society of Management Accountants. He has been quoted in the
media on investment matters and represented Foresters on industry
groups such as the Pension Investment Association of Canada
Bill Hughes (MBA, MES) is a Senior Fellow at the Institute on Municipal
Finance and Governance at the University of Toronto. Bill has over 35
years' experience in finance and public policy in both the provincial and
municipal governments. Before joining the Institute, Bill was the
Commissioner of Finance and Treasurer for the Regional Municipality of
York. He has held senior positions in the Ontario government, mainly at
the Ministries of Finance and Infrastructure, where he was the Assistant
Deputy Minister of Infrastructure Policy and Planning. Bill was a member
of the board of directors of the Move Ontario Trust until its wind-up in 2017.
He is a lecturer at the University of Toronto's Munk School of Global Affairs
and Public Policy, where he co -teaches a course on policy development.
Christine Tessier (CFA) is Vice -President, Investments and Treasury at
CAA Club Group, where she is responsible for oversight and management
of the company's nearly $1 B in pension, corporate and insurance assets.
Christine brings over 16 years' investment experience, with a specific focus
in product development and design, investment consulting and strategic
planning. She has experience in retail and institutional markets and has
developed or researched products across the asset class spectrum,
spanning straightforward and complex solutions. Christine has a Bachelor
of Commerce degree from Laurentian University.
Geri James (CFA) has over 25 years' experience designing, implementing
and monitoring investment strategies for pension plans, non -profits,
sovereign wealth funds, governments and other institutional investors. As
well, she has designed and launched investment vehicles such as pooled
funds, mutual funds and exchange traded funds. Geri spent nine years as
an investment consultant with AON Hewitt followed by 17 years in various
roles, including Head of Business Development, Head of Product and Chief
Operating Officer, for BlackRock Asset Management Canada Limited. She
was an ongoing guest lecturer on investments at Humber College. In
addition to her work with The One Investment Advisory Committee, Geri is
currently a Director of the Board of the Police Credit Union, Board Chair of
the Wilderness Canoe Association and a founding member of Sparrow, a
refugee sponsorship and resettlement program.
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As the ONE JIB is a municipal board, ONE Investment will also retain the secretarial services normally
provided by a Municipal Clerk to the ONE JIB.
Denis Kelly received a Bachelor of Laws from Queen's University and was
called to the Bar in 1981. He was a Solicitor in the City of North York Legal
Department from 1981 to 1987. Denis then served in municipal Clerk's
Offices in various capacities -- as Deputy City Clerk (1987 to 1991) and
Y
City Clerk (1991 to 1997) for the City of North York, Clerk -Administrator for
ff
the Town of East Gwillimbury (1998 to 1999) and Regional Clerk for the
Regional Municipality of York (1999 to 2017). Over his long career in the
municipal sector, Denis' portfolio included providing legal services and
leading the Council and Committee, Access and Privacy and Information
Management programs for three municipalities. Denis also acted as the
Corporate Secretary for the Greater Toronto Services Board between 1999
and 2001. Denis lives in Thornhill, Ontario, with his family.
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Appendix B - STEPS TO ESTABLISH ONE JOINT INVESTMENT BOARD
(ONE JIB)
1. ONE Staff will work with municipal staff of each founding municipality ("Founding Municipality") to
assist in drafting a report to Council for initial direction and authority to establish ONE JIB in
conjunction with ONE Investment and to opt into the prudent investor regime on or after January
1, 2019 by passing a by-law under subsection 418.1(2) of the Municipal Act, 2001 (the "Act').
Council: (after the Founding Municipalities authorize staff in conjunction with ONE Investment to
inaugural meeting of develop an agreement to establish ONE JIB, together with all related matters such
council in December, as Codes, policies and appointments and to adopt the prudent investor regime on
2018)
or after January 1, 2019.
2. ONE Staff will develop an Initial Formation Agreement and a ONE JIB Agreement.
3. The Initial Formation Agreement will establish ONE JIB as a joint municipal service board,
authorize investment through ONE JIB of the money and investments that the Founding
Municipalities do not require immediately (the "Investible Funds") and provide for those matters
necessary or desirable to facilitate the establishment and operation of ONE JIB.
4. The ONE JIB Agreement will set out the basis on which the Founding Municipalities and other
municipalities that wish to participate by investing their Investible Funds through ONE JIB will be
able to do so.
5. ONE Staff will develop job descriptions for the members of ONE JIB, interview and recommend
the appointment of members and arrange for indemnity/insurance for the members of ONE JIB.
6. ONE Staff will develop a Code of Conduct and Conflict of Interest Policy as well as recommend
an integrity commissioner (interim).
7. ONE Staff will develop a Know Your Client Framework which will be called a Municipal Client
Questionnaire.
8. In light of existing municipal Statements of Investment Policies and Goals, ONE Staff will develop
one or more investment policy statement "IPS" templates which reflect a range of possible
investment objectives and strategies.
9. ONE Staff will formulate a monitoring system to provide assurance that investments comply with
each IPS and investment plan.
10. ONE Staff will establish the mechanism for regular reviews of the IPS to assist participating
municipalities in their efforts to update or amend their IPSs.
11. ONE Staff will develop guidelines to help the Founding Municipalities review and organize
investments in anticipation of a transfer of their Investible Funds on or after January 1, 2019.
12. As they develop draft materials ONE Staff will periodically meet with municipal staff to review and
obtain input on these policies and documents.
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13. Each Founding Municipality will complete and provide ONE Staff with its Municipal Client
Questionnaire.
14. After ONE Staff has completed the various drafts and templates, and each Founding Municipality
has provided the required Municipal Client Questionnaire, each Founding Municipality will work
with municipal staff as they prepare reports to Council setting out their recommendations, a draft
IPS, a draft investment plan that complies with the draft IPS and the related authorizing by-law
(Authorizing By-law).
Council: Enact an Authorizing By-law that authorizes: the execution of the Initial
(before or after Formation Agreement; the establishment of ONE JIB pursuant to that
January 1, 2019) agreement; the completion of a Municipal Client Questionnaire; the approval
of the IPS; the approval of a draft investment plan; and the execution of the
ONE JIB Agreement, which will have a future effective date. Also authorize,
approve or adopt, all the necessary Codes, Policies, and appointments set
out above.
Each Founding Municipality must certify as at the day ONE JIB is established
that it meets the criteria in s. 15(2) of the regulation (O. Reg. 438/97, Part II).
15. ONE JIB will hold its initial meeting at which it will approve and execute the ONE JIB Agreement
following which the ONE JIB Agreement will be executed by each of the Founding Municipalities.
16. ONE Staff will consult with ONE JIB about potential updates to each IPS, each investment plan
and other documents.
17. ONE Staff will assist municipal staff as they prepare reports recommending the adoption of the
prudent investor regime pursuant to a Prudent Investor Enabling By-law, required updates to the
IPS and related policies and decisions and they prepare the required by-law pursuant to which
each Founding Municipality will opt into the prudent investor regime.
Council: (on or after Formally opt into the prudent investor regime by enacting a Prudent Investor
January 2019 and Enabling By-law (under subsection 418.1(2) of the Act) with a future effective
after the ONE JIB date. Approve any modifications to the IPS or other documents.
Agreement has been
entered into by each
Founding Municipality
and ONE JIB)
18. Founding Municipalities will transfer Investible Funds to ONE JIB for investment.
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