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Investment Policy Statement Example

Overview

The Guidance for Developing an Investment Policy Statement, adopted by the Pension Review Board

(PRB), provides a description of policies and sections that systems are encouraged to include in their

investment policy statement (IPS), as applicable. This IPS example is an additional reference tool provided

by the PRB to demonstrate what each type of policy might look like in an IPS. Specific requirements

included below (including defined roles and responsibilities, defined percentages, etc.) are not

intended to be prescriptive but to help inform users about the types of elements that should be

Association (GFOA) and the Chartered Financial Analyst Institute (CFAI). Specific references are provided

at the end of this document. The PRB also used policy language from actual IPS documents adopted by

several Texas public retirement systems including, but not limited to, the Texas Municipal Retirement

System (TMRS), Texas County and District Retirement System (TCDRS), Teacher Retirement System of

Texas (TRS), City of Austin Employees’ Retirement System (COAERS), Irving Firemen’s Relief and

Retirement Fund, Fort Worth Employees’ Retirement Fund, City of El Paso Employees Retirement Trust,

and Abilene Firemen’s Relief and Retirement Fund, among others. In addition, a glossary of common terms

used in IPS documents can be found at the end of this example IPS as an additional resource.

Example Language

I.

The board has a fiduciary duty to the members and beneficiaries of the system to prudently allocate

contributions from the sponsoring governmental entity and system members in accordance with the IPS

to pay future benefits. The investment program relies on incoming funds in accordance with the

established funding policy to meet a reasonable investment return assumption that matches future

benefits.

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II.

officers acting in accordance with written procedures, this investment policy, and exercising due diligence,

shall be relieved of personal responsibility for an individual security's credit risk or market price changes,

provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of

securities are carried out in accordance with the terms of this policy.

Ethics and Conflicts of Interest: Officers and employees involved in the investment process shall refrain

from personal business activity that could conflict with the proper execution and management of the

investment program, or that could impair their ability to make impartial decisions. Employees and

investment officials shall disclose any material interests in financial institutions with which they conduct

business, in accordance with applicable laws. They shall further disclose any personal financial or

investment positions that could be related to the performance of the investment portfolio. Trustees and

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III.

The investment objective is to maximize the probability of achieving the actuarial return assumption

without exceeding the risk tolerance specified by the board. The actuarial consultant’s recommended

return assumption for the system should be created after consulting with the system’s investment

consultant to determine appropriate expectations surrounding long-term investment returns for a well-

diversified investment portfolio considering system future liabilities.

1. The investment assets nominal net of fee return should meet or exceed the return assumption

of 7 percent over a rolling five-year, 10-year, and 20-year period. The total fund portfolio

performance will be compared using the relative benchmarks and asset weights specified in the

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reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature

concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible

cash demands cannot be anticipated, the portfolio should consist largely of securities with active

secondary or resale markets (dynamic liquidity). Alternatively, a portion of the portfolio may be placed in

money market mutual funds or local government investment pools which offer same-day liquidity for

short-term funds.

The investment consultant is responsible for monitoring and providing a liquidity report monthly to the

board. As liquidity can vary by asset class and investment vehicle, the board shall limit portfolio asset

investments based on redemption periods. The consultant will provide notice of known distribution

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accordance with Section VI.

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Authorized Investments

Investments in public equity securities must be traded on a national exchange or electronic

2. Fixed Income

Domestic and Yankee Bonds, mortgages and mortgage-backed securities, asset-backed securities,

global corporate bonds, global sovereign debt, fixed income futures, interest rate futures.

No more than 5 percent of the fund’ total assets may be invested in the securities of any single

corporate issuer.

All securities must be rated at least B- or equivalent.

4. Alternative Investments

Private equity, hedge funds, private real estate

5. Cash

Custodian bank STIF vehicles, AAA rated money market mutual funds, US Treasuries with maturity

less than 365 days.

Alternative Investment Legal Requirements

Due to the unique nature of alternative investments, all investment entry documents, and any

accompanying side letters will be reviewed by the system’s contracted legal counsel to determine if the

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For all real estate investments, the investment consultant will confirm compliance with industry best

practices. These investments should preferably have quarterly valuations, but valuations must be

conducted no less than semi-annually. Exceptions to this policy can be approved by the board, such as for

non-stabilized properties which include but are not limited to those under construction or renovation as

well as land held for future expansion or entitlement. Because of the complexity and uniqueness of each

alternative investment, the policies below are not all inclusive and the investment consultant may identify

additional policies according to their expertise that will be maintained as an external document to the IPS

available to the board.

1. Valuation Requirements – The scope must be sufficient to demonstrate that the value of each

property held has been appropriately determined. The scope should include, but not be limited,

to the following:

VII.

The board by default does not intend to invest in investment vehicles that provide proxy voting rights;

however, when applicable, the investment manager is granted the authority to represent the system and

shall vote shares in the best interest of the fund and its beneficiaries. A listing of all proxy votes showing

the date each proxy was voted, the issue as to which each proxy was voted, and how each proxy was

voted shall be provided to the board upon request within a reasonable timeframeat least annually. If a

proxy was not voted, the investment manager will provide a written statement indicating the reason that

period to reflect the investment expertise of the manager(s) over one full market cycle, or five years,

whichever is less. Performance results and evaluation relative to objectives will be reported to the board

on a quarterly basis. A time-weighted return formula (which minimizes the effect of contributions and

withdrawals) will be utilized in performance calculations. For alternatives, time-weighted returns will be

used for consolidated reporting; however, internal rates of return and comparison to relevant peer groups

and vintages will be used for evaluation of managers.

Asset Class Benchmarks

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10%

Private Equity – (Rollup of

underlying manager benchmarks)

Russel 3000 + 3% 10%

review of the investment portfolio, in terms of value and price volatility, has been performed consistent

with the GFOA Recommended Practice on "Mark-to-Market Practices for State and Local Government

Each quarter, the investment consultant will prepare a report that compares the performance of the

total investment fund against the benchmarks for the preceding quarter, fiscal year-to-date and

annualized periods. The report shall provide the current allocation to each strategy and asset class. The

report will also provide a synopsis of the performance of each active manager and a list of currently

scheduled commitments or redemptions, if any, as well as any activity for the preceding quarter.

Performance attribution analysis shall be provided that will show the impact of any asset class

divergences over the past quarter and year as well as the performance of active managers.

maturity (in accordance with Governmental Accounting Standards Board (GASB) requirements).

3. Average weighted return on investments as compared to applicable benchmarks.

4. Percentage of the total portfolio which each type of investment represents.

5. A statement that the investment portfolio is compliant with the investment policy and is meeting

the investment policy objectives.

Investment Expenses

Each quarter, the investment consultant will prepare a report that reviews both the direct and indirect

expenses against relevant benchmarks and peers for the preceding quarter, fiscal year-to-date and one-

year. Total fund expenses compared to peers will be reviewed annually with recommendations for

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The report must show each investment’s expenses, both direct and indirect, accrued or estimated for

the applicable period if available and not cost prohibitive. Alternative investments will show the most

recent incurred expenses. Investments are allowed to be aggregated into asset classes if approved by

the board. The expenses incurred must be aggregated based on the type of fee incurred (e.g.,

management fee paid from trust, management fee netted from returns, commission/brokerage fees,

and profit share carried interest) and by asset class. The investment consultant should raise any

concerns about fee tracking, complexity, and any cost prohibitive concerns with the board so that

performance and expenses are adequately tracked in a cost effective manner.

including bribery and corruption and contact between the board and managers during the search process

that is related to the pending selection and intended to influence the search outcome. Contact will be

limited during the search process and directed through the investment consultant or third-party provider

assisting in the investment manager search. Direct inquiries by managers to individual board members

regarding the investment program will be referred to the investment consultant. As the investment needs

of the system are ever-changing, so are the criteria appropriate for the selection of investment managers.

Additional criteria and/or amendments to these criteria may be made by the board when appropriate.

2. Manager candidates must have demonstrated a long-term record of superior performance.

3. Manager candidates must have registered with the U.S. Securities and Exchange Commission

(SEC) as investment advisors or be exempt from registration.

4. Manager candidates should have a material amount of assets under management for that specific

investment product unless a waiver is authorized by the board.

1. The general partners or sponsors of alternative investment funds must possess the management

skill and industry knowledge to exercise influence or have an impact on the portfolio companies