Report to: General Committee                                                         Report Date: Mar 30, 2009

 

 

 

SUBJECT:                          Town of Markham Revised Investment Policy

PREPARED BY:               Mark Visser, Manager, Financial Strategy & Investments

 

 

 

RECOMMENDATION:

 

1) THAT the attached “Town of Markham Investment Policy” be received and adopted by the Town.

 

2) AND THAT staff be authorized and directed to do all things necessary to give effect to this resolution.

 

EXECUTIVE SUMMARY:

N/A

 

 

 

PURPOSE:

 

The Investment Policy of the Town of Markham (Attachment 1) has been designed to provide a framework from which to make investment decisions within acceptable risk levels.  The Town of Markham strives for the maximum utilization of its cash resources within statutory limitations and the basic need to protect and preserve capital.  The recommended changes to the policy will allow the Town to achieve a better return on investment without a significant increase in risk.

 

BACKGROUND:

 

The current Town of Markham Investment Policy has been in place since April 2003.  In the last several years, the financial landscape has changed dramatically, but the fundamentals that the policy was built on have remained relatively unchanged.  There are still four basic objectives of the Town with respect to investments: Legality of Investments, Preservation of Principal, Maintenance of Liquidity, and Competitive Rate of Return. 

 

OPTIONS/ DISCUSSION:

 

The purposes of the changes to the policy are to a) more accurately define the Town’s risk tolerance and reducing maximum exposure to each bank and b) expand the maximum term of an investment from 10 to 12 years.

 

Risk Tolerance

 

Long-term debt rated “AA” is of  superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated “AAA” (exceptional credit) only to a small degree. Given the extremely restrictive definition DBRS (Dominion Bond Rating Service) has for the “AAA” category, entities rated “AA” are also considered to be strong credits, typically exemplifying above-average strength in key areas of consideration and unlikely to be significantly affected by reasonably foreseeable events. 

 

Long-term debt rated "A" is of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than that of “AA” rated entities. While "A" is a respectable rating, entities in this category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher-rated securities.

 

Each rating category has subcategories such as "high/medium/low" or "+/-" (depending on the rating agency) that are used  to for further differentiation.

 

The current investment policy had varying minimum credit ratings for instruments issued by different entities.  Currently, the minimum credit for non-provincial bond holdings (municipalities, government agencies, banks, etc) is “AA”, while provincial bonds only require a rating of “A”. 

 

The proposed investment policy harmonizes the minimum rating required for all long-term investments so that everything has to have a minimum credit rating in the AA category (which includes high/low or +/- subcategories), thereby ensuring all the Town’s long term investments of superior quality. 

 

Diversification

 

To further reduce risk, the new policy increases the minimum percentage of the portfolio to be invested in instruments offered by, or unconditionally guaranteed by, the government of Canada or a province of Canada from 30% to 40%.  Conversely, the maximum percentages for banks are proposed to decrease in order to spread out credit risk.  The following are changes to the investment policy with respect to percentage holdings:

 

 

2003 Policy

2009 Policy

Minimum Limit for total holdings of Government of Canada and provincial securities

30%

40%

Maximum Limit for total holdings of municipal securities

30%

30%

Maximum Limit for total holdings with the 5 major Canadian chartered banks

65%

60%

Maximum Limit for individual holdings with the 5 major Canadian chartered banks

25%

20%

Maximum Limit for total holdings with other chartered banks and Schedule II banks

25%

25%

Maximum Limit for individual holdings with other chartered banks and Schedule II banks

15%

15%

Investment Term

 

The current maximum length of an investment is ten years.  Given the current yield curves of Ontario bonds, the difference in yield between a 10 and 12 year bond can be as high as 50 basis points.  This yield pick up is very attractive for such a short increase in term.  The change in the policy will allow the Town to maximize investment opportunity when yield curves are steep.

 

As with the current policy, all investments for terms in excess of one year are restricted to any of the Canadian Federal, Provincial, and Municipal Governments, the 5 largest Canadian Schedule I banks ranked by assets, and institutions guaranteed by the aforementioned.

 

 

 

All other aspects of the proposed Investment Policy remain consistent with the current policy.

 

 

FINANCIAL TEMPLATE

 

There is no net financial impact resulting from the changes to the Investment Policy.

 

ALIGNMENT WITH STRATEGIC PRIORITIES:

 

Not applicable

 

DEPARTMENTS CONSULTED AND AFFECTED:

 

Not applicable

 

 

 

RECOMMENDED

                            BY:    ________________________          ________________________

                                      Barb Cribbett,                                    Andy Taylor, Commissioner

                                      Treasurer                                            of Corporate Services

 

 

 

 

ATTACHMENTS:

Attachment 1 – Town of Markham Investment Policy (March 2009)

(Changes from the 2003 policy are in bold)