Outsourcing Investment Services

Dona J. Newman, CIA, CPA, CGFO City Auditor

City of Cape CoralMay 20, 2008

FGFOA Annual Conference

Introduction

Benefits of Outsourcing

Fiduciary Responsibility

Assess Internal Resources

Assess internal resources

• Do you have the resources?

• Do you have the time?

• Do you have the expertise?

Determine Cash Flow

Tax Receipts

Fees for Service

Assessments

Bond Proceeds

CIP Needs

Investment Services Available

Services can vary

• Reporting • Consultation • Non-discretionary portfolio management

• Full discretionary portfolio management

Outsourcing Options

Local Government Investment Pool

Mutual Funds

Investment Advisor

Define and Control Procurement Process

GFOA Recommended Practice

• Process should address the following:

• Objective procurement

• Competitive analysis

• Goal definition

Selection Criteria

Adviser’s understanding of government’s investment program

Adviser’s background

Adviser’s recommended approach

Fee and fee basis

Risk Control

Level of adviser discretion Prohibitions against self-dealing Competitive trade execution Trade confirmations Delivery vs. payment trade settlement No adviser custody Timely reconciliations Monthly reporting Compliance reviews

Definition of Services Desired

Investment policy development Portfolio management Cash flow analysis Security selection Credit analysis Security bidding Trade execution Reporting Client meetings Educational seminars

FL Statute 218.415(14)

CONTINUING EDUCATION.—The investment policy shall provide for the continuing education of the unit of local government’s officcials responsible for making investment decisions or chief financial officer. Such officials must annually complete 8 hours of continuing education in subjects or courses of study related to investment practices and products.

Selection Process

Sources for potential candidates

• Consultant’s databases

• Association databases

• Industry reports

• Marketing materials

• Referrals

Due Diligence on Candidates

SEC licenses Quantitative information Organization structure Experience & depth of personnel Reporting standards Investment philosophy Trading process Regulatory censure or litigation Interviews References

Advisory Agreement

Objectives and risk parameters

Allowable investment instruments and strategies

Required reporting procedures

All provisions of RFP

Ongoing review

Prudent Person Rule

FL Statutes 218.415(4)

“Investments should be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived from the investment.”

Benchmarking

Performance of the advisor should be assessed annually

A performance standard, or “benchmark”, should be developed in advance to assess the value-added by the investment advisor

Many common indices are available

Benchmark may vary for each tier of a portfolio

Fees

Flat fee or asset-based fee

Economies of scale for larger accounts

Discretionary vs. non-discretionary

Can the advisor leverage lower custody costs

Final Thoughts

Allowed investments

Focus on objectives

Develop relationship with service provider

Stay informed through education

Trust, but verify

Source of Information

Government Finance Officers Association Recommended Practice Selection of Investment Advisers for Non-Pension Fund Assets (2003 and 2007) (CASH)

The 2007 Florida Statues

Notes and comments by Mark Mason, Director of Financial Services, City of Cape Coral

Investment Practice and Products Training for Public Funds, Presented by PFM Asset Management LLC, February 28, 2008

Comments and suggestions by Jeff Larson, D.A. Davidson & Co., and Glenn Scott, Davidson Fixed Income Management

Addition Reference Sources Available

GFOA Sample Request for Proposal for Investment Advisory Services, GFOA, 2007.

An Elected Official’s Guide to Investing, Corinne Larson, GFOA, 1996.

An Introduction to Investment Advisers for State and Local Governments, M. Corinne Larson, GFOA, 1996. (This publication includes a sample investment agreement.)

Investing Public Funds, Second Edition, Girard Miller with M. Corrine Larson and W. Paul Zom, GFOA 1998.