Financial Management Practice Manual

FMPM 301: Procedure

Investments

Scope

To set out the requirements for monitoring and reporting the investment and performance of all monies (including monies held in trust and surplus funds) that are subject to the control of James Cook University.

Definitions

Asset Allocation

Fund Managers

Investment

Restricted Funds

Surplus Funds

Procedure

The University has authority, granted by the Queensland Treasurer, to exercise investment powers under Part 6 of the Statutory Bodies Financial Arrangement Act 1982. The University’s investing activities maybe constrained by such limitations, caveats or restrictions specified by the Queensland Treasurer from time to time and/or such other regulation deemed relevant. Any such limitations in existence at the date of this procedure have been incorporated into this procedure.The procedure will be revised and reissued for any subsequent changes in legislation.

This procedure aims to:

• establish a clear understanding of the University’s investment goals and objectives;

• define and assign responsibilities for investing activities;

• offer guidance and limitations regarding the investment of University funds;

• manage University funds according to prudent standards and consistent with the laws of the State of Queensland;

• establish the relevant investment horizon for the management of investments; and

• establish a basis of evaluating investment results.

This procedure includes guidelines for:

• asset allocation;

• funds management;

• portfolio management;

• reports on investment performance; and

• determining market benchmarks to assist in tracking and adjusting investment performance targets.

Investment Pools

Surplus Cash

The amount of funds available for investment is limited by the demands on funds for financing and operating activities of the University. Financing or operating decisions may therefore significantly increase or decrease the level of the cash portfolio and hence the potential investment returns to the University.

Management decisions with significant impact on operating cash flows will be evaluated to determine if alternate financing arrangements can be entered into so as to optimise the consequent return from such investment activities net of alternative financing arrangements.

Restricted Funds

Restricted funds are accounted for within the Restricted Fund Pool. This Fund Pool has specific spending requirements each year and funds are invested to meet the requirements for both income and growth.

Goals and Objectives

Goals

The University shall invest its funds to meet cash requirements in both the short and the long term. The investment strategy will therefore take into account:

• the expected time horizon of the cash requirements;

• the expected return outcomes of the available asset classes;

• the volatility or variability of the returns of these asset classes;

• the longevity of the University’s investment horizon; and

• the income tax status of the University.

The University’s general principles underlying goals are:

• Investments shall be made solely in the interest of the University.

• Investments shall be made with care, skill, prudence and diligence.

• Investment of funds shall be so diversified as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.

• The University may employ one or more investment managers to attain its investment objectives.

• Cash is to be employed productively at all times, by investment in short-term cash equivalents to provide safety, liquidity and returns.

Objectives

The primary objectives in the investment of assets shall be:

Bank Account:

To provide absolute security and accessibility for regular transactions.

Cash Portfolio:

To provide a high degree of security and accessibility and a competitive interest rate.

Managed Portfolio:

To exceed the Target Rate of Return (see below) over rolling five (5) year periods.

Target Rate of Return

To equal or exceed a return (after fees) of:

• Bank Account	A competitive rate relative to similar banking facilities in the market
  Cash Portfolio	A competitive rate relative to the weighted term of the investment eg. for investments with a one year weighted term the USB Warburg Australian Bank Bill Index/BBSW over rolling one-year periods
  Managed Portfolio	A combined return from income and growth which: exceeds CPI,over a rolling five (5) year period by 4% to 5%; and meets or exceeds to the Asset Class Benchmark determined for each strategic asset allocation of the portfolio over rolling five (5) year periods.

Note 1:Asset Class Benchmarks will be determined by Investment Sub –Committee in consultation with the Fund Manager(s); form part of the written contract; and be periodically reviewed.

Note 2: For budgeting purposes, the University may wish, from time to time, to determine an absolute value of realized returns (ie a cash sum) which will be communicated to the Fund Manager(s), as necessary, on a timely basis.

Volatility of Returns

The rate of return for managed funds is designed to achieve a balanced return of current income and modest growth of principal in the short to medium term and to emphasise long term growth of principal while avoiding excessive risk. In order to achieve its objectives it is understood that investment will experience volatility and consequently fluctuations in market value. The University will tolerate volatility as measured against the volatility of a comparable market index in each asset class and, for the portfolio as a whole, the volatility of a composite index based on the strategic asset allocation. The indices (eg the ASX All Ordinaries index) used as a measure of a Fund Manager’s performance will also be used to benchmark what is acceptable volatility.

Measurement of Rate of Return

Investment Returns are measured on the basis of total performance which captures in a single measure; changes in the capital value of assets held (where applicable), income from managed investment portfolio assets, proceeds of sales of assets sold and cost of assets acquired.

Distribution of Investment Returns

Investment Returns, for internal purposes, are measured on the basis of the aggregate return from realized capital gains/losses and income from all investment portfolio assets less fees and expenses. (Refer FMPM 510: Policy – Internal Interest Distribution).

Surplus Cash

Investment returns generated from cash surpluses are considered to be available for the general purposes of the University and are distributed via the Budget process.

Restricted Funds

There is a difference between the Measurement of Rate of Return convention of the Managed Portfolio and the calculation of internal investment returns defined above. The total return for the Managed Portfolio takes to account unrealised market value gains and losses as at reporting dates based on the market value of the portfolio at that date. However, the internal return takes into account only realised gains or losses ie converted into real cash increments/decrements.

Delegation of Authority

The Council has delegated to Finance Committee the responsibility for monitoring the investment and performance of all moneys (including moneys held in trust) that are subject to its control.

Operationalisation of Responsibility

Council

The specific responsibilities of Council relating to investment management includes:

• determine the risk profile of the University;

Finance Committee

The specific responsibilities of Finance Committee relating to investment management include:

• approving investment strategy, policy and procedures, objectives, guidelines, asset allocations and the rate of return, and tolerance to volatility that will direct investment activities;

• approving the appointment of external investment professionals specifically including Fund Manager(s);

• monitoring and reviewing the performance of Fund Manager(s) to assure compliance with policy and procedures;

• monitoring investment performance; and

• reviewing quarterly investment reports.

Investment Sub-Committee

A Sub-Committee of Finance Committee responsible for providing recommendations to Finance Committee with respect to its specific investment responsibilities in accordance with the Investment Sub-Committee Terms of Reference.

Executive Director, Finance and Resource Planning

The Executive Director, Finance and Resource Planning provides information and reporting to Finance Committee and the Investment Sub-Committee with respect to all aspects of the investing activities including but not limited to:

• investment strategies;

• policies and procedures;

• investment performance; and

• external investment advisors.

Fund Managers

The University’s contract with the Fund Manager can be terminated at any time without penalty based upon the conditions specified below. Each Fund Manager appointed by the University will be provided with a copy of this procedure and must acknowledge, in writing, its acceptance of responsibility for investing University funds.

Each Fund Manager agrees to comply with the requirements of the University’s FMPM 300: Policy - Investments, FMPM 301: Procedure - Investments and FMPM 302: Authorised Limits - Investments as annexed to their contract including any alterations thereto as agreed between the parties. Fund Managers are not responsible for ensuring discretionary investments managers comply with the FMPM requirements.

The terms of appointment of each Fund Manager will allow the Fund Manager to provide investment advice and recommendations either on an advisory or discretionary basis for the assets placed under its jurisdiction while observing and operating within this procedure.

Specific responsibilities of the Fund Manager(s) include:

• investment management including advice on strategic and tactical asset allocation and decisions to buy or sell individual securities, by either one or both of the following investment strategies:

  • direct investment in securities; and/or

  • investment via underlying discretionary investment managers,

within the asset allocation limitations set out in this procedure;

• providing the rationale, in writing, prior to action being taken, for decisions to hold or sell investments where the potential investment gain or loss exceeds the limits set out in FMPM 302: Authorised Limits - Investments (Gain or Loss) and an assessment of the impact of these decisions on investment returns;

• reporting, on a timely basis, of quarterly investment performance results;

• providing quarterly (or on an ad hoc basis as required by the University) valuation of the investment portfolio based on the quarter (or relevant period) end closing prices;

• disclosing details of any fees, trails, commissions or like, earned from sources other than the University by virtue of the investment holdings (past or current) of the University;

• communicating any major changes to the economic outlook, investment strategy, or any other factors that may affect investments, or investment objectives;

• informing the University, in writing, of any substantial and material qualitative change in the Fund Manager’s organisation. Examples include changes in portfolio management personnel, ownership structure, investment philosophy etc;

• investment transactions must be settled on the due date to ensure the University does not incur losses because a settlement has not been made on time.The University will ensure necessary resources, systems infrastructure and appropriate control frameworks to minimise the risk of losses (reputation and monetary) due to settlement failure; and

• advising the Executive Director, Finance and Resource Planning, Director, Financial and Business Services or Deputy Director, Financial and Business Services, prior to any purchase of securities for which the Fund Manager’s organisation is conducting an initial public offering (“IPO”) or placement of shares and for a period of six (6) months after the IPO or placement, outlining the rationale for the investment. The proposal will be discussed with nominated members of the Investment Sub-Committee prior to any purchase being made. This responsibility does not apply where an underlying discretionary investment manager purchases securities for which the Specialist Fund Manager’s organisation is conducting an initial public offering (“IPO”) or placement of shares.

Performance Reporting, Review and Evaluation

Reporting

Fund Manager(s)

Performance reports shall be compiled at least quarterly by Fund Managers. The report, including commentary, will, as a minimum, be required to contain the following:

• asset allocation information – asset market values and asset class percentages versus target allocation and ranges;

• investment performance – investment returns versus performance benchmarks;

• compliance with this procedure – a statement that each portfolio conforms to the guidelines or identification and explanation for variances;

• forward earnings and capital appreciation projections;

• where available, Snail Charts or similar information on individual investments.

Investment Reports (excluding appendix) will not usually exceed 8 pages in length.

On an annual basis and at the time of mid-year reporting, the Fund Managers will provide a “health check” report of their own organisation including:

• Rating;

• Qualifications;

• Years of Experience; and

• Reputation.

Cash Portfolio

All major cash flows arising from financing or operating decisions which impact (favourably or adversely) on available funds for investment are to be reported to Finance Committee.

A financial report comparing the performance of the Cash Portfolio against the Target Rate of Return will be prepared by the Director, Financial and Business Services and submitted to Finance Committee each year.

Review and Evaluation

The investment performance of total portfolios, as well as asset class components, will be measured against the performance of the Asset Class Benchmarks agreed with the Fund Manager(s).

The Investment Sub-Committee will consider the extent to which the investment results are consistent with the investment objectives, goals and guidelines set forth in this procedure, and if necessary, will recommend to Finance Committee appropriate corrective action.

Fund Manager(s) shall be reviewed over at least a three-year (3) rolling period regarding performance, personnel strategy, research capabilities, organizational and business matters, and other qualitative factors that may impact their ability to achieve the desired investment results. The University reserves the right to terminate a Manager for any reason including but not limited to the following:

• Investment performance that is significantly outside the agreed performance benchmarks taking into account the risk and volatility parameters or unacceptable justification of poor results;

• Failure to comply with any aspect of this procedure, including communication and reporting requirements; and

• Significant qualitative changes to the investment management organization: for example staffing; ownership; research capabilities etc.

Asset Allocation

Asset Allocations are used in this procedure to describe a preferred mix of classes of investments toward which the portfolio is aimed.

From time to time the actual mix may vary from that approved by Finance Committee. A temporary variance of up to 5% will be tolerated. Variances which continue for more than 2 quarters shall be reviewed by the Investment Sub-Committee for recommendation to Finance Committee to determine whether:

• to readjust back to the determined asset allocation as market conditions allow and prudence dictates; or

• to determine adjusted asset allocations taking into account the overall objectives of the fund.

The allocation between asset classes as approved by Finance Committee is specified in FMPM 302: Authorised Limits - Investments.

Allowable Investments

The University has been granted Category 3 Investment powers under Part 6 Section 46 of the Statutory Bodies Financial Arrangements Act 1982 (See Appendix A – Delegations Policy). Additionally the University has appointed an Investment Manager under Part 7 Section 59 of the Statutory Bodies Financial Arrangement Act.

The University’s portfolio can be invested in the following areas:

• Bank and Financial Institution Deposits;

• Cash Securities;

• Fixed Interest Securities and Debt Instruments;

• Listed Australian Shares;

• Listed International Shares;

• Trusts and Portfolios managed by investment management organisations;

• Alternative Assets; and

• Other assets as approved by Finance Committee.

Excluded and Discouraged Investments

Where Finance Committee determines certain types of industries (eg tobacco or uranium) or companies (eg immoral staff practices concerning WHS) should be excluded on ethical grounds these will be registered as excluded and advice provided to Fund Managers.

A register of excluded and discouraged investments shall be maintained by the Executive Director, Finance and Resource Planning

An investment portfolio must retain liquidity to maintain stability of cashflows and preserve the capital investment portfolio.Therefore, illiquid investments are not encouraged.Illiquid investments include:

• Land;

• Securities with unique features, structured elements or those issued by counterparties that are not well known or thinly traded;

• Securities with issuance volume of less than $150 million;

• Sub-investment grade securities;

• Private placements; and

• Securities that are not priced or priced by less than two brokers/dealers.

Related documents, legislation or JCU Statutes

Statutory Bodies Financial Arrangement Act Part 6

For enquiries in relation to this FMPM Procedure please contact investments@jcu.edu.au

Approval Details

Policy sponsor:	Director, Financial and Business Services
Approval authority:	Executive Director, Finance and Resource Planning
Version no:	13-01
Date for next review:	04/2014

Modification History

Version no.	Approval date	Date notification sent by Approval Authority to policy@jcu.edu.au	Implementation date	Details
13-01	11/04/2013		11/04/2013
12-01	12/03/2012		12/03/2012
07–01	08/03/2007		04/04/2007
05-01	09/2005		09/2005

Susan Kinobe last updated this page on 1 May 2013.