1 Sofia Anastopoulos, CFA Senior Manager GFOA Research & Consulting 312-578-2292, [email protected] INVESTING BASICS SC GFOA Conference Sheraton Convention Center, Myrtle Beach,South Carolina October 13, 2008
Jan 05, 2016
1
Sofia Anastopoulos, CFASenior ManagerGFOA Research & Consulting 312-578-2292, [email protected]
INVESTING BASICS
SC GFOA Conference
Sheraton Convention Center, Myrtle Beach,South Carolina
October 13, 2008
2©2008. Government Finance Officers
Association
Investment Framework & Policy
Internal ControlSafekeeping
CDs and collateralization
3©2008. Government Finance Officers
Association
TREASURY & INVESTMENT MANAGEMENT
All activities undertaken to insure liquidity and maximum investment return on government’s idle cash
Balancing act – risk and return liquidity while maximizing return
4©2008. Government Finance Officers
Association
TREASURY MANAGEMENT
Cash mobilizationGet cash in as fast as you can
Cash concentration Investing – Do something worthwhile with cash
DisbursementRelease cash efficiently
5
INVESTMENT FRAMEWORK & POLICY
6©2008. Government Finance Officers
Association
FIDUCIARY
Individual or institution
Special relationship of trust with another person or group
Legally responsible for assets
7©2008. Government Finance Officers
Association
FIDUCIARY
EXAMPLES
TreasurersFinance directors Investment personnel Oversight boards Investment advisersBrokers are NOT
8©2008. Government Finance Officers
Association
FIDUCIARY
Legally bound to:
Make decisions in the best interest of the beneficiary
Act prudently
Always put the beneficiaries’ interests before their own
9©2008. Government Finance Officers
Association
PRUDENCE
Original standard of investment care – Prudent Person
Consider safety and yield of an investment
“ to exercise the judgment and care, under the circumstances then prevailing, which persons of prudence, character and intelligence in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital.”
10©2008. Government Finance Officers
Association
PRUDENCE
Limitations - did not address how investment fits into overall portfolio
Evolving standards of fiduciary duty Prudent InvestorPrudent Expert
11©2008. Government Finance Officers
Association
INVESTMENT POLICY
WHY?
Defines investment program Legal & permitted activities Who’s in charge Measurement of results Relationship to counterparties
Protection
Dynamic process
12©2008. Government Finance Officers
Association
COMPONENTS
Scope Funds covered by policy
Different funds have different objectives
INVESTMENT POLICY
13©2008. Government Finance Officers
Association
COMPONENTS
Objectives
Safety Liquidity Yield/return (SLY) Other
Conform to laws
INVESTMENT POLICY
14©2008. Government Finance Officers
Association
COMPONENTS
Standards of Care Prudence
Ethics & conflict of interest• Existing guidelines for the entity• Expectations of investment personnel• Guidelines for handling deviations
Delegation of authorityCite statutesIdentify personnel by titleDiscuss personal liability
INVESTMENT POLICY
15©2008. Government Finance Officers
Association
COMPONENTS
Investment Instruments State statutes - legality Risk tolerance Selection & purchase of investments Collateralization
Authorized institutions
INVESTMENT POLICY
16©2008. Government Finance Officers
Association
INVESTMENT POLICY
Investing is fundamentally a balancing act
risk and return
So investment policy should address risk & establish a risk tolerance
Diversification
17©2008. Government Finance Officers
Association
INVESTMENT POLICY
Risks
Credit (default) risk Risk that all / some of principal and interest will be
lost
To mitigate credit risk:know your banks and/or broker-dealersRequire delivery-versus-paymentLimit investments to those of highest credit quality
18©2008. Government Finance Officers
Association
INVESTMENT POLICY
Liquidity Risk
Ability to sell investment (prior to maturity) Some short-term investments are relatively illiquid
Marketability – ability to sell security on short notice without incurring meaningful loss in price
19©2008. Government Finance Officers
Association
INVESTMENT POLICY
Market Risk
Risk value decreases due to changes in market Interest rate risk
Reinvestment RiskRisk that cash flows from securities reinvested at a lower rate than original investment callable
20©2008. Government Finance Officers
Association
INVESTMENT POLICY
Reputational Risk
Risk that mistakes negatively harm reputation of government and official
Loss of stature
21©2008. Government Finance Officers
Association
GFOA RP-DIVERSIFICATION
Fiduciary responsibility to reach objectives: safety, liquidity, return
Greater risk typically increases returns
Effective management of risk critical to achievement of objectives
22©2008. Government Finance Officers
Association
GFOA RP-DIVERSIFICATION
Diversification-useful strategy for managing risk
Establish risk profile Use profile to determine levels of diversification
Can be achieved by investing in variety of securities with dissimilar risk characteristics
Areas where diversification can be achieved include:
Maturity distributionSector allocationIssuer allocationStructures
23©2008. Government Finance Officers
Association
GFOA RP-DIVERSIFICATION
Recommendations
Government investors should:
Define objectives
Prepare cash flow – determine liquidity
Consider political climate
Use LGIPs, repos, MMMF to ensure liquidity day-to-day
Establish limits on specific securities specific business sectors
24©2008. Government Finance Officers
Association
GFOA RP-DIVERSIFICATION
Recommendations
Government investors should:
Develop guidelines for investing in single classes
Limit investments in securities with high credit and/or market risk
Limit particular structures
Define maturity/duration ranges
Establish risk profile for portfolio
25©2008. Government Finance Officers
Association
COMPONENTS
Safekeeping
• Third-party• Delivery versus payment (DVP) settlement
Internal Control
INVESTMENT POLICY
26©2008. Government Finance Officers
Association
COMPONENTS
Accounting GAAP
Reporting specify types and frequency of reports
provide information for wide audiences both technical and easy-to-read
Monitoring and adjusting the portfolio marking-to-market
INVESTMENT POLICY
27©2008. Government Finance Officers
Association
COMPONENTS
Performance evaluation Benchmarks
Criteria for selecting benchmarks Minimum yield standards Methods of calculation
INVESTMENT POLICY
28©2008. Government Finance Officers
Association
COMPONENTS
Appendices Authorized personnel - title Statutes, ordinances, etc. Authorized broker-dealers Authorized depositories B-D questionnaire and certification
INVESTMENT POLICY
29©2008. Government Finance Officers
Association
COMPONENTS
Appendices (cont’d)
Master repurchase agreementSafekeeping agreementWire transfer agreementCollateralization agreementSample investment reportsFormulas for returnsInternal control checklistGFOA recommended practices
INVESTMENT POLICY
30©2008. Government Finance Officers
Association
ADDITIONAL POLICY THOUGHTS
Internal document Involve staff responsible for investments
External document Distribute to outside parties
Board approval As resolution, ordinance, etc.
Annual reviews & updates
INVESTMENT POLICY
31©2008. Government Finance Officers
Association
HELP
Government Finance Officers Association “Sample Investment Policy”www.gfoa.org
INVESTMENT POLICY
32
INTERNAL CONTROL
33©2008. Government Finance Officers
Association
INTERNAL CONTROL
There are two ways to steal funds from governments…
On the way in and on the way out!
34©2008. Government Finance Officers
Association
INTERNAL CONTROL
Citizens/tax payers have 2 expectations for their money
Safeguarded
Spent wisely for authorized purposes
35©2008. Government Finance Officers
Association
INTERNAL CONTROL
Process
determined by an organization's people and information technology (IT) systems
designed to help the organization accomplish specific goals
helps direct, monitor, measure entity’s resources
protects from fraud, misuse, poor decisions, errors, loss
36©2008. Government Finance Officers
Association
INTERNAL CONTROL
ORGANIZATIONAL STRUCTURE
Management’s attitude
Familiarize staff with formal procedures and internal control
Train managers to detect erratic employee behavior
Mandate reporting of perceived impropriety or errors
Implement and communicate consequences
Provide professional development
37©2008. Government Finance Officers
Association
INTERNAL CONTROL
ORGANIZATIONAL STRUCTURE OR DESIGN
Segregate duties
1. Authorization of transactionsClear lines of authority and authorizationsLevel of authorizations spelled out in proceduresOne “go-to” person for questions
2. Execution of transactions3. Recording of transactions4. Reconciling of transactions5. Maintaining custody / control of assets
Custody separate from accounting collusion
38©2008. Government Finance Officers
Association
INTERNAL CONTROL
ORGANIZATIONAL STRUCTURE OR DESIGN
Segregate duties
Harder for small entities but “do-able”Management’s awareness of issue helps
Perhaps other controls implementedMandatory vacationsRotating tasks
39©2008. Government Finance Officers
Association
INTERNAL CONTROL
ORGANIZATIONAL STRUCTURE
HR – PERSONNEL
Pre-employment screeningCheck references and credentialsStrict screening for financial positions with bona fide security requirements
Check background and creditTest skills, knowledge and accuracyRequire drug tests
40©2008. Government Finance Officers
Association
INTERNAL CONTROL
ORGANIZATIONAL STRUCTURE
HR – Human Resources
Mandatory VacationsHard to cover up when someone else takes over the position
Document policies
Train, train, train
41©2008. Government Finance Officers
Association
INTERNAL CONTROL
PRE-EMPLOYMENT SCREENING
Check references and credentials
Strict screening for financial positions with bona fide security requirements
Check background for criminal activity
Test skills, knowledge and accuracy
Require drug tests
42©2008. Government Finance Officers
Association
INTERNAL CONTROL
TRAININING
Minimize loss from judgment errors and technical mistakes
Familiarize staff with formal procedures and internal control
Train managers to detect erratic employee behavior
Mandate reporting of perceived impropriety or errors
Provide professional development
43©2008. Government Finance Officers
Association
INTERNAL CONTROL
RISK ASSESSMENT
Asses risks, determine risk tolerance and develop response
Identify - What loss could occur?
Evaluate - What is probability it might occur? frequency ? magnitude of loss or negative effect?
Risk appetite
What is our response? avoid?
Do the costs of establishing IC outweigh benefits ?
44©2008. Government Finance Officers
Association
INTERNAL CONTROL
IMPLEMENTATION
Employees must buy into and understand the need for controls
Procedures should be understandable and make sense
Consequences for noncompliance or willful neglect of procedures should be established and enforced
45©2008. Government Finance Officers
Association
INTERNAL CONTROL
MONITORING
Internal audits
• Authorization and execution• Recording and accountability• Exception monitoring• Safeguards
External audits• Routinely change external audit firms
46©2008. Government Finance Officers
Association
INTERNAL CONTROL
RED FLAGS OF FRAUD
Ineffective IC Limited or NO segregation of dutiesNo reconciliation Lifestyle changes
New cars, jewelry, houses, tripsSignificant personal problems
Debt or credit problemsHigh turnoverRefusal to take vacationReluctance to provide info to auditorsFrequent disputes with auditorsFrequent changes in external auditors
47©2008. Government Finance Officers
Association
INTERNAL CONTROL
RED FLAGS OF FRAUD
Excessive number of checking accountsFrequent changes in banking accountsExcessive year end transactionsPhotocopied or missing documents
Stuff that just doesn’t seem right
48©2008. Government Finance Officers
Association
SECURITY DELIVERY
Strongly recommend delivery vs. payment (DVP) ONLY
Settlement procedure where payment for securities is simultaneous to transfer of purchased securities.
Ensures funds are released only upon receipt of securities, thus protecting government
Delivered to your custodian who is your agent
Perfected ownership
In your control through your custodian
49©2008. Government Finance Officers
Association
CONCLUSION
Plan
Policies and procedures
Internal Control
50
LEARN MORE
http://www.gfoa.org/
GFOACash Committee Resources
Reference Library samples, agreements