Loading...
HomeMy WebLinkAboutMINUTES - 06042013 - C.104RECOMMENDATION(S): Approve amendments to the Contra Costa County Post-Employment Health Care Plan Investment Policies and Guidelines to authorize the investment in Alternative Assets (last revised June 2011). FISCAL IMPACT: No specific fiscal impact. BACKGROUND: As a matter of best practices the Post-Retirement Health Benefits Trust Agreement Advisory Body annually reviews the Investment Policies and Guidelines Document. Considerations are made as to whether or not: any cleanup language is necessary to clarify meaning and application of the policies and guidelines; any new legislation and regulations governing the investment practice of the Plan’s funds have been passed since the last review; new asset categories and/or allocations affecting the management and performance of the investment portfolio have been introduced; and APPROVE OTHER RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE Action of Board On: 06/04/2013 APPROVED AS RECOMMENDED OTHER Clerks Notes: VOTE OF SUPERVISORS AYE:John Gioia, District I Supervisor Candace Andersen, District II Supervisor Mary N. Piepho, District III Supervisor Karen Mitchoff, District IV Supervisor Federal D. Glover, District V Supervisor Contact: Lisa Driscoll, County Finance Director (925) 335-1023 I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board of Supervisors on the date shown. ATTESTED: June 4, 2013 David Twa, County Administrator and Clerk of the Board of Supervisors By: Stacey M. Boyd, Deputy cc: Robert Campbell, Auditor-Controller, Russell Watts, Treasurer-Tax Collector, David Twa, County Administrator, Patrick Godley, Health Services Chief Financial Officer, Lisa Driscoll, County Finance Director C.104 To:Board of Supervisors From:Post Retirement Health Benefits Trust Agreement Advisory Body Date:June 4, 2013 Contra Costa County Subject:Revisions to the CCC Post-Employment Health Care Plan Investment Policies and Guidelines (Last Revised June 2011) BACKGROUND: (CONT'D) new guidelines and requirements have been added to further guide and/or restrict the investing of funds. For 2013, the following changes were reviewed by the Advisory Body and are presented to the Board of Supervisors for approval: 1. Page 1, Added revision date 2. Page 2, Correction of the meaning PARS from Public Agency Retirement System to Public Agency Retirement Services 3. Page 2, Update in the description of Risk Tolerance from Moderately Aggressive Objective to Balanced Objective 4. Page 2, Adjustment to the Strategic Range of Asset Classes as follows: Cash: 0-5%, Fixed Income: 30-50%, Equity: 45-65%, Alternatives (NEW) 5-20%. 5. Page 2, Additional language to Communication Schedule information that committee meetings are held quarterly. 6. Page 4, Changing of the title Investment Manager to Portfolio Manager to be consistent with the intent and use of a term throughout the document. 7. Page 5, Additional language in item 2 under Portfolio Managers Responsibilities, that the Portfolio Manager would advise the Plan Administrator about the selection of and the allocation of asset categories every three years or as needed. 8. Page 6, Additional language item 2 under Quarterly Reports (Portfolio Reporting Requirements), stating the quarterly report will also include median return of peers. 9. Page 7, Addition of new asset class, Alternatives, in section VII, Asset Categories, and a description of these securities. 10. Page 8, Adjustments in the benchmark composition in section VIII, Investment Objectives, to reflect the addition of the Hedge Fund Research Inc (HFRI) for Alternatives. 11. Page 9, Addition of letter H under Investment Objectives describing Alternative Funds. 12. Page 9, Modification to the Target Mix and Allocation Ranges in Table 1 of the Asset Allocation. 13. Page 10, Inclusion of Alternatives category under Investment Guidelines with an explanation that the total investment amount for any alternative fund would not exceed 5% of total Plan assets. 14. Page 11, Addition of a paragraph at the bottom of section XI, Prohibited Assets, explaining that this section applied to the direct investment managers but not to third-party managers. 15. Page 12, Addition of bullet item (3rd) relating to when an investment mutual fund may be removed from the portfolio, which is if the annualized return trails the benchmark or median return on a three-year basis for more than three consecutive quarters. The red-lined current policy and a copy of the revised policy are included as Attachments A and B. Post Retirement Health Benefits Trust documents are available on the Post Retirement Health Benefits Trust Agreement Advisory Body website (http://ca-contracostacounty.civicplus.com/index.aspx?NID=2915). CONSEQUENCE OF NEGATIVE ACTION: County's assets currently held by HighMark Capital Management will not be invested in Alternatives. This restriction may impact the potential earning of these funds. CHILDREN'S IMPACT STATEMENT: None. ATTACHMENTS Attachment A Attachment B Contra Costa County Investment Policies & Guidelines February Revised June 2013 1 COUNTY OF CONTRA COSTA POST-EMPLOYMENT HEALTH CARE PLAN INVESTMENT POLICIES AND GUIDELINES DOCUMENT Adopted February 2011 Revised June 2011 Revised June 2013 Contra Costa County Investment Policies & Guidelines February Revised June 2013 2 Contra Costa County Post-Retirement Health Care Plan Investment Policies and Guidelines Document In response to the Government Accounting Standards Board (GASB) Statement Number 45 disclosure requirements for Other Post-Employment Benefit (OPEB) Plans, Contra Costa County has adopted a Section 115 Trust Plan that seeks to satisfy these liabilities for certain eligible employees. Executive Summary Plan Sponsor: Contra Costa County (County) Advisory Body: Post Retirement Health Benefits Trust Agreement Advisory Body Plan Administrator: Contra Costa County Treasurer-Tax Collector Trust Administrator: Public Agency Retirement Systems Services (PARS) Trustee: U.S. Bank, N.A. Investment Advisor: U.S. Bank, N.A., as Trustee has hired HighMark Capital Management (Portfolio Manager) via a sub-advisory agreement to serve as the Investment Advisor. Investment Authority: Full Investment Authority Account Number: To be determined Current Assets: $95,160,073.94 (as of December 31, 2012) Annual Contributions: Evaluated annually Risk Tolerance: Moderately Balanced Objective Time Horizon: Long-Term Assumed Earnings Rate: 6.25% Investment Objective: The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth below. The Plan’s targeted rate of return is 6.25%. The asset allocation ranges for the Plan is listed below: Strategic Ranges: Cash: 0 - 5% Cash Fixed Income: 3530-5550% Equity: 45-65% Alternatives 5 – 20% Communication Schedule: See Portfolio Reporting Requirements Committee meetings quarterly Income Needs/Cash Flow Required: To be determined annually by the Plan Administrator. Unique Needs and Circumstances: None Known HCM Portfolio Manager: Andrew Brown, CFA 415-705-7605 Andrew.Brown@highmarkcapital.com HCM Back up -Portfolio Manager: Anne E. Wimmer, CFA 310-550-6457 Anne.Wimmer@highmarkcapital.com U.S Bank Administrative Officer: Fran Schoenfeld, 949-224-7204 Fran.Schoenfeld@usbank.com The managing director for HighMark Capital Management is Kevin Rogers, he can be reached at 949-553-2580 Formatted: Indent: First line: 0.5" Formatted: Space After: 0 pt Contra Costa County Investment Policies & Guidelines February Revised June 2013 3 Portfolio Constraints Income Needs/Cash Flow Required: Income needs are expected to be minimal in the initial years of the Plan Client (Signature): Date: HCM Portfolio Manager: Date: U.S. Bank Administrative Officer: Date: Contra Costa County Investment Policies & Guidelines February Revised June 2013 4 I. INTRODUCTION The Board of Supervisors (the “Board”) of the County of Contra Costa has established the following Investment Policies and Guidelines Document (the “Document”) for the investment of the trust fund (the “Trust”) of the Contra Costa County Post-Retirement Health Benefits Plan (the “Plan”). The Board reserves the right at any time and from time to time to amend, supplement or rescind this document. II. OVERVIEW The purpose of this Document is to assist the Board and the Investment Portfolio manager Manager in effectively supervising, monitoring and evaluating the investment of the Plan’s portfolio. The investment program is defined in the various sections of the Document by: A. Stating the Board’s attitudes, expectations, objectives and guidelines for the investment of all assets. B. Setting forth an investment structure for managing the Plan’s portfolio. This structure includes various asset classes, investment management styles, asset allocation and acceptable ranges that, in total are expected to produce an appropriate level of overall diversification and anticipated total investment return over the investment time horizon. C. Encouraging effective communications between the Board and the Investment Portfolio managerManager. D. Complying with all applicable fiduciary, prudence and due diligence requirements experienced investment professionals would utilize, and with all applicable laws, rules and regulations of various local, state and federal entities that may impact the Plan’s assets. III. AUTHORITY The investment of the assets for the Trust shall be in accord with applicable law, including but not limited to the following: A. Investments shall be solely in the interest of, and for the exclusive purposes of providing benefits to the participants in the Plan and their beneficiaries, minimizing the contributions of employers thereto, and defraying the reasonable expenses of administering the Trust (Cal. Gov. Code Sec. 31595 (a)). B. Investments shall be made with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims (Cal. Gov. Code Sec. 31595 (b)). C. Investments shall be diversified so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent not to do so (Cal. Gov. Code Sec. 31585 (c)). D. In considering potential investment managers, it is the policy of the Board not to exclude managers from consideration based on ethnic background or gender, and not to arbitrarily exclude an emerging firm if, in the opinion of the Board, that firm has equal or superior capabilities to other candidates. E. It shall be the policy of the Board that an Economically Targeted Investment (ETI) can be considered if and only if it has return and risk circumstances attractive in comparison to other alternatives. Contra Costa County Investment Policies & Guidelines February Revised June 2013 5 IV. COUNTY PLAN ADMINISTRATOR’S RESPONSIBILITIES A. On behalf of the Board, execute all legal and administrative documents pertaining to a trust fund, and take whatever actions are necessary to maintain the County’s participation in the trust fund, including compliance with any relevant regulation issued or as may be issued. B. Oversee the investment portfolio and monitor performance by means of regular reviews to assure objectives are met and the policy and guidelines are being followed. C. Provide the investment manager with all relevant information on the Plan, and shall notify him/her promptly of any changes to this information. D. Advise the investment manager of any change in the Plan’s circumstances, such as a change in actuarial assumptions, which could possibly necessitate a change to the overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to the overall investment objective and goals of the portfolio. V. PORTFOLIO MANAGERS’ RESPONSIBILITIES, POLICIES AND GUIDELINES All portfolio mangers hired by the County will be registered investment advisors with the Securities and Exchange Commission, or will be trust companies that are regulated by State and Federal Banking authorities. Such portfolio managers will maintain proper and adequate insurance coverage including errors & omissions, surety bond and fiduciary liability. In addition, portfolio managers agree to notify the Board and Plan Administrator in writing if they are unable to continue acting in the capacity of a fiduciary or investment advisor. Portfolio Managers’ Responsibilities The portfolio manager is expected to manage the Plan’s portfolio in a manner consistent with this Document and in accordance with State and Federal law and the Uniform Prudent Investor Act. The portfolio manager is a registered investment advisor and shall act as such until the Board decides otherwise. The portfolio manager shall be responsible for: 1. Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. 2. Advising the Plan Administrator about the selection of and the allocation of asset categories every three years or as needed. 3. Identifying specific assets and investment managers within each asset category. 4. Monitoring the performance of all selected assets. 5. Recommending changes to any of the above. 6. Periodically reviewing the suitability of the investments, being available to meet with the Board and Plan Administrator at least once each year, and being available at such other times within reason at the Board’s request. 7. Preparing and presenting appropriate reports. 8. Informing the Board and Plan Administrator of changes occurring in personnel that are responsible for portfolio management or research. Contra Costa County Investment Policies & Guidelines February Revised June 2013 6 Investment Manager Policies and Guidelines The investment policies governing each investment manager hired by the County are as follows: 1. The investment manager is required to accept the responsibilities stated above. These responsibilities include acting as a prudent expert and agreeing to be a fiduciary to the County. The manager will seek to satisfy the County’s investment objectives. If a problem exists with these objectives, it is the manager’s responsibility to formally discuss these problems in a written communication to the Advisory Body and Plan Administrator. Also, the manager agrees to satisfy the County’s prescribed requirements outlined in a subsequent section. 2. Under any and all capital market environments, the investment manager agrees to maintain the investment approach that it is was hired to implement. Significant changes to the manager’s investment decision-making process are to be immediately reported in writing to the Board and Plan Administrator. It is the responsibility of the investment manager to fully educate the Board and Plan Administrator as to the specifics of its investment process and internal research that may lead to changes in the firm’s investment approach. 3. An investment portfolio constructed for the Board is expected to generally conform to other portfolios managed by the investment organization, exclusive of specific investment guidelines. When the Board guidelines require the investment manager to manage a portfolio significantly different than its other portfolios, it is the responsibility of the manager to communicate in writing the potential impact of the Board’s guidelines on the portfolio. 4. The manager will otherwise treat the Plan’s portfolio in a manner similar to other comparable portfolios in portfolio construction trading and in all other aspects. 5. Managers shall have full discretionary power to direct the investment, exchange, liquidation and reinvest the assets of the Plan, but must meet the provisions of the Board’s investment objectives and policies. The Board expects the manager to recommend changes to this document at any time when the manager views any part of it to be at variance with overall market and economic conditions. 6. Unless otherwise specified, portfolios are to be fully invested in allowable investment securities. Under no circumstance shall an investment manager attempt to “market time” investments in its portfolio(s). VI. PORTFOLIO REPORTING REQUIREMENTS Quarterly Reports: 1. The investment objectives of the portfolio will be clearly stated. Next a narrative description of the portfolio’s investment strategy will be provided with a discussion of the factors that proved to be favorable and those that were unfavorable. In addition, a concise statement of the firm’s investment decision-making process will be provided and any changes or modifications that were made to the process. 2. Portfolio performance before and after investment management fees: The manager shall report the quarterly total portfolio rate of return before and after investment management fees have been deducted, as well as cumulative and annual performance on both bases since account inception. Also included in these tables will be the manager's performance benchmarks and ranking with median return of peers. Contra Costa County Investment Policies & Guidelines February Revised June 2013 7 3. Portfolio asset mix and asset growth: The portfolio's allocation to the major asset classes will be specified for the beginning and end of the quarter. Market values will be shown for the total account over the same period. 4. Portfolio allocations according to characteristics and other classifications: Specific portfolio characteristics will be developed and contrasted to those of the portfolio's performance benchmark. 5. Portfolio reconciliation to the custodial bank: As of month end, the investment manager will reconcile their portfolio market value to that provided by the custodial bank. The custodial trustee accounts for investments on a trade date, full accrual basis. Explanation of any discrepancies shall be provided to the County. Monthly Reports: Portfolio summary report and detailed positions and transactions: A summary report consisting of a statement of changes in market value from the preceding month, a summarized portfolio composition using market values and portfolio performance for the latest month, and a portfolio reconciliation to the custodial market value of the account. The report should also include individual issues in the portfolio as of the most recent month-end along with a list of portfolio purchases and sales. VII. ASSET CATEGORIES For purposes of setting objectives and guidelines for the investment of the assets of the Plan, the assets shall be divided into four five segments described as: Global Equity, Global Fixed Income, Real Estate, Alternative Investments, and the Incidental Cash position. The Domestic and International Equity allocations are considered part of the Global Equity segment. The Domestic Fixed Income allocation and the High Yield Fixed Income allocation are considered part of the Global Fixed Income portion of the Plan. Global Equity Portion shall consist of investments in common stock and other securities which are convertible into common stock. The Global Equity portion may be further divided into domestic, international, and global; large, mid and small capitalization; growth, value, and core. Global Fixed Income Portion shall consist of investments in fixed income securities including High-Yield bonds as well as securities including cash equivalents. Real Estate Portion shall consist of investments in real estate through the use of publicly traded real estate investment trusts (REITs) and through the use of commingled funds that invest in publically traded REITs. Incidental Cash Portion shall include short-term monies not invested in either the Real Estate, Global Fixed Income, or the Global Equity portion of the Plan. Alternative Investments shall consist of investments in funds that are not traditional equity, fixed income, real estate or cash/money market. Alternative investments maintain correlations that compliment traditional investment classes. Examples of alternative investments would include market neutral funds, global macro funds, merger/arbitrage funds, managed futures funds, commodity/precious metals funds, long-short funds, and absolute return funds. Contra Costa County Investment Policies & Guidelines February Revised June 2013 8 VIII. INVESTMENT OBJECTIVES The general investment objective of the Plan is to maximize total return, subject to the risk and quality constraints described in the Investment guidelines. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The rate of return objective shall be the actuarial interest assumption, as determined from year to year. A. Total Fund Benchmarks The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth. The Plan’s targeted rate of return is 6.25%. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The custom benchmark composition would include 1817% Russell 1000 Index, 6% Russell Mid-Cap Index, 8% Russell 2000 Index, 87% MSCI-ACWI Index, 109% MSCI-EAFE Index, 4538% Barclay’s Aggregate Index, 4% DJ Wilshire REIT Index, 10% HRFIHFRI FOF Market Defensive Index, and 1% Citigroup 3-Month T- Bill Index. B. Domestic Equity 1. For the Domestic Large Capitalization portion of the Plan, a rate of return in excess of the Russell 1000 Index, and a return in the upper half of the corresponding Morningstar large capitalization style universe. 2. For the Domestic Small Capitalization portion of the Plan, a rate of return in excess of the Russell 2000 Index, and a return in the upper half of the corresponding Morningstar small capitalization style universe. 3. For the Domestic Mid-cap portion of the Plan, a rate of return in excess of the Russell Mid-Cap Index, and a return in the upper half of the corresponding Morningstar mid- capitalization style universe. C. Global Equity 1. For the Global Equity portion of the Plan, a rate of return in excess of the MSCI- ACWI Index, and a return in the upper half of the corresponding Morningstar global large capitalization style universe. D. International Equity 1. The objective for the international equity portion of the Plan is a return in excess of the MSCI-EAFE Index, and a return in the upper half of the corresponding Morningstar International Equity style universe. E. Fixed Income 1. The objective for the fixed income portion of the Plan is a return in excess of the Barclays Aggregate Index, and a return in excess of the Morningstar Universe of intermediate-term fixed income universe. 2. The objective for the high-yield portion of the Plan is a return in excess of the Merrill Lynch BB/B Index, and a return in the upper half of the corresponding Morningstar High Yield universe. F. Real Estate 1. The objective for the real estate portion of the Plan is a return in excess of the Dow Jones U.S. REIT Index, and a return in excess of the Morningstar Universe of REIT funds. G. Incidental Cash Contra Costa County Investment Policies & Guidelines February Revised June 2013 9 1. The objective of the cash portion is to achieve a return in excess of a comparable money market universe of funds. H. Alternative Funds 1.I. 1. The objective of the alternative portion of the Plan is to achieve a return in excess of the HFRI Fund of Funds Market Defensive Index. IX. ASSET ALLOCATION Targets The asset allocation targets and their associated ranges, which are a function of the returns and risks from various asset classes and the nature of the Plan’s liabilities, are set forth below in Table 1. The Board will review its asset allocation position as needed or a minimum of once every three to five years. The Board may make tactical adjustments to the targets and ranges, and may change the targets and ranges as appropriate. The Investment manager is responsible for maintaining the balance between fixed income and equity securities based on the asset allocation. The parameters shown in Table 1 shall be adhered to in managing the portfolio: Table 1 Allocation Ranges Target Mix Minimum Maximum Total Domestic Equity Large Cap 1817% 1513% 3532% Mid Cap 66% 2% 10% Small Cap 88% 44% 12% Global Equity 87% 4% 12% International Equity (Developed) 109% 4% 16% International Equity (Emerging) 0% 0% 3% Fixed Income 4538% 3530% 5055% High Yield 0% 0% 4% Real Estate 4% 0% 8% Cash (Money Market) 1% 0% 5% Alternatives 10% 5% 20% Rebalancing 1. From time to time, market conditions may cause the asset allocation to vary from the established target. To remain consistent with the asset allocation guidelines established by this document, the investment manager will at a minimum rebalance the portfolio on a quarterly basis. 2. The Board and Plan Administrator have the authority to issue instructions to the investment manager to liquidate securities for reallocation to other managers. Formatted Contra Costa County Investment Policies & Guidelines February Revised June 2013 10 3. On an annual basis, the Board and Plan Administrator shall develop a cash flow plan for the subsequent year. This plan will take into consideration expected cash needs both for the payment of benefits as well as to fund under-allocated or new asset classes. X. INVESTMENT GUIDELINES The following guidelines apply to all Investment managers. Any further constraints, limitations or authorities to an individual manager, which are specific to that manager and have been agreed to by the manager and the Plan Administrator also apply. Global Equity 1. The maximum percentage of the Plan which may be invested in the securities of a single corporation shall be 10% of the value of the Plan. 2. The Plan shall not hold more than 5% of the equity securities of an issuer. Alternatives 1. The total investment amount for any alternative fund will not exceed 65% of total Plan assets. Global Fixed Income The Fixed Income account securities will be restricted to the following: 1. Obligations of the U.S. Treasury 2. Obligations guaranteed by an agency of the United States, including agency Mortgage-Backed Securities 3. Government, agency, quasi-government and supranational bonds. 4. Certificates of deposit and banker’s acceptance of credit-worthy banks. 5. Individual Corporate bond investments shall be “Investment Grade” with a minimum quality rating of Baa2/BBB at the time of purchase. In the event that quality ratings differ among rating agencies, the higher rating will prevail. 6. Eligible instruments issued pursuant to SEC Rule 144(a) or Regulation S. 7. Commercial paper (including variable rate notes) of issuers rated P-1 by Moody’s Investor Services and A-1 by Standard & Poor’s. 8. Lower risk planned amortization class (PAC) collateralized mortgage obligations (“CMO”) and Sequential CMOs. CMOs other than PACs and Sequentials are limited to a maximum of 10% of the fixed income portfolio at cost. 9. Portfolio holdings in CMOs greater than 15 years or less than negative 15 years in duration (based on a 100 basis point move in rates) are limited to no more than a total of 2% of the fixed income portfolio at cost. 10. High yield securities may be held, but they will be held using a high-yield mutual fund 11. Investment-grade bonds backed by the interest and principal payments on loans for certain types of assets, such as automobiles, credit cards or student loans, known as asset-backed securities. Real Estate Investments in Real Estate will be made through individual REIT securities as well as commingled funds that invest in REITs. Separately held real estate investments are prohibited. Formatted: Font: Bold, Italic Formatted: Numbered + Level: 1 + Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left + Aligned at: 0.25" + Indent at: 0.5" Formatted: Indent: Left: 0.5" Contra Costa County Investment Policies & Guidelines February Revised June 2013 11 Incidental Cash The incidental cash portion of the Plan shall be invested in readily marketable and diversified assets as are enumerated in the Fixed Income Portion Guidelines. Additionally money market funds and repurchase agreements are acceptable cash oriented investments. XI. PROHIBITED ASSETS The Plan wishes to avoid investments in the following investment categories: • Precious metals • Private Equity • Venture Capital • Short sales • Purchases of Letter Stock, Private Placements, or direct payments • Leveraged Transactions • Commodities Transactions Puts, calls, straddles, or other option strategies, • Purchases of real estate, with the exception of REITs • Derivatives, with exception of ETFs • Contra Costa County Issued Bonds • Non-agency (or Private Label) Mortgage-Back Securities • (or Private Label) Mortgage-Back Securities The investment manager will not make direct investments in any of the prohibited assets listed above. However, to the extent that the Investment Manager uses a mutual or commingled fund as an investment vehicle for County assets, that fund’s policies will supersede the County’s policies, which can result in investments in prohibited assets. The Investment Manager is responsible for reviewing the County’s policies on at least an annual basis and reporting back to the County on mutual and/or commingled fund policies that are in conflict with County policies and also on any holdings of such funds that are in conflict with County policies. XII. FUND SELECTION PROCESS Funds selected as investments in the Plan will be expected to have undergone a rigorous screening process that searches for managers and styles that will produce above average returns within acceptable risk parameters. The evaluation process will consider the following factors: • Performance track record • Fund assets • Manager tenure with fund • Expense ratios • Market capitalization • Style consistency • Number of holdings • Assets in top 10 • Portfolio turnover • Sector weighting allocations • Standard deviation • Sharpe ratio Performance evaluation of the Funds will take into consideration both performance relative to a benchmark index as well as performance relative to a universe of the fund’s peers. Evaluation metrics versus a representative benchmark will utilize a twelve-month rolling performance record compared to a representative benchmark over a three, five, seven and ten-year period (if/when available). Formatted: Font: (Default) Arial, 10 pt, Not Italic Formatted: Font: (Default) Arial, 10 pt, Not Italic Formatted: Justified Contra Costa County Investment Policies & Guidelines February Revised June 2013 12 A fund is expected to rank above the median in its appropriate peer group for the three, five and ten-year periods (if/when available). An additional requirement for all funds utilized in the Plan is that the fund families that sponsor the funds will have filled out and returned a request for proposal (RFP) submitted to them by the investment manager. This RFP will highlight significant areas such as organizational factors, composition of assets, portfolio characteristics, investment process, fee structure, internal compliance controls, and an overview of the investment personnel. Investment mutual funds may be removed from the investment portfolio from time to time. Factors that the investment manager will consider in regards to removing a fund include, but is not limited to: • Performance that is inconsistent with the manager’s style or our expectations • Performance that conflicts with peers and style universes • Annualized return trails the benchmark or median return on a 3-year basis for more than three consecutive quarters • Security selection not in agreement with the manager’s investment philosophy/process • Purchases that lead to abnormal portfolio concentrations • Sector and industry exposures that are inconsistent with the manager’s guidelines • Unusual tracking error to the benchmarks • Inadequate transparency between the manager’s comments and portfolio holdings • Inconsistencies related to the manager’s remarks on style, sector, and market cap weightings • Instability at the manager’s investment management firm • Modifications to the investment process and/or risk controls that interfere with a firms strategy • Staffing adjustments that may result in poor performance • The fund selection process described above is not required for any passive investments, including index-based mutual funds or exchange-trade funds (ETFs). Contra Costa County Investment Policies & Guidelines Revised June 2013 1 COUNTY OF CONTRA COSTA POST-EMPLOYMENT HEALTH CARE PLAN INVESTMENT POLICIES AND GUIDELINES DOCUMENT Adopted February 2011 Revised June 2011 Revised June 2013 Contra Costa County Investment Policies & Guidelines Revised June 2013 2 Contra Costa County Post-Retirement Health Care Plan Investment Policies and Guidelines Document In response to the Government Accounting Standards Board (GASB) Statement Number 45 disclosure requirements for Other Post-Employment Benefit (OPEB) Plans, Contra Costa County has adopted a Section 115 Trust Plan that seeks to satisfy these liabilities for certain eligible employees. Executive Summary Plan Sponsor: Contra Costa County (County) Advisory Body: Post Retirement Health Benefits Trust Agreement Advisory Body Plan Administrator: Contra Costa County Treasurer-Tax Collector Trust Administrator: Public Agency Retirement Services (PARS) Trustee: U.S. Bank, N.A. Investment Advisor: U.S. Bank, N.A., as Trustee has hired HighMark Capital Management (Portfolio Manager) via a sub-advisory agreement to serve as the Investment Advisor. Investment Authority: Full Investment Authority Account Number: To be determined Current Assets: $95,160,073.94 (as of December 31, 2012) Annual Contributions: Evaluated annually Risk Tolerance: Balanced Objective Time Horizon: Long-Term Assumed Earnings Rate: 6.25% Investment Objective: The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth below. The Plan’s targeted rate of return is 6.25%. The asset allocation ranges for the Plan is listed below: Strategic Ranges: Cash: 0 - 5% Fixed Income: 30-50% Equity: 45-65% Alternatives 5 – 20% Communication Schedule: See Portfolio Reporting Requirements Committee meetings quarterly Income Needs/Cash Flow Required: To be determined annually by the Plan Administrator. Unique Needs and Circumstances: None Known HCM Portfolio Manager: Andrew Brown, CFA 415-705-7605 Andrew.Brown@highmarkcapital.com HCM Back up -Portfolio Manager: Anne E. Wimmer, CFA 310-550-6457 Anne.Wimmer@highmarkcapital.com U.S Bank Administrative Officer: Fran Schoenfeld, 949-224-7204 Fran.Schoenfeld@usbank.com The managing director for HighMark Capital Management is Kevin Rogers, he can be reached at 949-553-2580 Contra Costa County Investment Policies & Guidelines Revised June 2013 3 Portfolio Constraints Income Needs/Cash Flow Required: Income needs are expected to be minimal in the initial years of the Plan Client (Signature): Date: HCM Portfolio Manager: Date: U.S. Bank Administrative Officer: Date: Contra Costa County Investment Policies & Guidelines Revised June 2013 4 I. INTRODUCTION The Board of Supervisors (the “Board”) of the County of Contra Costa has established the following Investment Policies and Guidelines Document (the “Document”) for the investment of the trust fund (the “Trust”) of the Contra Costa County Post-Retirement Health Benefits Plan (the “Plan”). The Board reserves the right at any time and from time to time to amend, supplement or rescind this document. II. OVERVIEW The purpose of this Document is to assist the Board and the Portfolio Manager in effectively supervising, monitoring and evaluating the investment of the Plan’s portfolio. The investment program is defined in the various sections of the Document by: A. Stating the Board’s attitudes, expectations, objectives and guidelines for the investment of all assets. B. Setting forth an investment structure for managing the Plan’s portfolio. This structure includes various asset classes, investment management styles, asset allocation and acceptable ranges that, in total are expected to produce an appropriate level of overall diversification and anticipated total investment return over the investment time horizon. C. Encouraging effective communications between the Board and the Portfolio Manager. D. Complying with all applicable fiduciary, prudence and due diligence requirements experienced investment professionals would utilize, and with all applicable laws, rules and regulations of various local, state and federal entities that may impact the Plan’s assets. III. AUTHORITY The investment of the assets for the Trust shall be in accord with applicable law, including but not limited to the following: A. Investments shall be solely in the interest of, and for the exclusive purposes of providing benefits to the participants in the Plan and their beneficiaries, minimizing the contributions of employers thereto, and defraying the reasonable expenses of administering the Trust (Cal. Gov. Code Sec. 31595 (a)). B. Investments shall be made with the care, skill prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims (Cal. Gov. Code Sec. 31595 (b)). C. Investments shall be diversified so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent not to do so (Cal. Gov. Code Sec. 31585 (c)). D. In considering potential investment managers, it is the policy of the Board not to exclude managers from consideration based on ethnic background or gender, and not to arbitrarily exclude an emerging firm if, in the opinion of the Board, that firm has equal or superior capabilities to other candidates. E. It shall be the policy of the Board that an Economically Targeted Investment (ETI) can be considered if and only if it has return and risk circumstances attractive in comparison to other alternatives. Contra Costa County Investment Policies & Guidelines Revised June 2013 5 IV. COUNTY PLAN ADMINISTRATOR’S RESPONSIBILITIES A. On behalf of the Board, execute all legal and administrative documents pertaining to a trust fund, and take whatever actions are necessary to maintain the County’s participation in the trust fund, including compliance with any relevant regulation issued or as may be issued. B. Oversee the investment portfolio and monitor performance by means of regular reviews to assure objectives are met and the policy and guidelines are being followed. C. Provide the investment manager with all relevant information on the Plan, and shall notify him/her promptly of any changes to this information. D. Advise the investment manager of any change in the Plan’s circumstances, such as a change in actuarial assumptions, which could possibly necessitate a change to the overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to the overall investment objective and goals of the portfolio. V. PORTFOLIO MANAGERS’ RESPONSIBILITIES, POLICIES AND GUIDELINES All portfolio mangers hired by the County will be registered investment advisors with the Securities and Exchange Commission, or will be trust companies that are regulated by State and Federal Banking authorities. Such portfolio managers will maintain proper and adequate insurance coverage including errors & omissions, surety bond and fiduciary liability. In addition, portfolio managers agree to notify the Board and Plan Administrator in writing if they are unable to continue acting in the capacity of a fiduciary or investment advisor. Portfolio Managers’ Responsibilities The portfolio manager is expected to manage the Plan’s portfolio in a manner consistent with this Document and in accordance with State and Federal law and the Uniform Prudent Investor Act. The portfolio manager is a registered investment advisor and shall act as such until the Board decides otherwise. The portfolio manager shall be responsible for: 1. Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. 2. Advising the Plan Administrator about the selection of and the allocation of asset categories every three years or as needed. 3. Identifying specific assets and investment managers within each asset category. 4. Monitoring the performance of all selected assets. 5. Recommending changes to any of the above. 6. Periodically reviewing the suitability of the investments, being available to meet with the Board and Plan Administrator at least once each year, and being available at such other times within reason at the Board’s request. 7. Preparing and presenting appropriate reports. 8. Informing the Board and Plan Administrator of changes occurring in personnel that are responsible for portfolio management or research. Contra Costa County Investment Policies & Guidelines Revised June 2013 6 Investment Manager Policies and Guidelines The investment policies governing each investment manager hired by the County are as follows: 1. The investment manager is required to accept the responsibilities stated above. These responsibilities include acting as a prudent expert and agreeing to be a fiduciary to the County. The manager will seek to satisfy the County’s investment objectives. If a problem exists with these objectives, it is the manager’s responsibility to formally discuss these problems in a written communication to the Advisory Body and Plan Administrator. Also, the manager agrees to satisfy the County’s prescribed requirements outlined in a subsequent section. 2. Under any and all capital market environments, the investment manager agrees to maintain the investment approach that it is was hired to implement. Significant changes to the manager’s investment decision-making process are to be immediately reported in writing to the Board and Plan Administrator. It is the responsibility of the investment manager to fully educate the Board and Plan Administrator as to the specifics of its investment process and internal research that may lead to changes in the firm’s investment approach. 3. An investment portfolio constructed for the Board is expected to generally conform to other portfolios managed by the investment organization, exclusive of specific investment guidelines. When the Board guidelines require the investment manager to manage a portfolio significantly different than its other portfolios, it is the responsibility of the manager to communicate in writing the potential impact of the Board’s guidelines on the portfolio. 4. The manager will otherwise treat the Plan’s portfolio in a manner similar to other comparable portfolios in portfolio construction trading and in all other aspects. 5. Managers shall have full discretionary power to direct the investment, exchange, liquidation and reinvest the assets of the Plan, but must meet the provisions of the Board’s investment objectives and policies. The Board expects the manager to recommend changes to this document at any time when the manager views any part of it to be at variance with overall market and economic conditions. 6. Unless otherwise specified, portfolios are to be fully invested in allowable investment securities. Under no circumstance shall an investment manager attempt to “market time” investments in its portfolio(s). VI. PORTFOLIO REPORTING REQUIREMENTS Quarterly Reports: 1. The investment objectives of the portfolio will be clearly stated. Next a narrative description of the portfolio’s investment strategy will be provided with a discussion of the factors that proved to be favorable and those that were unfavorable. In addition, a concise statement of the firm’s investment decision-making process will be provided and any changes or modifications that were made to the process. 2. Portfolio performance before and after investment management fees: The manager shall report the quarterly total portfolio rate of return before and after investment management fees have been deducted, as well as cumulative and annual performance on both bases since account inception. Also included in these tables will be the manager's performance benchmarks and ranking with median return of peers. Contra Costa County Investment Policies & Guidelines Revised June 2013 7 3. Portfolio asset mix and asset growth: The portfolio's allocation to the major asset classes will be specified for the beginning and end of the quarter. Market values will be shown for the total account over the same period. 4. Portfolio allocations according to characteristics and other classifications: Specific portfolio characteristics will be developed and contrasted to those of the portfolio's performance benchmark. 5. Portfolio reconciliation to the custodial bank: As of month end, the investment manager will reconcile their portfolio market value to that provided by the custodial bank. The custodial trustee accounts for investments on a trade date, full accrual basis. Explanation of any discrepancies shall be provided to the County. Monthly Reports: Portfolio summary report and detailed positions and transactions: A summary report consisting of a statement of changes in market value from the preceding month, a summarized portfolio composition using market values and portfolio performance for the latest month, and a portfolio reconciliation to the custodial market value of the account. The report should also include individual issues in the portfolio as of the most recent month-end along with a list of portfolio purchases and sales. VII. ASSET CATEGORIES For purposes of setting objectives and guidelines for the investment of the assets of the Plan, the assets shall be divided into five segments described as: Global Equity, Global Fixed Income, Real Estate, Alternative Investments, and the Incidental Cash position. The Domestic and International Equity allocations are considered part of the Global Equity segment. The Domestic Fixed Income allocation and the High Yield Fixed Income allocation are considered part of the Global Fixed Income portion of the Plan. Global Equity Portion shall consist of investments in common stock and other securities which are convertible into common stock. The Global Equity portion may be further divided into domestic, international, and global; large, mid and small capitalization; growth, value, and core. Global Fixed Income Portion shall consist of investments in fixed income securities including High-Yield bonds as well as securities including cash equivalents. Real Estate Portion shall consist of investments in real estate through the use of publicly traded real estate investment trusts (REITs) and through the use of commingled funds that invest in publically traded REITs. Incidental Cash Portion shall include short-term monies not invested in either the Real Estate, Global Fixed Income, or the Global Equity portion of the Plan. Alternative Investments shall consist of investments in funds that are not traditional equity, fixed income, real estate or cash/money market. Alternative investments maintain correlations that compliment traditional investment classes. Examples of alternative investments would include market neutral funds, global macro funds, merger/arbitrage funds, managed futures funds, commodity/precious metals funds, long-short funds, and absolute return funds. Contra Costa County Investment Policies & Guidelines Revised June 2013 8 VIII. INVESTMENT OBJECTIVES The general investment objective of the Plan is to maximize total return, subject to the risk and quality constraints described in the Investment guidelines. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The rate of return objective shall be the actuarial interest assumption, as determined from year to year. A. Total Fund Benchmarks The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth. The Plan’s targeted rate of return is 6.25%. The relative return objective is a total return on a market value basis which exceeds that of a custom index composed of appropriate asset class indexes weighted proportionally by corresponding asset class targets. The custom benchmark composition would include 17% Russell 1000 Index, 6% Russell Mid-Cap Index, 8% Russell 2000 Index, 7% MSCI-ACWI Index, 9% MSCI-EAFE Index, 38% Barclay’s Aggregate Index, 4% DJ Wilshire REIT Index, 10% HFRI FOF Market Defensive Index, and 1% Citigroup 3-Month T- Bill Index. B. Domestic Equity 1. For the Domestic Large Capitalization portion of the Plan, a rate of return in excess of the Russell 1000 Index, and a return in the upper half of the corresponding Morningstar large capitalization style universe. 2. For the Domestic Small Capitalization portion of the Plan, a rate of return in excess of the Russell 2000 Index, and a return in the upper half of the corresponding Morningstar small capitalization style universe. 3. For the Domestic Mid-cap portion of the Plan, a rate of return in excess of the Russell Mid-Cap Index, and a return in the upper half of the corresponding Morningstar mid- capitalization style universe. C. Global Equity 1. For the Global Equity portion of the Plan, a rate of return in excess of the MSCI- ACWI Index, and a return in the upper half of the corresponding Morningstar global large capitalization style universe. D. International Equity 1. The objective for the international equity portion of the Plan is a return in excess of the MSCI-EAFE Index, and a return in the upper half of the corresponding Morningstar International Equity style universe. E. Fixed Income 1. The objective for the fixed income portion of the Plan is a return in excess of the Barclays Aggregate Index, and a return in excess of the Morningstar Universe of intermediate-term fixed income universe. 2. The objective for the high-yield portion of the Plan is a return in excess of the Merrill Lynch BB/B Index, and a return in the upper half of the corresponding Morningstar High Yield universe. F. Real Estate 1. The objective for the real estate portion of the Plan is a return in excess of the Dow Jones U.S. REIT Index, and a return in excess of the Morningstar Universe of REIT funds. Contra Costa County Investment Policies & Guidelines Revised June 2013 9 G. Incidental Cash 1. The objective of the cash portion is to achieve a return in excess of a comparable money market universe of funds. H. Alternative Funds I. 1. The objective of the alternative portion of the Plan is to achieve a return in excess of the HFRI Fund of Funds Market Defensive Index. IX. ASSET ALLOCATION Targets The asset allocation targets and their associated ranges, which are a function of the returns and risks from various asset classes and the nature of the Plan’s liabilities, are set forth below in Table 1. The Board will review its asset allocation position as needed or a minimum of once every three to five years. The Board may make tactical adjustments to the targets and ranges, and may change the targets and ranges as appropriate. The Investment manager is responsible for maintaining the balance between fixed income and equity securities based on the asset allocation. The parameters shown in Table 1 shall be adhered to in managing the portfolio: Table 1 Allocation Ranges Target Mix Minimum Maximum Total Domestic Equity Large Cap 17% 13% 32% Mid Cap 6% 2% 10% Small Cap 8% 4% 12% Global Equity 7% 4% 12% International Equity (Developed) 9% 4% 16% International Equity (Emerging) 0% 0% 3% Fixed Income 38% 30% 50% High Yield 0% 0% 4% Real Estate 4% 0% 8% Cash (Money Market) 1% 0% 5% Alternatives 10% 5% 20% Rebalancing 1. From time to time, market conditions may cause the asset allocation to vary from the established target. To remain consistent with the asset allocation guidelines established by this document, the investment manager will at a minimum rebalance the portfolio on a quarterly basis. 2. The Board and Plan Administrator have the authority to issue instructions to the investment manager to liquidate securities for reallocation to other managers. Contra Costa County Investment Policies & Guidelines Revised June 2013 10 3. On an annual basis, the Board and Plan Administrator shall develop a cash flow plan for the subsequent year. This plan will take into consideration expected cash needs both for the payment of benefits as well as to fund under-allocated or new asset classes. X. INVESTMENT GUIDELINES The following guidelines apply to all Investment managers. Any further constraints, limitations or authorities to an individual manager, which are specific to that manager and have been agreed to by the manager and the Plan Administrator also apply. Global Equity 1. The maximum percentage of the Plan which may be invested in the securities of a single corporation shall be 10% of the value of the Plan. 2. The Plan shall not hold more than 5% of the equity securities of an issuer. Alternatives 1. The total investment amount for any alternative fund will not exceed 5% of total Plan assets. Global Fixed Income The Fixed Income account securities will be restricted to the following: 1. Obligations of the U.S. Treasury 2. Obligations guaranteed by an agency of the United States, including agency Mortgage-Backed Securities 3. Government, agency, quasi-government and supranational bonds. 4. Certificates of deposit and banker’s acceptance of credit-worthy banks. 5. Individual Corporate bond investments shall be “Investment Grade” with a minimum quality rating of Baa2/BBB at the time of purchase. In the event that quality ratings differ among rating agencies, the higher rating will prevail. 6. Eligible instruments issued pursuant to SEC Rule 144(a) or Regulation S. 7. Commercial paper (including variable rate notes) of issuers rated P-1 by Moody’s Investor Services and A-1 by Standard & Poor’s. 8. Lower risk planned amortization class (PAC) collateralized mortgage obligations (“CMO”) and Sequential CMOs. CMOs other than PACs and Sequentials are limited to a maximum of 10% of the fixed income portfolio at cost. 9. Portfolio holdings in CMOs greater than 15 years or less than negative 15 years in duration (based on a 100 basis point move in rates) are limited to no more than a total of 2% of the fixed income portfolio at cost. 10. High yield securities may be held, but they will be held using a high-yield mutual fund 11. Investment-grade bonds backed by the interest and principal payments on loans for certain types of assets, such as automobiles, credit cards or student loans, known as asset-backed securities. Real Estate Investments in Real Estate will be made through individual REIT securities as well as commingled funds that invest in REITs. Separately held real estate investments are prohibited. Contra Costa County Investment Policies & Guidelines Revised June 2013 11 Incidental Cash The incidental cash portion of the Plan shall be invested in readily marketable and diversified assets as are enumerated in the Fixed Income Portion Guidelines. Additionally money market funds and repurchase agreements are acceptable cash oriented investments. XI. PROHIBITED ASSETS The Plan wishes to avoid investments in the following investment categories: • Precious metals • Private Equity • Venture Capital • Short sales • Purchases of Letter Stock, Private Placements, or direct payments • Leveraged Transactions • Commodities Transactions Puts, calls, straddles, or other option strategies, • Purchases of real estate, with the exception of REITs • Derivatives, with exception of ETFs • Contra Costa County Issued Bonds • Non-agency (or Private Label) Mortgage-Back Securities • (or Private Label) Mortgage-Back Securities The investment manager will not make direct investments in any of the prohibited assets listed above. However, to the extent that the Investment Manager uses a mutual or commingled fund as an investment vehicle for County assets, that fund’s policies will supersede the County’s policies, which can result in investments in prohibited assets. The Investment Manager is responsible for reviewing the County’s policies on at least an annual basis and reporting back to the County on mutual and/or commingled fund policies that are in conflict with County policies and also on any holdings of such funds that are in conflict with County policies. XII. FUND SELECTION PROCESS Funds selected as investments in the Plan will be expected to have undergone a rigorous screening process that searches for managers and styles that will produce above average returns within acceptable risk parameters. The evaluation process will consider the following factors: • Performance track record • Fund assets • Manager tenure with fund • Expense ratios • Market capitalization • Style consistency • Number of holdings • Assets in top 10 • Portfolio turnover • Sector weighting allocations • Standard deviation • Sharpe ratio Performance evaluation of the Funds will take into consideration both performance relative to a benchmark index as well as performance relative to a universe of the fund’s peers. Evaluation metrics versus a representative benchmark will utilize a twelve-month rolling performance record compared to a representative benchmark over a three, five, seven and ten-year period (if/when available). A fund is expected to rank above the median in its appropriate peer group for the three, five and ten-year periods (if/when available). Contra Costa County Investment Policies & Guidelines Revised June 2013 12 An additional requirement for all funds utilized in the Plan is that the fund families that sponsor the funds will have filled out and returned a request for proposal (RFP) submitted to them by the investment manager. This RFP will highlight significant areas such as organizational factors, composition of assets, portfolio characteristics, investment process, fee structure, internal compliance controls, and an overview of the investment personnel. Investment mutual funds may be removed from the investment portfolio from time to time. Factors that the investment manager will consider in regards to removing a fund include, but are not limited to: • Performance that is inconsistent with the manager’s style or our expectations • Performance that conflicts with peers and style universes • Annualized return trails the benchmark or median return on a 3-year basis for more than three consecutive quarters • Security selection not in agreement with the manager’s investment philosophy/process • Purchases that lead to abnormal portfolio concentrations • Sector and industry exposures that are inconsistent with the manager’s guidelines • Unusual tracking error to the benchmarks • Inadequate transparency between the manager’s comments and portfolio holdings • Inconsistencies related to the manager’s remarks on style, sector, and market cap weightings • Instability at the manager’s investment management firm • Modifications to the investment process and/or risk controls that interfere with a firms strategy • Staffing adjustments that may result in poor performance • The fund selection process described above is not required for any passive investments, including index-based mutual funds or exchange-trade funds (ETFs).