The vendor is required to provide for the prudent investment and administration of the state public trustee common fund (the “fund”).
- The policy provides the investment manager with a written statement of specific quality, quantity and rate of return standards.
- The objectives of the fund are:
• To preserve clients’ capital;
• To provide sufficient liquidity for
(i) Payment of clients’ regular and irregular expenditures and liabilities;
(ii) Repayment of clients’ guaranteed account balances at the conclusion of their relationship with the public trustee or as otherwise required;
• To generate returns to allow interest to be credited to clients’ guaranteed accounts at competitive rates;
• To provide funds for payment of compensatory payments to clients as provided of the act;
• To provide funds for transfers to the general revenue fund to be applied to the cost of administering the act, as provided of the act
- Investment and risk philosophy
A. Investment beliefs
• Asset allocation is the most important determining factor in the investment performance of the fund. asset allocation refers to the long-term (strategic) allocation of assets to the broad equity and bond asset classes.
• In the long term, equities are expected to outperform bonds to compensate for their higher risk.
• Market movements between asset classes are not perfectly correlated as equity and bond portfolios respond differently to economic factors.
• In addition, versus foreign equities are not perfectly correlated due to different economic environments and the underlying composition of the capital markets.
• As a result, diversification offers the opportunity to improve risk-adjusted returns.
• Exposure to foreign currencies as a result of moderate levels of foreign equity investments can provide diversification benefits.
• The success of active management varies based on efficiency of capital markets.
• Where markets are efficient, the quick dissemination of information limits the ability of investment professionals to consistently add value to the broad market indices.
B. Investment philosophy
• Fund assets should be prudently managed to ensure capital is protected within the tracking portfolio and the reference rate is earned within an acceptable tolerance range.
C. Risk philosophy
• While prudent management seeks to avoid excessive volatility, it is recognized that a low-risk investment policy will earn a low rate of return.
• The nature of the tracking portfolio, a low-risk approach is appropriate.
• More risk may be taken within the diversified portfolio
• These assets may be invested in investments that have uncertain returns, such as equities, foreign equities and non-government bonds
• The public trustee attempts to reduce the overall level of risk by diversifying the asset classes and further diversifying within each individual asset class
- Fund profile
• Accounts are maintained for each client of the public trustee, which are unconditionally guaranteed by the province of state
• The guaranteed account balance is comprised of monies paid into the account plus interest on the account less amounts withdrawn from the account.
1. The following constraints, which flow directly from the express requirements of the act, have direct investment implications and constrain the approach for investment of fund assets:
• Always positive returns (interest): clients whose money is paid into the fund must receive positive nominal returns on that money in every period, in the form of interest on their guaranteed accounts.
• Clients cannot suffer negative returns in any period.
• Guaranteed accounts: the province of state guarantees payment of the amount outstanding on clients’ guaranteed accounts.
- Interest paid on clients’ guaranteed accounts is based on a reference rate as defined in the regulations to the public trustee act:
• The regulations outline an objective that the average effective annual interest rate on guaranteed accounts during a fiscal year will be at least 90% of the average of the reference rate for each day during the fiscal year.