Investment Policy

1.0 Purpose

This policy outlines how the Council will manage its investments as at 1 July 2015.

2.0 Background

The Council is required to have an Investment Policy under section 102 (2) of the Local Government Act 2002.

The Council has had an Investment Policy since 2002 which has been generally reviewed every 3 years.

The Council’s objectives are:

  • To make and manage investments to optimise returns in the long term while balancing risk and return considerations.
  • To safeguard financial market investments by establishing and regularly reviewing investment parameters and ensuring that all investment activities are carried out within these parameters.
  • To ensure the integrity of the financial market investments by only investing in appropriately rated organisations and in appropriate financial market instruments.
  • To maintain relationships with financial market participants, to enable Council to carry out its investment activities in an efficient and practical way.
  • To produce accurate and timely information that can be relied on by senior management and Council for control, exposure monitoring and performance measuring purposes.

3.0 Key Definitions

Refer to Appendix 1.

4.0 Policy

1. Policy Setting and Management Procedures

The Council approves policy parameters in relation to investment activities.

The Council’s Chief Executive has overall responsibility for the operations of the Council.

The Group Manager Corporate Services Manager has financial management responsibility over the Council’s investments, including all treasury activity.

The Council exercises on-going governance over its corporate investments through its Council Controlled Organisation, Timaru District Holdings Ltd (TDHL). The process of approving the Constitution, Statements of Corporate Intent and appointing Boards of Directors of these corporate investments, while carried out by the board of TDHL, still requires Council approval.

Operational management of the Council’s forestry investment is provided by the Council’s Community Services Group.

The Council’s Policy and Development Committee (P&DC) oversees and monitors the risks arising from its treasury activities to ensure consistency with the Council’s Long Term Plan and to evaluate the finance function’s effectiveness in achieving its objectives. The P&DC is responsible for approving strategy and for monitoring compliance and performance of the Council’s treasury activities.

The Council is able to appoint an independent advisor to assist in the management of the financial market exposures that the council is subjected to. The scope of the appointment and the parameters within which the advisor operates, will be determined by the Group Manager Corporate Services and at all times will operate within the parameters of this policy document.

The Council’s investments and cash management activities are managed centrally through its finance function.

The finance function is broadly charged with the following responsibilities:

  • Manage the Council’s investments within its strategic objectives and ensure that surplus cash is invested in liquid and credit worthy instruments.
  • Manage the impact of market risks such as interest rate risk and liquidity on the Council’s investments by undertaking appropriate hedging activity in the financial markets.
  • Minimise adverse interest rate related increases on ratepayer charges and maintain overall interest revenues within budgeted parameters.
  • Manage the overall cash and liquidity position of the Council’s operations.
  • Provide timely and accurate reporting of treasury activity and performance.

2. Philosophy

The Council acknowledges that there are various financial risks such as interest rate risk, liquidity risk and credit risk arising from its investments. Council is a risk averse entity and does not wish to incur additional risk from its treasury activities.

The Council’s finance function in relation to its treasury activities is a risk management function focused on protecting the Council’s budgeted interest revenues and stabilising the Council’s cashflows. The Council does not normally undertake any treasury activity which is unrelated to its underlying cashflows or is purely speculative in nature unless with formal prior approval of Council.

The Council has statutory obligations under Part 6 of the Local Government Act 2002 to properly administer, manage and account for its funds. In particular the Council chooses to make its investments in accordance with the provisions of the Trustee Act 1956 as they apply to the investment of trust funds. In exercising its powers of investment, Council is required to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others. The Council may consider, in making any investment decisions:

  • the desirability of diversifying investments
  • the nature of existing investments
  • the risk of capital loss or depreciation
  • the potential for capital appreciation
  • the likely income return
  • the length of the term of the proposed investment
  • the marketability of the proposed investment during, and on the determination of, the term of the proposed investment
  • the effect of the proposed investment in relation to tax liability
  • the likelihood of inflation affecting the value of the proposed investment
  • the credit rating of any entity or instrument (if applicable) in which it proposes to invest.

The Council’s overall philosophy on the management of investments is to optimise returns in the long term while balancing risk and return considerations. The Council recognises that as a responsible public authority any investments that it does hold should be of relatively low risk. It also recognises that lower risk generally means lower returns. It is noted that Council may have significant reasons other than financial for its investment activities.

Treasury investments are financial investments incorporating a term greater than 90 days. In its treasury investment activity, the Council’s primary objectives when investing are the protection of its investment, and the provision of cashflow when required. Accordingly, only credit worthy counterparties are acceptable. The Council’s policies on managing credit risk are discussed later in this policy and in the Investment Policy Toolkit in Appendix 1.

The Council recognises its custodial responsibility and shall review the performance and ownership of all investments at least on an annual basis.

3. Investment Mix

The Council manages a portfolio of investments comprising:

  • equity investments, including corporate investments and other shareholdings
  • property investments incorporating land, buildings and a portfolio of ground leases
  • forestry investments
  • treasury investments incorporating longer term and liquidity investments.

3.1 Equity Investments

Nature of Investment

The Council’s current equity investments, including investments in corporate investments and other shareholdings, including an Energy Company and a Port Company.

Rationale for Holding Investment

The Council’s investments in such assets fulfil various strategic, economic development and financial objectives as outlined in Council’s Long Term Plan and comply fully with the Local Government Act 2002.

Acquisition of New Investments

The Council will acquire equity investments in line with its strategic, economic development and financial objectives as outlined in the Council’s Long Term Plan and on the commercial merits of the proposal. All equity investment purchases will require prior Council approval.

Revenue

Proceeds from the disposition of equity investments are to be applied to:

  • repayment of district wide funded debt and/or
  • repayment of community funded debt and/or
  • fund pre approved capital expenditure items and/or
  • purchase treasury investments from which interest accrued is to be used for general purposes.

Proceeds from the disposition of equity investments are not used for general purposes.

All income from the Council’s equity investments, including dividends is included in financial arrangements activity and forms part of the Council’s general revenue to be used for district wide activities.

Risk Management

The Council manages its risk in equity investments through the governance of Timaru District Holdings Ltd and the approving of Statements of Corporate Intent.

Management and Reporting Procedure

The P&DC, through Timaru District Holdings Ltd, reviews performance of these investments on a regular basis to ensure that their stated objectives as outlined in the respective Statements of Corporate Intent are being achieved. Timaru District Holdings Ltd reports back to the Council on a quarterly basis. There is an annual review of these investments, which includes a calculation of the return on investment being achieved. The preparation of this is the responsibility of the Group Manager Corporate Services.

3.2 Property Investments (general properties - not for specific purposes)

Nature of Investment

The Council currently owns a number of properties, which are surplus to its operational needs.

Rationale for Holding Property

The Council’s overall objective is to only own property that is necessary to achieve its strategic objectives. As a general rule, Council does not maintain a property investment where it is not essential to the delivery of relevant services, and property is only retained where it relates to a primary output of Council.

Acquisition of New Investments

The Council has no intention of acquiring additional investment properties, however if it does, it will be based on the commercial merits of the proposal.

Revenue

Proceeds from the disposition of property investments are used for general purposes.

All income, including rentals and ground rent from property investments is included in the properties activity to be used for general purposes.

Risk Management

The Council manages its risk by reviewing its return on investment on an annual basis. It also ensures adequate insurance is in place to protect these assets from non financial risks and a sound repairs and maintenance plan is also in place to protect the ongoing value of these assets. This review is the responsibility of the Group Manager Corporate Services.

Management and Reporting Procedure

The Council reviews property ownership through assessing the benefits of continued ownership in comparison to other arrangements, which could deliver the same results. This assessment is based on the most financially viable method of achieving the delivery of Council services. The Council generally follows a similar assessment criteria in relation to new property investments.

3.3 Forestry Investments

Nature of Investment

The Council’s forestry operation is made up of over 50 woodlots of (mainly vested reserve) land totalling 239 hectares, consisting predominantly of Radiata pine but also, where appropriate, Douglas Fir and Macrocarpa.

Rationale for Holding Forestry

Forestry assets are held as long term investments on the basis of their net positive discounted cashflows, factoring in projected market prices and annual maintenance and cutting costs and to maintain the land upon which the Council’s forestry investment is held.

Acquisition of New Investments

The Council has no immediate intention of purchasing new forestry investments.

Revenue

Proceeds from the disposition of forestry investments are to be applied to:

  • repayment of district wide funded debt and/or
  • repayment of community funded debt and/or
  • fund pre approved capital expenditure items and/or
  • re-afforestation of existing forestry blocks and/or
  • purchase treasury investments from which interest accrued is to be used for general purposes.

Proceeds from the disposition of the Council’s entire forestry investments are not used for general purposes.

Income from the Council’s forestry operation is reinvested in forestry through a separate Forestry Fund. A dividend is payable to Council at any agreed time that does not affect the viability of the forestry operation.

Expenditure in maintaining the forestry investment is expensed in the year it is incurred.

Risk Management

The risk is minimised by the number and size of the blocks, the range of the species, fire breaks around the edges near residential areas, and the adoption of silviculture practices to enhance the trees’ ability to withstand wind. The blocks are regularly inspected by MAF for pests and diseases and foliage sampling and nutrient analysis is undertaken to maximise the crop. Harvesting of the forests is carried out at appropriate times to maximise the return the Council receives on its investment.

Management and Reporting Procedure

The Council’s forestry investment is managed by the Community Services Group on behalf of the Council. The operating income and expenditure is reported to the Council on a quarterly basis, with an annual report to Council on the value of the investment.

3.4 Treasury Investments

Nature of Investment

Investments of cash held for specific purposes (special funds) usually held as short-term deposits or in bonds.

Rationale for Holding Investment

The Council maintains treasury investments for the following primary reasons:

  • Provide ready cash in the event of a natural disaster. This cash is intended to bridge the gap between the disaster and the reinstatement of normal income streams.
  • Invest amounts allocated to special funds, bequests, and reserves.
  • Invest funds allocated for approved future expenditure, to implement strategic initiatives or to support intergenerational allocations.
  • Invest proceeds from the sale of assets.
  • Invest surplus cash, and working capital funds.

Acquisition of New Investments

The Council acquires new treasury investments to maintain its policy of ensuring that funds held for specific purposes are matched with actual cash invested.

Revenue

Interest income from treasury investments is credited to general funds, other than income from investments for all specified funds where interest is credited on a pro rata basis between general funds and the specified fund.

Risk Management

Investment Objectives

The Council’s primary objective when investing is the protection of its investment. Accordingly, only credit worthy counterparties are acceptable. Creditworthy counterparties are selected on the basis of their current Standard and Poors (“S&P”) ratings, or Moody’s Investor Services (“Moody’s”) or Fitch Ratings (“Fitch”) equivalents. Credit ratings are monitored on a regular basis by the Group Manager Corporate Services from external sources.

Within the above credit constraints, the Council also seeks to:

  • Maximise investment return
  • Ensure investments are liquid
  • Manage potential capital losses due to interest rate movements if investments need to be liquidated before maturity.

The above objectives are captured in The Investment Policy ToolKit in Appendix I, which provides operating parameters for investment activity including approved counterparties and relevant limits. The following principles form the key assumptions of the operating parameters contained in the Investment Policy Toolkit:

  • Credit risk is minimised by placing maximum limits for each broad class of non-Government issuer, and by limiting investments to registered banks and strongly rated SOES, and corporates within prescribed limits.
  • Liquidity risk is minimised by ensuring that all investments must be capable of being liquidated in a secondary market.

Performance of the Special Fund portfolio is benchmarked by measuring the performance of the portfolio against the performance of an appropriate external benchmark portfolio. The duration of the portfolio is also compared to the duration of the external benchmark portfolio and the Council is able to vary the duration of the portfolio within 25% either side of the external benchmark portfolio’s duration. Comparison with the benchmark portfolio is not required if the nominal value of the portfolio is less than $5 million.

Approved Investment Instruments

Within the constraints of Appendix I of this policy, the Council invests in the following instruments:

  • Government debt instruments
  • SOE debt instruments
  • New Zealand Registered Bank debt instruments
  • Local Authority debt instruments
  • Local Government Funding Agency debt instruments
  • Approved corporate debt instruments
  • Approved financial institutions debt instruments.

Interest Rate Risk Management

The Group Manager Corporate Services sets overall investment strategy, by reviewing on a regular basis, cashflow forecasts incorporating plans for approved expenditure and strategic initiatives, evaluating the outlook for interest rates and the shape of the yield curve, and where applicable, seeking appropriate financial advice. The Group Manager Corporate Services, Finance Manager and Management Accountant implements investment management strategy by reviewing rolling cashflow forecasts and:

  • Changing interest rate investment profiles by adjusting the average maturity of its investments according to current market conditions.
  • Using risk management instruments to protect investment returns.

Interest rate risk management instruments (of the type included under the Borrowing Policy) may be used for interest rate risk management on investments, with the formal prior approval of the Group Manager Corporate Services.

Management and Reporting Procedures

The Management of the Council’s Treasury Investments is carried under delegated authority to the Group Manager Corporate Services (who has delegated the day to day operation to the Council’s Finance Manager and Management Accountant).

Reports on the Council’s Treasury Investments are prepared on a quarterly basis for the Council.

3.5 New Zealand Local Government Funding Agency Limited Investment

Despite anything earlier in this Investment Policy, the Council may invest in shares and other financial instruments of the New Zealand Local Government Funding Agency Limited (LGFA), and may borrow to fund that investment.

The Council’s objective in making any such investment will be to:

a) obtain a return on the investment; and

b) ensure that the LGFA has sufficient capital to become and remain viable, meaning that it continues as a source of debt funding for the Council.

Because of this dual objective, the Council may invest in LGFA shares in circumstances in which the return on that investment is potentially lower than the return it could achieve with alternative investments.

If required in connection with the investment, the Council may also subscribe for uncalled capital in the LGFA.

Appendix I

The Investment Policy Tool Kit

  1. Approved Treasury Counterparty Limits and Treasury Investment Instruments
  2. Approved Treasury Investment Instruments - Definitions and Description

1. Approved Treasury Counterparty Limits and Investment Instruments

Timaru District Council is able to invest with the following institutions:

List of institutions Timaru District Council can invest with
InstitutionOverall Portfolio Limit
(as a % of the total portfolio)
Approved Financial Market Investment Instruments
(must be denominated in NZ dollars)
Credit Rating Criteria – Standard and Poor’s
(or Moody’s or Fitch equivalents)
Limit for each issuer subject to overall portfolio limit for issuer class
New Zealand Government or Government Guaranteed100%Government Stock
Treasury Bills
Not ApplicableNo limit

New Zealand Registered Banks

 

100%Call/Deposits/
Bank Bills/
Commercial Paper
Short term S&P rating of A1 or better

Long-term rating of BBB or better

$10 million

$1 million

  

Bonds/MTN’s/FRN’s

Long-term rating of A- or better
Long-term rating of A+ or better
Long-term rating of AA- or better
$2 million

$3 million

$4 million
Rated Local Authorities70%

Commercial Paper

Short term S&P rating of A1 or better

$3 million

  Bonds/MTN’s/
FRN’s
Long term S&P rating of :
BBB or better
A- or better;
A+ or better;
AA or better


$1 million;
$2 million;
$3 million;
$4 million
Local Authorities where rates are used as security60%

Commercial Paper

Bonds/MTN’s/FRN’s

Not Applicable

$2 million

$2million

State Owned Enterprises70%

Commercial Paper

Short term S&P rating of A1 or better

$3 million

  Bonds/MTN’s/FRN’sLong-term rating of BBB or better
Long-term rating of A- or better
Long-term rating of A+ or better
Long-term rating of AA- or better
$1 million

$2 million

$3 million

$4 million
Corporates*60%

Commercial Paper

Bonds/MTN’s/
FRN’s

Short term credit rating of A1 or better
Long-term rating of BBB or better.
Long-term rating of A- or better.
Long-term rating of A+ or better.
Long term rating of AA- or better
$3 million

$1 million

$2 million

$3million

$4 million
Financials*30%

Commercial Paper

Bonds/MTN’s/
FRN’s

Short term credit rating of A1 or better
Long-term rating of BBB or better.
Long-term rating of A- or better.
Long-term rating of A+ or better.
Long term rating of AA- or better
$3 million

$1 million

$2 million

$3million

$4 million

*The combined holding of Corporates and Financials shall not exceed 70% of the portfolio.

The combined holdings of entities rated BBB and or BBB+ shall not exceed 25% of the portfolio.

Investments that no longer comply with minimum rating criteria due to a downgrade in their rating must be recommended to Council within one month of the downgrade being notified.

2. Approved Treasury Investment Instruments – Definitions and Descriptions

Investment instruments available in the market (excluding equities and property) can generally be discussed under four broad categories relating to the issuer of these instruments.

1) New Zealand Government
  • Treasury bills are registered securities issued by the Reserve Bank of New Zealand (RBNZ) on behalf of the Government. They are usually available for terms up to a year but generally preferred by investors for 90 day or 180 day terms. They are discounted instruments, and are readily negotiable in the secondary market.
  • Government stocks are registered securities issued by the RBNZ on behalf of the Government. They are available for terms ranging from one year to twelve year maturities. Government stocks have fixed coupon payments payable by the RBNZ every six months. They are priced on a semi-annual yield basis and are issued at a discount to face value. They are readily negotiable in the secondary market.
2) Local Authorities
  • Local Authority stocks are registered securities issued by a wide range of local government bodies. They are usually available for maturities ranging from one to ten years. A fixed coupon payment is made semi-annually to the holder of the security. They are negotiable and usually can be bought and sold in the secondary market.
3) State Owned Enterprises (SOE’s)
  • SOE bonds are issued by enterprises 100% owned by the New Zealand Government but do not necessarily have an explicit government guarantee. These bonds can be registered securities or bearer instruments. A fixed coupon payment is made semi-annually to the holder of the security. They are priced on a semi-annual yield basis and are issued at a discount to face value. SOE bonds are negotiable and can be bought and sold in the secondary market.
  • Commercial paper is issued by SOE’s with a strong credit rating that is sufficient to enable the notes to be issued without endorsement or acceptance by a bank. The notes are usually underwritten by financial institutions to ensure that the borrower obtains the desired amount of funds. Commercial paper is issued with maturities ranging from 7 days to over one year. The most common maturity is for 90 days. The face value of the note is repaid in full to the bearer on maturity.
4) Registered Banks
  • Call and term deposits are funds accepted by the bank on an overnight basis (on call) or for a fixed term. Interest is usually calculated on a simple interest formula. Term deposits are for a fixed term and are expected to be held to maturity. Term deposits are not negotiable instruments. Termination prior to maturity date can often involve penalty costs.
  • Certificates of deposits are securities issued by banks for their funding needs or to meet investor demand. Transferable certificates of deposits (TCDs) are non-bearer securities in that the name of the investor, face value and maturity date are recorded on the certificate. They are able to be transferred by registered transfer only. Negotiable certificates of deposits (NCDs) on the other hand, are bearer securities and are able to be transferred immediately. Both TCDs and NCDs are priced on a yield rate basis and issued at a discount to face value. They are generally preferred over term deposits because investors can sell them prior to maturity.
  • Bank bills are bills of exchange drawn or issued, usually by a corporate borrower and accepted or endorsed by a bank. The investor is exposed to bank credit risk when investing in such instruments. Bank bills are readily available for any maturity up to 180 days, although 30 to 90 day terms are more common. They are priced on a yield basis and issued at a discount to face value. Investors in bank bills can sell the bills prior to maturity date.
5) Corporates and Financial Institutions
  • Corporate bonds are generally issued by companies with good credit ratings. These bonds can be registered securities or bearer instruments. A fixed coupon payment is made semi-annually to the holder of the security. They are priced on a semi-annual yield basis and are issued at a discount to face value. Corporate bonds are negotiable and can be bought and sold in the secondary market.
  • Promissory notes are issued by borrowers who usually have a credit rating and standing in the market that is sufficient to enable the notes to be issued without endorsement or acceptance by a bank. The notes are usually underwritten by financial institutions to ensure that the borrower obtains the desired amount of funds. Commercial paper is issued with maturities ranging from 7 days to over one year. The common maturities are for 30 and 90 days. The face value of the note is repaid in full to the bearer on the due date.

 Adopted by Policy and Development Committee 14 October 2014