Outsourcing Investment Services

1
Outsourcing Investment Services

• Dona J. Newman, CIA, CPA, CGFO
• City Auditor
• City of Cape Coral
• May 20, 2008
• FGFOA Annual Conference

2
Introduction

• Benefits of Outsourcing
• Fiduciary Responsibility

3
Assess Internal Resources

• Assess internal resources
• Do you have the resources?
• Do you have the time?
• Do you have the expertise?

4
Determine Cash Flow

• Tax Receipts
• Fees for Service
• Assessments
• Bond Proceeds
• CIP Needs

5
Investment Services Available

• Services can vary
• Reporting
• Consultation
• Non-discretionary portfolio management
• Full discretionary portfolio management

6
Outsourcing Options

• Local Government Investment Pool
• Mutual Funds
• Investment Advisor

7
Define and Control Procurement Process

• GFOA Recommended Practice
• Process should address the following
• Objective procurement
• Competitive analysis
• Goal definition

8
Selection Criteria

• Advisers understanding of governments
  investment program
• Advisers background
• Advisers recommended approach
• Fee and fee basis

9
Risk Control

• Level of adviser discretion
• Prohibitions against self-dealing
• Competitive trade execution
• Trade confirmations
• Delivery vs. payment trade settlement
• No adviser custody
• Timely reconciliations
• Monthly reporting
• Compliance reviews

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Definition of Services Desired

• Investment policy development
• Portfolio management
• Cash flow analysis
• Security selection
• Credit analysis
• Security bidding
• Trade execution
• Reporting
• Client meetings
• Educational seminars

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FL Statute 218.415(14)

• CONTINUING EDUCATION.The investment policy shall
  provide for the continuing education of the unit
  of local governments officcials responsible for
  making investment decisions or chief financial
  officer. Such officials must annually complete 8
  hours of continuing education in subjects or
  courses of study related to investment practices
  and products.

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Selection Process

• Sources for potential candidates
• Consultants databases
• Association databases
• Industry reports
• Marketing materials
• Referrals

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Due Diligence on Candidates

• SEC licenses
• Quantitative information
• Organization structure
• Experience depth of personnel
• Reporting standards
• Investment philosophy
• Trading process
• Regulatory censure or litigation
• Interviews
• References

14
Advisory Agreement

• Objectives and risk parameters
• Allowable investment instruments and strategies
• Required reporting procedures
• All provisions of RFP
• Ongoing review

15
Prudent Person Rule

• FL Statutes 218.415(4)
• Investments should be made with judgment and
  care, under circumstances then prevailing, which
  persons of prudence, discretion, and intelligence
  exercise in the management of their own affairs,
  not for speculation, but for investment,
  considering the probable safety of their capital
  as well as the probable income to be derived from
  the investment.

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Benchmarking

• Performance of the advisor should be assessed
  annually
• A performance standard, or benchmark, should be
  developed in advance to assess the value-added by
  the investment advisor
• Many common indices are available
• Benchmark may vary for each tier of a portfolio

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Fees

• Flat fee or asset-based fee
• Economies of scale for larger accounts
• Discretionary vs. non-discretionary
• Can the advisor leverage lower custody costs

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Final Thoughts

• Allowed investments
• Focus on objectives
• Develop relationship with service provider
• Stay informed through education
• Trust, but verify

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Source of Information

• Government Finance Officers Association
  Recommended Practice Selection of Investment
  Advisers for Non-Pension Fund Assets (2003 and
  2007) (CASH)
• The 2007 Florida Statues
• Notes and comments by Mark Mason, Director of
  Financial Services, City of Cape Coral
• Investment Practice and Products Training for
  Public Funds, Presented by PFM Asset Management
  LLC, February 28, 2008
• Comments and suggestions by Jeff Larson, D.A.
  Davidson Co., and Glenn Scott, Davidson Fixed
  Income Management

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Addition Reference Sources Available

• GFOA Sample Request for Proposal for Investment
  Advisory Services, GFOA, 2007.
• An Elected Officials Guide to Investing, Corinne
  Larson, GFOA, 1996.
• An Introduction to Investment Advisers for State
  and Local Governments, M. Corinne Larson, GFOA,
  1996. (This publication includes a sample
  investment agreement.)
• Investing Public Funds, Second Edition, Girard
  Miller with M. Corrine Larson and W. Paul Zom,
  GFOA 1998.