Statement of Investment Policy
Addendum
ADDENDUM TO
Statement of Investment Policy for
Pompano Beach
Police & Firefighters’ Retirement System
DROP Accounts
Adopted
August 21, 2006
The
Retirement Board (the
“Board”) of the Pompano Beach Police & Firefighters’ Retirement
System, as Sponsor, Named Fiduciary and Plan Administrator hereby
adopts the following Statement of Investment Policy for its DROP
Plan (the “Plan”), effective August 21, 2006.
I.
Statement of Funding Policy and Method
The
principal purpose of the DROP Plan is to provide certain benefits
upon actual retirement and thereafter. Thus, the principal goal
of the investment of the funds in the Plan should be both security
and long-term stability with moderate growth expectations.
Investments, other than “fixed dollar” investments, should be
included among the Plan’s available investments to prevent erosion
by inflation. However, investments should be sufficiently liquid
to enable the Plan, on short notice, to make distributions
(without investment penalties) in the event of distributions on
demand.
The Plan
will be funded with deposits and reinvestment of income in an
IRS-qualified retirement plan and trust exempt from income tax
under IRC Section 501(a).
II.
Purpose
The Plan
Fiduciaries are charged with the overall responsibility under the
law to manage the Plan’s assets prudently on behalf of the
participants pursuant to certain standards of conduct. The
general purpose of this Investment Policy Statement is to assist
the Fiduciaries in discharging their responsibility to supervise,
monitor and evaluate the investment of DROP Plan assets and to set
forth the investment standards expected.
Therefore,
this Statement is compiled so that the Fiduciaries define a formal
set of investment objectives, guidelines and procedures for the
management of the DROP Plan assets. It shall be subject to the
terms of the Plan documents and any Plan Service Agreement entered
into by the Plan and other Fiduciaries. Any DROP Plan Investment
Consultant may rely upon the Statement for guidance in order to
make recommendations to the Fiduciaries regarding the selection
and monitoring of investments in the DROP Plan. Effective
communications between Fiduciaries, consultants and money
management firms is encouraged.
III.
Objectives
The primary
investment objective of the DROP Plan is to offer the participants
a range of investment choices to permit diversification among
different asset classes and the opportunity for the growth of
their accounts. The objectives are further defined as follows:
A.
To provide sufficient investment choices so that DROP
participants will be able to choose the investment mix that may
fall within a full range of risk and return characteristics they
deem appropriate for themselves.
B.
To provide sufficient investment choices so that the asset
classes selected shall be such that, taken together, participants
will have a reasonable opportunity to materially affect the
potential investment returns in their accounts, while at the same
time controlling risk or volatility.
C.
To provide sufficient investment choices so that participants will
have adequate opportunity to diversify so as to reduce the risk of
loss.
IV.
Guidelines
A.
Investment alternatives for the participants shall be
determined solely in the interest of the participants and their
beneficiaries and for the exclusive purpose of providing benefits
to the participants and their beneficiaries.
B.
Investment alternatives for the participants shall be
determined with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of like character and aims.
C.
The Fiduciaries will engage the services of investment
professionals (Consultants). The Consultants are expected to
exhibit a general understanding of the Fiduciary aspects of
relevant statutes, regulations, case law and investment theory and
practice. The Consultants will provide a review of the investment
performance as it relates to the criteria in this document not
less frequently than semi-annually, and otherwise perform in
accordance with the terms of any servicing agreement. The
Consultants are responsible for frequent and open communication
with the Fiduciaries with respect to all significant matters
pertaining to this Statement and the management of the Plan’s
assets. Any change to this Investment Policy Statement or the
plan provisions will be communicated in writing on a timely basis
to all interested parties.
D.
The responsibility of the Board and its fiduciaries
ends with the selection and monitoring of DROP investment
performance. Individual investment decisions and asset allocations
made by DROP participants are solely within the discretion of the
member and are not the responsibility of the Board. DROP
participants are urged to consult with their accountant and/or an
investment professional in selecting self-directed investments
which are consistent with the financial needs of the member. DROP
participants are also urged to monitor investment performance as
they would for their personal portfolios.
V.
DROP Participant Direction
A.
All current DROP Participants (at the time of the initial
implementation of the Employee-Directed Option) shall be given a
choice between the following investment vehicles:
1.
A variable investment return credited quarterly, equal to
the investment return experienced by the Pension Fund as a whole,
net of investment and administrative expenses (called “The Fund
Rate Option”), or
2.
A variable investment return based upon the actual
performance of various investment funds in which they choose to
invest (called “The Employee-Directed Option”), net of investment
and administrative expenses.
Once the
Employee-Directed Option is elected, a DROP Participant may not
change back to the Fund Rate. It is an irrevocable election. Any
current DROP Participants who fail to make an election hereunder,
shall be deemed to have elected the Fund Rate and shall remain
therein unless directed otherwise. All current DROP Participants
electing the Fund Rate (whether by explicit or deemed election)
may change that election at any later time to enter the
Employee-Directed Option.
B.
The Investment Policy Statement for The Fund Rate Option
shall be the Investment Policy Statement adopted by the Board for
the Pension Fund as a whole.
C.
DROP Participants electing The Employee-Directed Option
shall be given control over the investment allocation process.
This shall include the right to change investment allocations of
existing account balances and future contributions at least once
every three months. Participants shall also be given any and all
information that the Fiduciaries deem necessary for participants
to understand the investment funds and to make informed investment
decisions. Participants shall have the right to direct the
investment of certain funds contributed to the Plan as specified
in the Plan documents among the investment fund alternatives
chosen by the Plan Fiduciaries.
D.
For The Employee-Directed Option, Fiduciaries shall adopt
three to five Model Portfolios that DROP Participants may select
and designate as representing their investment allocations. They
shall be sample sets of investment asset allocation elections
based upon percentages of the underlying basic investment
alternatives made available by the Plan. Such Model Portfolios
shall be developed with the assistance of the Investment
Consultants as suggested portfolios for each given level of risk.
The development shall utilize generally accepted optimization
techniques and modern portfolio theory. DROP Participants shall,
nevertheless, be entitled to waive the use of Model Portfolios and
design their own investment asset allocation elections among the
investment funds made available to the Employee-Directed Option.
VI.
Asset Classes (The Employee-Directed Option)
A.
Broad Asset Classes shall be selected by the Fiduciaries.
Individual investment alternatives shall be selected by
Fiduciaries which represent the respective Asset Classes.
B.
Asset Classes shall be selected based upon general
non-correlation of returns, fundamentally dissimilar underlying
instruments, and generally accepted investment standards.
Consideration shall also be given to the number of separate
investment alternatives deemed prudent by Fiduciaries. Asset
Classes considered may include but are not necessarily limited to:
Large Company Stock Fixed
Income Bond
Mid-Size Company Stock -
Corporate
Small Company Stock -
Government
Foreign Stock Foreign Bond
- Broad
Convertible Bond
- Regional
Mortgage-Based
Specialty
Stock
High Yield
Balanced Stable Value
Money Market
C.
As a result of review and analysis, and in consideration of
the criteria outlined in this policy, the Fiduciaries have
selected the Asset Classes outlined in Appendix A, as attached
hereto. It is understood that this list is dynamic and subject to
change by amendment of this Policy.
VII.
Implementation Procedure (Employee-Directed Option)
A.
The Fiduciaries shall use business judgment in selecting
investment products such as open-ended mutual funds, insurance
investment products, common or collective trust funds, and money
manager separate accounts. Passive and active management
strategies will be considered. The
Fiduciaries may select, for member-directed investments, a
commingled fund, e.g. a group, collective or common trust
maintained by a corporate trustee, regardless of whether such
trustee is the Plan’s trustee, investment manager, or otherwise a
party-in-interest of the Plan and that the Fiduciaries adopt and
incorporate the governing provisions of such fund herein.
B.
The following characteristics (when applicable) and others
shall be considered in selecting the investment alternatives to be
made available to participants:
1.
Investment Asset Class and Objective
2.
Investment Style Category
3.
The Manager(s) and Tenure
4.
Acquisition Costs and Ongoing Management Fees including
Turnover
5.
Investment Record - Total Returns (Net of Expenses) on a
Time-weighted basis over 1-, 3-, and 5-year periods
6.
Risk Characteristics - Standard Deviation, Beta
Calculations and Morningstar downside risk measures
7.
Risk-Adjusted Return Measurements - Sharpe Ratio, Alpha
Returns and Morningstar Category Ratings
8. Financial Characteristics
a.
Equities
b.
Debt Instruments
Price/Earnings Ratios Duration
Price/Book Ratios Average Effective
Maturity
Median Market Capitalization Credit Quality
Number of Securities Held Average Weighted Coupon
Concentration Composition of
Fund
Assets Under Management Yield Measures
Sector Weightings Assets Under
Management
Earnings Growth
Composition of Fund
Country/Region Weightings
C.
Miscellaneous Criteria - In selecting the specific
investments to be made available to participants, the Fiduciaries
may consider the following additional criteria:
1.
Nature and frequency of investment reports
2.
Availability and access to administrator
3.
Corresponding costs and expenses associated with plan
recordkeeping
4.
Quantitative and qualitative due diligence regarding the
money managers
5.
Name Recognition
D.
Separate written direction shall be provided to any
individual investment manager appointed to an individually managed
separate account.
VIII.
Criteria for Selection/Retention of Investment Alternatives
(The Employee-Directed Option)
A.
Each investment alternative shall be measured against
Benchmark Returns. The Benchmark Returns for each investment
alternative shall be the lesser of the returns of an appropriately
selected and publicly available Index and the average (or median)
net returns of an appropriately selected peer group(s) universe(s)
of similarly managed funds. The appropriate selection of Indexes
and Funds shall be made on the advice of the Investment Consultant
and shall have financial characteristics appropriate to the
particular intended style of the respective investment
alternatives being measured.
B.
The performance of each investment may be measured against
additional standards and benchmarks established by the Fiduciaries
from time to time as criteria for continued retention of each
investment. The following information may be considered in
determining if an investment option should be replaced.
1.
Various portfolio statistics including average market
capitalization and price-to-book/price-to-earnings ratios for
equities and average credit quality and average maturity/duration
for debt instruments that demonstrate a departure from the initial
or stated investment style (discipline).
2.
Termination of the manager, material change in the
management team or change in ownership.
3.
Increase in direct and indirect expenses.
4.
A trend of increasing volatility expressed by standard
deviation or downside volatility.
5.
A net return lower than the Benchmark in any four
consecutive calendar quarters.
6.
An average net return lower than the Benchmark for the
three year period ending on a calendar quarter.
7.
Sharpe Ratios and/or Morningstar Category Ratings lower
than the Benchmark for the three year period ending on a calendar
quarter.
8.
Marked increase in assets under management.
9.
Any other information that may lead the Fiduciaries to
believe the fund is not fulfilling the intent and purpose of this
Policy.
The
Fiduciaries acknowledge that fluctuating rates of return
characterize the securities markets, particularly during
short-term time periods. Recognizing that short-term fluctuations
may cause variations in performance, the Fiduciaries intend to
evaluate manager performance from a long-term perspective.
C.
Qualitative due diligence of each fund may (but need not)
be conducted through annual written or oral interviews with
appropriate parties at each investment manager. Any issue
materially affecting the management staff and investment process
associated with each fund will be considered, including:
1.
Changes to the management team or the firm’s ownership.
2.
Modifications to the fund’s investment policy, philosophy
and decision process.
3.
Deviation of investment style, regulatory action, and
investigation or litigation by a government agency.
Appendix
A
Selection of Funds
to Fulfill the Statement of Investment Policy
for
Pompano Beach Police & Firefighters’ Retirement System
Employee-Directed - DROP Accounts
Pursuant to
our Statement of Investment Policy, effective August 21, 2006, the
Board as the Plan Fiduciary(ies) has selected the following
investment alternatives representing the stated asset classes and
hereby adopt the following Model Portfolios.
