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Home My WebLink AboutHandouts_Pension Public Safety_Tab 03_02/01/2010)Village of Tequesta Public Safety Officers' Pension Fund Investment Performance Attribution Supplement 4Q 2009 Key elements of equity manager attribution are as follows: Note to analysis: We used Thomson Portfolio Analytics for the holdings-based attribution analysis, which is based on monthly holdings obtained from Salem Trust. Holdings-based attribution can help to identify active elements of the investment manager. The analysis does not reflect the impact of cash flows or management fees; actual portfolio returns may differ. ^ Based on the Thomson Portfolio Analytics holdings-based attribution analysis, the Rockwood portfolio (including the impact of the monthly cash holdings) lagged the S&P 500 Index during the quarter by 1.15 percentage points (+4.89% vs. +6.04%). ^ Rockwood held 37 securities in the portfolio at the end of December. Based on the underlying security allocations in the portfolio, there was approximately 60% overlap with the S&P 500 Index at quarter-end. The portfolio continues to focus on "smaller" capitalization companies compared to the S&P 500 Index, as the average market cap is significantly less than ($33.1 B vs. $80.6 B). Looking the value metrics and earnings growth rates, the portfolio has a "growth" bias. Relative to the S&P 500 Index, the dividend yield is less, the forecasted price-earnings ratio is greater, price-to-book and price-to-cash flow ratios are greater, and each of the EPS growth rates (trailing and forecasted) are greater. Dividend Yield 1.00 1.94 P!E -Forecast 12-Month 16.40 14.46 Price-to-Cash Flow 15.02 5.10 Price-to-Book 2.68 2.23 EPS Growth -Forecast 12-Month 29.24 28.78 EPS Growth -Historical 12-Month -74.05 -84.54 EPS Growth -Historical 5 Year (VBlE/S) 14.77 8.18 EPS Growth -Long Term (I/B/E/S) 13.55 9.56 Return on Equity 10.86 16.91 Total Debt-to-Equity (Worldscope) 2.35 1.53 Profit Margin -Operating (Worldscope) 4.16 8.59 Attribution analysis generated from Thomson Portfolio Analytics; composite holdings obtained from the Plan's custodian. ~~ Village of Tequesta Public Safety Officers' Pension Fund Holdings-Based G/CS Sector Attribution Analysis 4Q 2009 Rockwood vs. S8~P 500 9130/2009 - 12/31/2009 Materials 7.39 3.52 2.29 7.36 0.21 0.26 0.08 -0.411 -0.32 Industrials 1.79 10.31 9.51 5.38 0.27 0.56 0.01 ' _ 0.21 0.22 _. Consumer Discretionary 19.99 9.35 3.51 9.07 0.83 0.84 0.34 __ -1.21 ~ -0.86 ..___. Consumer Staples 4.70 11.66 6.54 5.02 0.33 0.5 9_0.07. 0.10' 0.17 Health Care 9.75 12.74 -1.92 9.09 -0.26 1.14 -0.15 -1.24 -1.39 Financials 20.24 14.63 0.45 -3.32 -0.10 -0.50 -0.58 0.75 0.17 information Technology 29.67 19.03 10.70 10.70 3.40 2.00 0.53 0.24 0.77 Telecomm Service 0.29 3.08 -3.15 7.43 -0.06 0.23 -0.15 -0.02. -0.16 Cash & Equivalents 2.77 0.00 0.01 0.00 0.00 0.00 0.13 0.00 0.13 SALESFORCE COM INC 3.11 29.58 0.86 BOSTON SCIENTIFIC CORP 1.07 -21.91 -0.52 NVIDIACORP 2.85 24.28 0.80 UBSAG 1.84 -17.85 -0.45 MOSAIC CO 2.24 27.61 0.57 ROSS STORES INC 3.16 -10.37 -0.34 ORACLE CORP 3.07 18.04 0.53 NYSE EURONEXT 2.23 -11.40 -0.27 MEDCO HEALTH SOLUTIONS 3.32 15.55 0.50 SCOTTS MIRACLE GRO CO 2.55 -8.20 -0.21 At the sector level, an overweight to the consumer discretionary and the information technology sectors relative to the index contributed positively to relative performance during the quarter. In fact, the portfolio's allocation to and performance of the stocks in the information technology sector provided the greatest contribution to performance (3.40 percentage points). Three of the top five contributors by holding (Salesforce.com, NVIDIA, and Oracle) are information technology sector constituents. Health care was the largest detractor during the quarter (-0.26 percentage points); Boston Scientific Corp. dragged down performance within the sector. Attribution analysis generated from Thomson Portfolio Analytics; composite holdings obtained from the Plan's custodian. ~~ ~~ Village of Tequesta Public Safety Officers' Pension Fund Holdings-Based Market Cap Attributioni 4Q 2009 MktCap biw $2B and $106 38.04 14.86 6.62 6.62 2.88 1.03 0.34 0.06 0.40 MktCap biw $10B and $20B 17.47 14.01 -0.62 5.86 -0.15 0.83' -0.05 -1.25 -1.30 MktCap btw $206 and $100B 22.69 37.21 2.70 6.32 0.69 2.304 -0.03 -0.76 -0.78 MktCap greaterthan $1006 13.82 33.60 11.31 5.61 1.54 1.84 0.07 0.76 0.82 Cash ~ Equivalents 2.77 0.00 0.01 0.00 0.00 0.00 0.13 0.00 0.13 An overweight to mid cap companies (MktCap btw $2B and $106) added 34 basis points to performance during the quarter. Attribution analysis generated from Thomson Portfolio Analytics; composite holdings obtained from the Plan's custodian. ~~ ~,,~:. The Bogdahn Group Con[iaVisory Investment Management January, 2010 ContraVisory Strategic Equity 2009 Review RECOMMENDATION The Research Group accepts ContraVisory's Strategic Equity product (the Strategy) for those clients seeking an opportunistic relative price trend analysis manager. Research accepts the interworkings of the Strategy's investment process and is confident the manager can execute said process. Research has proven ContraVisory did not deviate from their investment process despite its underperformance in 2009. The strategy has shown it is capable of generating alpha over the long-term and Research believes it should be used as such in a portfolio. Research is less comfortable with the strategy as the core or sole equity position in a portfolio. For those clients concerned about volatility during significant market trend changes, Research recommends the strategy be paired with an index fund or other active manager in some capacity. SUMMARY AND CONCLUSION Several concerns have risen in regards to the Strategy's over 800 bps underperformance in 2009. The most notable concerns stem from the reasons for the Strategy's underperformance, the increase in ADR exposure to over 10% of the portfolio in the latter half of 2009, investment in companies on the Scrutinized Company list and the term "quality" used to describe the Strategy's investment process from client service representatives in recent client meetings. The approach taken by Research was to first confirm Research's previous knowledge of the methodology behind the Strategy's investment process. Once this was confirnied, Research wanted to prove the managers were actually following the rules their methodology laid out and prove the managers did not "break their model." The next step was to understand the underperformance from both an investment process and attribution standpoint. The final step was to conclude if the Strategy is able to generate the alpha it has in the past going forward. The Strategy uses long-term relative price trend analysis over an 18-24 month cycle. More specifically, they are looking for changes in trend direction and typically look for 3-6 months evidence of a trend reversal. The Strategy tries to identify and invest in dominant positive themes that exist in the marketplace through the managers' implementation of long-terns price trends. Their methodology is confirming and not anticipatory. This means they will always be buying off the bottom and selling from the top. A good way to think of the managers of the Strategy is as conservative technicians (gradualists). Formally, their process involves looking at two charts. The first is the relative price of a security to the S&P 500 and the other is simply the absolute price of the security. The Strategy looks for a breakthrough of the 9-month relative moving average from the security's relative price. They will use abreak-through of the absolute price through its 9-month moving average as confirmation for a new price trend emerging. The managers will use these '`signals" to buy and sell stocks in the portfolio (see attached). The next step in the review process was to confirm that the managers of the Strategy implemented the process correctly and did not deviate from the process in an attempt to gain back their underperformance. Research gathered the monthly ContraSignals for 2009 and subsequently put every holding, buy and sell in the portfolio for the year to the test. Research concluded that 100% of the buys and sells in the portfolio for 2009 were enacted upon under the guidelines of the investment process set forth by the managers. The third step in the review process was to understand the reasoning for the underperformance in 2009 both from an investment process and attribution standpoint. From the Strategy's investment process, it was to be expected for the Strategy to underperforni in the market environment in 2009, which saw an extreme pop from the March 2009 lows. As noted early, the Strategy looks at long-term relative prices trends and is always acting in a confirming manner. When you combine these two aspects of the Strategy, it is to be expected the Strategy will underperform when there are quick major stock market theme and leadership changes. In order to confirm this, Research looked at the top performing 75-100 stocks from the S&P 500 for the month of April (the month the Strategy underperformed by over 600 bps). Of these top performing stocks, the ContraSignals were nearly all of the lowest grading ("D" and "F"). Looking at the previous months ContraSignals for the same top S&P 500 performers in April, it can be seen that the relatively quick market increase was not captured through the investment process. The Bogdahn Research Group Research Report Sample The Bogdahn Group ContraVisory Investment Management January, 2010 Next, Research looked at the holdings based attribution for the strategy. Using Thompson Portfolio Analytics, Research performed several types of analysis: l.) GICS sector attribution and 2.) Two relative-return attributions (Research used a 3- month and an 18-month relative return to the benchmark analysis). Most telling was the 18-month relative return analysis for 2009 (see below). ~~®~~~~~ Total Portfolio 100 100 20.98 26.47 20.98 26.47 -14.3 8.81 -5.49 RelRtn (18m vs SP500) 1 7.72 13.79 24.79 32.75 2.11 3.74 -0.42 0.04 -0.38 RelRtn (18m vs SP500) 2 16.08 15.24 40.59 28.02 6.04 4.71 0.56 1.47 2.02 RelRtn (18m vs SP500) 3 19.97 14.62 24.61 11.4 0.47 1.94 0.4 2.72 3.12 RelRtn (18m vs SP500) 4 24.01 14.86 10.77 2.93 5.89 0.1 -4.55 3.72 -0.83 RelRtn (18m vs SP500) 5 23.5E 11.85 -0.9 3.26 0.23 0.25 -3.42 -0.93 -4.35 Negative Values 8.71 29.53 133.39 58.61 6.24 15.57 -6.78 1.79 -4.99 N/A 0 0.1 0 7.32 0 0.15 -0.09 0 -0.09 Using 18-month relative return attribution, it can be seen that in 2009, the Strategy's underweight to the bucket of negative 18-month relative return securities detracted 678 bps from performance. Furthermore, the Strategy's overweight to the top two 18-month relative return buckets, "RelRtn (18m vs SP500) 4 & 5", detracted 455 and 342 bps from performance respectively. From this attribution, it can be concluded the Strategy's underperformance in 2009 was a function of the Strategy not owning securities that had a negative 18-month relative return to the benchmark and owning securities that had positive 18-month relative return to the benchmark. This shows that the Strategy owned those securities that had a positive relative price momentum in 2009 and confirms the Strategy did not abandon its investment process guidelines. The next area of concern was the increased ADR exposure in the latter half of 2009. On the outside looking in, it appears the Strategy began to allocate exposure internationally in an attempt to gain back the underperformance earlier in the year. The majority of the ADR exposure for the 4Q-2009 was in the industrial cyclical and financial sectors. Furthermore, the ContraSignals for the underlying securities in each sector were pointing to positive leadership changes for these two particular sectors. Research further investigated into the ContraSignals for each ADR holding and found the Strategy entered into each holding according to the investment process guidelines. It is Research's conclusion that the increased ADR exposure was a function of the investment process and not an attempt to make up for previous underperformance. When confronted with this question, the managers said if the ADR exposure was an issue with clients, they would replace the ADR security with a domestic security in the same sector with the best long-terns relative price trend and the most attractive entry point. It was also brought to Research's attention the inclusion of a security in the portfolio that is on the Scrutinized Company list. The managers are aware of the security in question and for those accounts the security must be removed, they will do so in a prudent manner. In regards to a client service representative recently using "quality" to describe the Strategy's investment process and 2009 underperformance, Research would like to re-iterate that in no way is a fundamental `°quality" aspect used in the investment process. Many money managers have used the excuse of not owning low quality stocks as a reason for underperfornance in 2009. Although, the Strategy did not own those "low quality" names and tended to own the "high quality" names, quality was not and is not a factor in their investment process. In 2009, it was a coincidence the low quality names, that had significant increases in value, happened to also be the names that were displaying negative long-term relative price trends. Hence, the Strategy did not own them (for their negative price trends) and did not participate in the pop from the bottom. The Bogdahn Research Grnup Research Report Sample 3 The Bogdahn Group ContraVisory Investment Management January, 2010 PERFORMANCE *The below perfo»nance figures were taken from composite clczta.from eVestment. In its 10-year history, the Strategy has lagged its benchmark only two years. It underperformed in 2006 and 2009 by 289 and 805 bps respectively. Taking a closer look at 2009 the performance per quarter are as follows: 1 Q: +363 bps; 2Q: -679 bps; 3Q: -430 bps; 4Q: -81bps. The most painful month came in April where the Strategy underperformed by 603 bps. The abysmal perforn~ance in 2009 has affected the Strategy's 5-year number, where it now trails the benchmark by 28 bps. The I O-year number still is solid where the Strategy has outperformed the benchmark by 496 bps. Looking on a 10-year risk-return graph the strategy is in the upper left quadrant, with a return of 4.01% and a standard deviation of 15.92%. The benchmark over the same 10-year period has a return of -0.95% and a standard deviation of 17.84%. For the 5-years ending 12-31-2009, the Strategy had a return of -0.14% and a standard deviation of 16.29%. The benchmark had a return of 0.42% and a standard deviation 17.62%. For the 5-years ending 12-31-2004 the Strategy had a return of 8.33% and a standard deviation of 15.70%. The benchmark had a return of -2.30% and a standard deviation of 18.49%. In all periods, the Strategy has had a lower standard deviation. Again, it can be seen how the significant underperformance in 2009 has hurt the 5-year numbers, but the 10-year numbers are still strong. CONCLUSION In conclusion, Research continues to be comfortable with their understanding of the Strategy and confirnis the Strategy did not deviate from its investment process, despite its underperformance in 2009. From its understanding of the investment process, Research expected the Strategy to underperform in 2009 due to the significant market leadership change that occurred after the March 2009 lows. Although Research understands the interworkings of the Strategy's investment process, it recognizes the managers' decisions for inclusion and exclusion in the portfolio take some form of art. At this point, Research is confident in the managers' ability to execute the Strategy effectively. Research expects the Strategy to outperform during markets of clearly defined leadership (positive or negative). Research expects the strategy to underperform during major market theme and leadership changes. Furthern~ore, Research expects this underperformance to last anywhere from 3 to 9-months until their ContraSignals can identify the leadership change. During major market theme and leadership changes, Research expects a bull market-to-bear market transition to be easier for the Strategy to capture than a bear market-to-bull market transition. A word of caution is given for those markets that "range trade." In these types of markets, the Strategy will not efficiently be able to capture the long-term relative price trends (because there are none) and in effect will get whipsawed and tend to underperform. The Bogdahn Research Group Research Report Sample The Bogdahn Group ContraVisorv InvesUnent Management January, 2010 *E,rcrmple ora Contr•aSignal more 4F.nlr~: IRi.. PULTE HOMES PAu:10.65 I Relative to S 6 P S00 rY _ Dec 2008 SbMI: t - ~ 7 t _ - l p .. nn.nlipc~rk.-InKK: rrMl~t _ __ -__ _ .._ _L __ ~ -- -- ~ 3p 1"- - '' 30 I ~ I _ _ - Vt.'asi~M.iuy.l..rtN.r1_. - 10 ~ { -~ . _-t ^_. _ .~1w..hsc lYi~a lli~7~q - } --- t ~ ~ -I I _ -- l --- 6 -- ~ -- ... _- - - •- ___ - -^ VryMh~c Irt~d ~ ' - R~.•.trarl 3 1N1-N RdWrtlRiw•IlirNmd _ -N' +---~- 1 ' ~ i i h C ~.. 1. ' ' _... ____ 1 - --~`9R4veh\bri~.lra~.:oC .,N __. .___. __._ .~ _-~ ltihi«ir~rl L 4 10.irna1 ~ { 1 - RELAT 'E PfUC I »~ y:ri~ am a~ aoo XIDr ?xb 2aG !JO- a~oe Positive Phase ~~atE~, ~ Phase ?+ +W A B C -W D E F ?- The Bogdahn Rrscurrh Group Research Report Sample S I n le rn a l ~ ~ n a I L q u ~ Ly ~eV ~ eW Zephyr StyIeADVISOR: The Bogdahn Group Manager vs Benchmark: Return through December 2009 (not annualized if less than 1 year) c 20 L ~_r .` -> .- _ _ ^ American Funds EuroPacific Gr R6 ^ Vanguard Total Intl Stock Index ~--+ - - - ^MSCI World Ex. US Index I ~ 0 ~ - 20 1 year 2 years 3 years 4 years 5 years 10 years Manager vs Benchmark: Return through December 2009 (not annualized if less than 1 year) 1 year 2 years 3 years 4 years 5 years 10 years American Funds EuroPacific Gr R6 39.35% -8.96% -0.47% 4.70% 7.79% 3.74% Vanguard Total Intl Stock Index 36.73% -12.58% -4.06% 2.83% 5.26% 2.29% MSCI World Ex. US Index 34.39% -12.66% -4.85% 2.12% 4.56% 2.04% Created with Zephyr StyIeADVISOR. Manager returns supplied by: Morningstar, Inc. International Equity Review B d h G R Th roup n : e og a ZephyrStyleADVISO Calendar Year Return As of December 2009 0 40 0 - -- --- - -- -- _ _ - ----- - --- - _ - --- ------------- -- -- -- 20% ------------- L ~.` _ :: ~,^ ^ American Funds EuroPacific Gr R6 , 0% - - ~-. ®Vanguard Total Intl Stock Index a~ ~~ ~ ~'-, _ _ _ P _ _ ~ ^MSCI World Ex. US Index -20%~ - ----------- ----------- -- _ _ --- -- ,y -40% I - --- --- 2008 2007 2006 2005 2004 2003 2002 2001 2000 Calendar Year Return As of December 2009 2009 2008 2007 2006 2005 2004 2003 2002 2001 American Funds EuroPacific Gr R6 39.35% -40.53% 18.95% 21.87% 21.12% 19.69% 32.91 % -13.61 % -12.17% Vanguard Total Intl Stock Index 36.73% -44.10% 15.52% 26.64% 15.57% 20.84% 40.34% -15.08% -20.15% MSCI World Ex. US Index 34.39% -43.23% 12.91 % 26.23% 14.95% 20.84% 40.01 % -15.51 % -21.16% Created with Zephyr SryIeADVISOR. Manager returns supplied by: Morningstar, Inc. International Equity Review eADVISOR: The Bo Manager Risk/Return Single Computation January 2000 -December 2009 3 ~ 2 L ~ o 4% • 5% 3% O 5% • z°i° 5°/a ,% 5% not ui° bro iuro faro c~io Standard Deviation Risk-Return Table .lanuarv 2000 -December 2009: Annualized Summary Statistics • American Funds EuroPacific Gr R6 • Vanguard Total Intl Stock Index Market Benchmark: ~ MSCI World Ex. US Index ~ Cash Equivalent: Citigroup 3-month T-bill Return ~%~ Std Dev ~%~ Downside Risk Beta vs. Sharpe Ratio Observs. /o S le American Funds EuroPacific Gr R6 3.74 1 7,00 13.01 1.0617 0.0527 120 Vanguard Total Intl Stock Index 2,29 19.00 14.48 1.1187 -0.0288 120 MSCI World Ex. US Index 2.04 17.99 13.83 1.0982 -0.0444 120 Created with Zephyr StyIeADVISOR. Manager returns supplied by: Morningstar, Inc. c L International Equity Review Risk/Return Recent 5 years Single Computation January 2005 -December 2009 a°i° ~ ~°i° s°i° • 5% 4% 3% 0 2°i° 1 °i° Oo8% 5% 10% 15% 20% 25 Standard Deviation • American Funds EuroPacific Gr R6 • Vanguard Total Intl Stock Index Market Benchmark: ~ MSCI World Ex. US Index ~ Cash Equivalent: Citigroup 3-month T-bill • American Funds EuroPacific Gr R6 c ®Vanguard Total Intl Stock Index ~ Market Benchmark: MSCI World Ex. US Index ~ Cash Equivalent: Citigroup 3-month T-bill Standard Deviation Inc. The Risk/Return 5 Years ending Oct 2004 Single Computation January 2000 -December 2004 VILLAGE OF TEQUESTA (PLAN SPONSN:R) PUBLIC SAFETY OFFICERS' PENSION FUND Investment Policy Statement I. PURPOSE OF INVESTMENT POLICY STATEMENT The Pension Board of Trustees (Board) maintains that an important determinant of future investment returns is the expression and periodic review of the Village of Tequesta Public Safety Officers" Pension Fund (the Plan) investment objectives. To that end, the Board has adopted this statement of Investment Policy and directs that it apply to all assets under their control. In fulfilling their fiduciary responsibility, the Board recognizes that the retirement system is an essential vehicle for providing income benefits to retired participants oi° their beneficiaries. The Board also recognizes that the obligations of the Plan are long-teen and that investment policy should be made with a view toward performance and return over a number of years. The general investment objective is to obtain a reasonable total rate of return -defined as interest and dividend income plus realized and um•ealized capital gains or losses -commensurate with the Prudent Investor Rule and any other applicable ordinances and statutes. Reasonable consistency of return and protection of assets against the inroads of inflation are paramount. However, interest rate fluctuations and volatility of securities markets make it necessary to judge results within the context of several years rather than over short periods of five years or less. The Board will employ investment professionals to oversee and invest the assets of the Plan. Within the parameters allowed in this document and their agreements with the Board, the investment management professionals shall have investment discretion over their mandates, including security selection, sector weightings and investment style. The Board, in performing their investment duties, shall comply with the fiduciary standards set forth in Employee Retirement Income Security Act of 1974 (ERISA) at 29 U.S.C. s. l 104(a) (1) (A) - (C). In case of conflict with other provisions of law authorizing investments, the investment and fiduciary standards set forth in this section shall prevail. .Ianuary ?010 Page 1 ~-(.q,N ubii~:~~ y i u r3~fc s~ ~~T1~ ~/i~i a IL TARGET ALLOCATIONS In order to provide for a diversified portfolio, the Board has engaged investment professional(s) to manage and administer the fund. The investment manager(s) are responsible for the assets and allocation of their mandate only and may be provided an addendum to this policy with their specific performance objectives and investment criteria. The Board has established the following asset allocation targets for the total fund: Asse# Class Tar et Ran a ` Benchmark Index. Domestic E ui 50% 35% - 65% S&P 500 International E uit 10% 0% - 25% MSCI SAFE Broad Market Fixed Income 40% 30% - 50% Barclays Intermediate U.S. Govt/Credit TIPS* 0% 0% - 10% Barcla s TIPS *Benchmark will default to "broad market fixed income" if these portfolios are not funded. Targets and ranges above are based on market value of total Plan assets. The Board will monitor the aggregate asset allocation of the portfolio, and will rebalance to the target asset allocation based on market conditions. If at the end of any calendar quarter, the allocation of an asset class falls outside of its allowable range, barring extenuating circumstances such as pending cash flows or allocation levels viewed as temporary, the asset allocation will be rebalanced into the allowable range. To the extent possible, contributions and withdrawals from the portfolio will be executed proportionally based on the most current market values available. The Board does not intend to exercise short-term changes to the target allocation. III. INVESTMENT PERFORMANCE OBJECTIVES The following performance measures will be used as objective criteria for evaluating the effectiveness of the Investment Managers. A. Total Portfolio Performance The performance of the total portfolio will be measured for rolling three and five year periods. The performance of the portfolio will be compared to the return of the policy indexes comprised of 50% S&P 500, 10% MSCI EAFE., 40% Barclays Intermediate U.S. Government/Credit Bond Index. 2. On a relative basis, it is expected that the total portfolio performance will rank in the top 40~'' percentile of the appropriate peer universe over three and five-year time periods. On an absolute basis, the objective is that the return of the total portfolio will equal or exceed the actuarial earnings assumption (8%), and provide inflation protection by meeting Consumer Price Index plus 3%. January 2010 Page 2 B. Equity Performance The combined equity portion of the portfolio, defined as common stocks and convertible bonds, is expected to perform at a rate at least equal to the 83% S&P 500 and 17% MSCI EAFE. Individual components of the equity portfolio will be compared to the specific benchmarks defined in each Investment Manager addendum. All portfolios are expected to rank in the top 40th percentile of the appropriate peer universe over three and five-year time periods. C. Fixed Income Performance The overall objective of the fixed income portion of the portfolio is to add stability and liquidity to the total portfolio. The fixed income portion of the portfolio is expected to perform at a rate at least equal to the Barclays Capital U.S. Intermediate Government/Credit Index. All portfolios are expected to rank in the top 40th percentile of the appropriate peer universe over three and five-year time periods. D. Treasury Inflation Protection Security (TIPS) Performance The overall objective of the TIPS portfolio, if utilized, is to provide inflation protection while adding stability to the total portfolio. If TIPS are utilized the strategy is expected to approximate the structure and performance of the Barclays Capital U.S Treasury TIPS Index. IV. INVESTMENT GUIDELINES A. Authorized Investments Pursuant to the investment powers of the Board of Trustees as set forth in the Florida Statutes and local ordinances, the Board of Trustees sets forth the following investment guidelines and limitations: 1. Equities: a. Must be traded on a national exchange or electronic network; and b. Not more than 5% of the Plan's assets, at the time of purchase, shall be invested in the common stock, capital stock or convertible stock of any one issuing company, nor shall the aggregate investment in any one issuing company exceed 5% of the outstanding capital stock of the company; and c. Convertible bonds of domestic corporations and traded in domestic dollars, and are easily negotiable; and d. Additional criteria may be outlined in the manager's addendum. January 2010 Page 3 2. Fixed Income: a. All fixed income investments shall have a minimum rating in one of the four highest classifications by a major rating service; and b. The value of bonds issued by any single corporation shall not exceed 5% of the total fund; and c. Preferred Stocks of domestic corporations, and are easily negotiable; and d. Additional criteria maybe outlined in the manager's addendum. 3. Money Market: a. The money market fund or STIF options provided by the Plan's custodian; and b. Have a minimum rating of Standard & Poor's A 1 or Moody's P 1. 4. Pooled Funds: Investments made by the Board may include pooled funds. For purposes of this policy pooled funds may include, but are not limited to, mutual funds, commingled funds, exchange-traded funds, limited partnerships and private equity. Pooled funds may be governed by separate documents which may include investments not expressly permitted in this Investment Policy Statement. In the event of investment by the Plan into a pooled fund, the Board will adopt the prospectus or governing policy of that fund as the stated addendum to this Investment Policy Statement. B. Trading Parameters When feasible and appropriate, all securities shall be competitively bid. Except as otherwise required by law, the most economically advantageous bid shall be selected. Commissions paid for purchase of securities must meet the prevailing best-execution rates. The responsibility of monitoring best price and execution of trades placed by each manager on behalf of the Plan will be governed by the Portfolio Management Agreement between the Plan and the Investment Managers. C. Limitations 1. Investments in corporate common stock and convertible bonds shall not exceed seventy (70%) of the Plan assets at market. 2. Foreign securities shall not exceed twenty-five percent (25%) of Plan's market value. 3. All equity and fixed income securities must be readily marketable. Commingled funds must be independently appraised at least annually. January 2010 Page 4 D. Absolute Restrictions No investments shall be permitted in; L Any investment not specifically allowed as part of this policy. 2. Illiquid investments, as described in Chapter 215.47, Florida Statutes. 3. Direct investment in `Scrutinized Companies' identified in the periodic publication by the State Board of Administration ("SBA list", updated on their website www.sbafla.com/fsb/ ), is prohibited. Any security identified as non-compliant on or before January 1, 2010 must be divested by September 1, 2010. Securities identified after January 1, 2010, are subject to the provisions of section V. (c) below. However, if divestiture of business activities is accomplished and the company is subsequently removed from the SBA list, the manager can continue to hold that security. Indirect investment in `Scrutinized Companies' (through pooled funds) are governed by the provisions of Section V(G) below. V. COMMUNICATIONS A. On a monthly basis, the custodian shall supply an accounting statement that will include a summary of all receipts and disbursements and the cost and the market value of all assets. B. On a quarterly basis, the Investment Managers shall provide a written report affirming compliance with the security restrictions of Section IV (as well as any provisions outlined in the Investment Manager's addendum). In addition, the Investment Managers shall deliver a report each quarter detailing the Plan's performance, forecast of the market and economy, portfolio analysis and current assets of the Plan. Written reports shall be delivered to the Board within 30 days of the end of the quarter. A copy of the written report shall be submitted to the person designated by the Village, and shall be available for public inspection. The Investment Managers will provide immediate written and telephone notice to the Board of any significant market related or non-market related event, specifically including, but not limited to, any deviation from the standards set forth in Section IV or their Investment Manager addendum. C. If the Fund owns investments, that complied with section IV at the time of purchase, which subsequently exceed the applicable limit or do not satisfy the applicable investment standard, such excess or noncompliant investments may be continued until it is economically feasible to dispose of such investment in accordance with the prudent man standard of care, but no additional investment may be made unless authorized by law or ordinance. An action plan outlining the investment `hold or sell' strategy shall be provided to the Board immediately. D. The Investment Consultant shall evaluate and report on a quarterly basis the rate of return net of investment fees and relative performance of the Plan. January 2010 Page 5 E. The Board will meet periodically to review the Investment Consultant performance report. The Board will meet with the investment manager and appropriate outside consultants to discuss performance results, economic outlook, investment strategy and tactics and other pertinent matters affecting the Plan on a periodic basis. F. At least annually, the Board shall provide the Investment Managers with projected disbursement needs of the Plan so that the investment portfolio can be structured in such a manner as to provide sufficient liquidity to pay obligations as they come due. To this end the Investment Managers should, to the extent possible, attempt to match investment maturities with known cash needs and anticipated cash-flow requirements. G. The Investment Consultant, on behalf of the Plan, shall send a letter to any pooled fund referring the investment manager to the listing of `Scrutinized Companies' by the State Board of Administration (`SBA list'), on their website www.sbafla.com/fsb/. This letter shall request that they consider removing such companies from the fund or create a similar actively managed fund having indirect holdings devoid of such companies. If the manager creates a similar fund, the Plan shall replace all applicable investments with investments in the similar fund in an expedited timeframe consistent with prudent investing standards. For the purposes of this section, a private equity fund is deemed to be an actively managed investment fund. However, after sending the required correspondence, the Plan is not required to sell the pooled fund. VL COMPLIANCE A. It is the direction of the Board that the plan assets are held by a third party custodian, and that all securities purchased by, and all collateral obtained by the plan shall be properly designated as Plan assets. No withdrawal of assets, in whole or in part, shall be made from safekeeping except by an authorized member of the Board or their designee. Securities transactions between abroker-dealer and the custodian involving purchase or sale of securities by transfer of money or securities must be made on a "delivery vs. payment" basis to insure that the custodian will have the security or money in hand at conclusion of the transaction. B. The investment policy shall require all approved institutions and dealers transacting repurchase agreements to execute and perform as stated in the Master Repurchase Agreement. All repurchase agreement transactions shall adhere to the requirements of the Master Repurchase Agreement. C. At the direction of the Board operations of the Plan shall be reviewed by independent certified public accountants as part of any financial audit periodically required. Compliance with the Board's internal controls shall be verified. These controls have been designed to prevent losses of assets that might arise from fraud, error, or misrepresentation by third parties or imprudent actions by the Board or employees of the plan sponsor, to the extent possible. D. Each member of the Board shall participate in a continuing education program relating to investments and the Board's responsibilities to the Plan. It is suggested that this education process begin during each Trustee's first term. January 2010 Page 6 E. With each actuarial valuation, the Board shall determine the total expected annual rate of return for the current year, for each of the next several years and for the long term thereafter. This determination shall be filed promptly with the Department of Management Services, the plan's sponsor and the consulting actuary. F. The proxy votes must be exercised for the exclusive benefit of the participants of the Plan. Each Investment Manager shall provide the Board with a copy of their proxy voting policy for approval. On a regular basis, at least annually, each manager shall report a record of their proxy vote. VII. CRITERIA FOR INVESTMENT MANAGER REVIEW The Board wishes to adopt standards by which judgments of the ongoing performance of a portfolio manager may be made. If, at any time, any three of the following is breached, the portfolio manager may be warned of the Board's serious concern for the Plan's continued safety and performance. If any five of these are violated the consultant may recommend a manager search for that mandate. ^ Four (4) consecutive quarters of relative under-performance verses the benchmark. ^ Three (3) year trailing return below the top 40th percentile within the appropriate peer group and under performance verses the benchmark. ^ Five (5) year trailing return below the top 40th percentile and under performance verses the benchmark. ^ Three (3) year downside volatility greater than the index (greater than 100), as measured by down market capture ratio. ^ Five (5) year downside volatility greater than the index (greater than 100), as measured by down market capture ratio. ^ Style consistency or purity drift from the mandate. ^ Management turnover in portfolio team or senior management. ^ Investment process change, including varying the index or benchmark. ^ Failure to adhere to the IPS or other compliance issues. ^ Investigation of the firm by the Securities and Exchange Commission (SEC). ^ Significant asset flows into or out of the company. ^ Merger or sale of firm. ^ Fee increases outside of the competitive range. ^ Servicing issues - key personnel stop servicing the account without proper notification. ^ Failure to attain a 60% vote of confidence by the Board. Nothing in this section shall limit or diminish the Board's right to terminate the manager at any time for any reason. January 2010 Page 7 VIII. APPLICABLE VILLAGE ORDINANCES If at any time this document is found to be in conflict with the Village Ordinances or applicable Florida Statutes, the Ordinances and Statutes shall prevail. IX. REVIEW AND AMENDMENTS It is the Board's intention to review this document at least annually subsequent to the actuarial report and to amend this statement to reflect any changes in philosophy, objectives, or guidelines. In this regard, the Investment Manager's interest in consistency in these matters is recognized and will be taken into account when changes are being considered. If, at any time, the Investment Manager feels that the specific objectives defined herein cannot be met, or the guidelines constrict performance, the Board should be notified in writing. By initialing and continuing acceptance of this Investment Policy Statement, the Investment Managers concur with the provisions of this document. By signing this document, the Chairman attests that this policy has been recommended by the Investment Consultant, reviewed by the plan's legal counsel for compliance with applicable law, and approved by the Board of Trustees. X. FILING OF THE INVESTMENT POLICY Upon adoption by the Board, the investment policy shall be promptly filed with the Florida Department of Management Services, the Village, and the plan's actuary. The effective date of the Investment Policy shall be the 31 days following the filing date with the Village. VILLAGE OF TEQUESTA PUBLIC SAFETY OFFICERS' PENSION PLAN Chairman, Board of Trustees Date January 2010 Page 8 {- I~ ~,~ u U u- l~ r v roc a r c emu.-~-~t~ ~1 ~ ~~ v Adjustable Rate Mortgage (Terms Defined) • Adjustable Rate Mortgage - A type of mortgage that may have an interest rate fixed for some period, then the interest rate after this period will change or "adjust" periodically. • Subprime Mortgage - A mortgage that is offered to borrowers with a lower credit quality and a greater chance of risk or default. As these loans are made with more risk involved they often involve significantly greater interest rates charged to the borrower. • Option ARM Mortgage -This is a type of adjustable rate mortgage that allows a borrower to choose from various payment options, which often include allowing the borrower to make interest-only or even minimum payments. • Alt-A Mortgage -Type of mortgage that inherently maintains more risk associated with it than "prime" mortgages but not as risky as "subprime" mortgages. These mortgages are often characterized by borrowers providing a lack of documentation, having high debt-to-income ratios, and possibly low credit ratings. This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~,\ ~,~ What's a "mortgage reset"? When an adjustable rate mortgage that contains a fixed introductory interest rate period, resets to a new interest rate andlor a new amortization schedule. This new interest rate is often variable and linked to an index plus a "margin" component. "In all nearly $1.65 Trillion of ARMs representing 15.5% of the total outstanding mortgage universe will reset by 2011."~ 'Citigroup Global Markets, "The Great Reset Surge of 2008". This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~\ ~, Figure 1.7. Montniy Mortgage Rate Resets First reset in billions of U. S. dollars] _ ~ Option adjus~dbte rate ~ Su6prime A/r-A ~ Prime ~ Agency ~, '~ M -~ ..~ i~~ ~-_ 2407 2009 2011 2013 201 - 45 - 40 - 35 - 30 - 25 - 20 -15 -10 - 5 0 2 Source: Credit Suisse_ zlnternational Monetary Fund, 2009, Global Financial Stability Report: Market Developments and Issues (Washington, April). This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~~ 1~,' `._. Fitch: • $47B Prime/Alt-A 2010 IO Loan Resets to Place Added Stress on U.S. ARM Borrowers • Approximately $134 billion of securitized "option" adjustable-rate mortgages will reset to higher payments (though 2011) • On average new "option" adjustable-rate mortgage payments are 63% higher than the initial minimum payment. This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~~ ~H . Figure 1.9. Realized and Expected Writedowns or Loss Provisions for Banks by Region ~ln billions of U.S, dollars unless other4vise shown) - Expected additional writedowns or 1200 - bss provisions: 2009: t?2-2010.04 -10 Realized writedowns or lass prov~sbns:2007.-Q2-2009-Q2 1000 ~ Implied crrmU/atit+~ bss rate - 8 ^ (percent. right scale) 800 600 400 200 0 0 3 Source: IMF staff estimates. 'Includes Denmark. Iceland. Norway. Sweden, and Switzerland. ?Includes Australia, Hong Kong SAR. Japan, Neur Zealand, and Singapore. 3lnternational Monetary Fund, 2009, Global Financial Stability Report: Navigating the Financial Challenges Ahead (Washington, October). This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~.~ 1~,~ `..,. - 6 - d ^ - 2 United United Euro Other mature Asian States Kingdom Area Europe Is this manageable.. The primary lenders were Countrywide Financial, Washington Mutual, American Home Mortgage, and Wachovia -- which have already gone bankrupt andlor become absorbed by larger banks, that have written down values of these loans. Low interest rate environment allows for easing of some forms of adjustable mortgages. (Even some mortgages adjusting lower). Banks have raised capital to handle losses. Tax incentives to homebuyers. This presentation is provided for informational purposes only, and does not represent any recommendations or solicitations. ~~ A.:. uli^k Treasury Inflation Protected Securities (TIPS) Overview u ~- Treasury Inflation Protected Securities (TIPS) Defined • Treasury Inflation Protected Securities (TIPS) are a type of Treasury bond that provide protection against inflation. The principal amount of the security is adjusted based upon the Consumer Price Index (CPI), and is increased with inflation and decreased with deflation. TIPS pay interest semiannually based on the principal amount. As a result of this principal fluctuation interest payments rise or fall based upon inflation or deflation of the principal. This information is provided for educational purposes only. Investing in TIPS does not guarantee preservation of capital or hedges against inflation. Past performance is used for illustrative reasons and cannot be used to represent future returns. Objectives of Investment in Securities (TIPS) Treasury Inflation Protected Typical objectives of investments in TIPS by pension fund investors include: Hedge against inflation Preserve purchasing power Increased cash flows Greater diversification of fixed income assets (reduce total portfolio volatility) This information is provided for educational purposes only. Investing in TIPS does not guarantee preservation of capital or hedges against inflation. Past performance is used for illustrative reasons and cannot be used to represent future returns. TIPS Investment Vehicles Direct Investment Separate Managed Accounts Commingled Funds -- O,r~en Ended Mutual Fund --Exchange Traded Fund (ETF) This information is provided for educational purposes only. Investing in TIPS does not guarantee preservation of capital or hedges against inflation. Past performance is used for illustrative reasons and cannot be used to represent future returns. TIPS Review a s of Dec 31, 2 00 9 Zephyr SryIeADVISOR: The Bogdahn Group Manager vs Benchmark: Return through December 2009 (not annualized if less than 1 year) 20 --- --------------- ---------------------------------------------------- 1 0 _ _ _ ^ Vanguard Inflation-Protected Secs ^ Barclays Capital U.S. Treasury: U.S. TIPS ~--r ~ _ ^ Barclays Capital U.S. Aggregate ^ S&P 500 ~ / L.L 0 -10 - ----------- ------------- 1year 2 years 3 years 4 years 5 years 7 years 10 years Manager vs Benchmark: Return through December 2009 (not annualized if less than 1 year) 1 year 2 years 3 years 4 years 5 years 7 years 10 years Vanguard Inflation-Protected Secs 10.80% 3.75% 6.30% 4.80% 4.36% 5.42% N/A Barclays Capital U.S. Treasury: U.S. TIPS 11.41 % 4.30% 6.69% 5.09% 4.63% 5.70% 7.69% Barclays capital U.S. Aggregate 5.93% 5.59% 6.04% 5.61 % 4.97% 4.76% 6.33% S&P 500 26.46% -10.74% -5.63% -0.67% 0.42% 5.52% -0.95% Created with Zephyr StyIeADVISOR. Manager returns supplied by: Morningstar, Inc. TIPS Review as of Dec 31 ~ 20 09 Zephyr StyIeADVISOR: The Bogdahn Group Calendar Year Return As of December 2009 30% - - -- ------ 20% ______________ - ____________ -________ 10% - ~ _. ^ Vanguard Inflation-Protected Secs 0% TIPS S Treasu : U ital U S l C ^ B ~ . ry . . . ap arc ays ~ ^ Barclays Capital U.S. Aggregate ~-10% ----- ---------- - ----------- -- - ^S&P 500 -20% _____ __________ ____________________ -_----_-__ ____ -30% ----- ----- ---- -------------------- ---------- ---- -40 2008 2007 2006 2005 2004 2003 2002 2001 2000 -- Calendar Y ear Return As of December 2009 2009 2008 2007 2006 2005 2004 2003 2002 2001 Vanguard Inflation-Protected Secs 10.80% -2.85% 11.59% 0.43% 2.59% 8.27% 8.00% 16.61 % 7.61 Barclays Capital U.S. Treasury: U.S. TIPS 11.41 % -2.35% 11.63% 0.41 % 2.84% 8.46% 8.39% 16.56% 7.89% Barclays Capital U.S. Aggregate 5.93% 5.24% 6.96% 4.33% 2.43% 4.34% 4.11 % 10.27% 8.42% S&P 500 26.46% -37.00% 5.49% 15.79% 4.91 % 10.88% 28.68% -22.10% -11.88% Created with Zephyr SryIeADVISOR. Manager returns supplied by: Morningstar, Inc. TIPS Review as of Dec 31 ~ 200J Zephyr StyIeADVISOR: The Bogdahn Group Manager Risk/Return Single Computation July 2000 -December 2009 8% 6% ~ • Vanguard Inflation-Protected Secs ° • Barclays Capital U.S. Treasury: U.S. TIPS ~ a io ~ • Barclays Capital U.S. Aggregate ~ 0 ~ 2% Market Benchmark: ~ S&P 500 ~ Cash Equivalent: Citigroup 3-month T-bill o°i° ° 2 /0 2% 4% 6% 8% 10% 12% 14% Standard Deviation 16% 18% Risk-Return Table July 2000 -December 2009: Annualized Summary Statistics Return Std Dev Downside R sk Beta vs Sharpe Observs. ~o/a~ ~%~ o /o . S le Ratio Vanguard Inflation-Protected Secs 7.13 6.84 5.25 1.5414 0.6488 114 Barclays Capital U.S. Treasury: U.S. TIPS 7.37 6.87 5.29 1.5363 0.6814 114 Barclays Capital U.S. Aggregate 6.24 3.86 2.90 1.1978 0.9188 114 S&P 500 -0.95 16.09 12.36 0.9937 -0.2265 114 Created with Zephyr StyIeADVISOR. Manager returns supplied by: Morningstar, Inc. TIPS Review as of Dec 31, 2009 Risk/Return Recent 5 years Single Computation January 2005 -December 2009 L s"/or 0 o°i°~ n°/ ~°/ d°/ R% R% 1n% 17% 14% 16% 18 Standard Deviation SOR: The • Vanguard Inflation-Protected Secs • Barclays Capital U.S. Treasury: U.S. TIPS • Barclays Capital U.S. Aggregate Market Benchmark: ~ S&P 500 ~ Cash Equivalent: Citigroup 3-month T-bill Risk/Return 5 Years ending Oct 2004 Single Computation July 2000 -October 2004 1 z° l o° a° s° C L 40 2° o° -z° -4° 6° ° o • ° ~ ° o ° ~ ° ° ° / / / / / / r / / • Vanguard Inflation-Protected Secs • Barclays Capital U.S. Treasury: U.S. TIPS • Barclays Capital U.S. Aggregate Market Benchmark: ~ S&P 500 ~ Cash Equivalent: Citigroup 3-month T-bill C N - /% 2% 4% 6% 8% 10% 12% 14% 16% 18% Standard Deviation with Zephyr SryIeADVISOR. Manager returns supplied by: Morningstar, Inc.