Cash Management Policy Board: Investment Subcommittee–11/05/14 Meeting 1
Minutes of the Cash Management Policy Board Investment Subcommittee
Buena Vista Conference Center–11/05/14
Attendance:
Member / PresentD. Marvin, Chair / Yes
M. Karia, Co-Chair / Yes
J. Flynn Jr / Yes
C. Flowers / No
T. Cook / No
Others Present:S. McVay, C. Kurtzman, J. Johnstone, J. Hoover
- Call to Order
Mr. Marvincalled the meeting to order.
- Land and Water Endowment Fund Investments Policy
Mr. Marvin reviews the circumstances that led to the Investment subcommittee managing the Land and Water Endowment Fund (the “Fund”) and states the need for different guidelines as the Fund is more long term. Mr. Marvin mentions the initial recommendations for management of the Fund and states the need for three organizations with full investment capabilities. Mr. Marvin recommends allowing the managers to make judgments based on broad guidelines provided by the Cash Management Policy Board.
Mr. Marvin distributes a set of recommended guidelines for discussion. Mr. Marvin specifies three as a reasonable number of managers with equal allocation allowing for diversification along some broad guidelines. Mr. Marvin states the guidelines as investing in assets with perceived quality and allowing substantial latitude in the amount of equity investment. Mr. Marvin notes that broad guidelines allow greater use of judgment from capable investment managers. Mr. Marvin states a guideline of having 35% or less of the equities allocations being international equities as well as a minimum of 5% of the allocation as cash. Mr. Marvin details some examples of how the guideline might incentivize various diverse investment strategies. Mr. Marvin mentions the Delaware Community Foundation as a local manager worthy of consideration.
Mr. Jeffrey Hoover, an investment manager with the Department of Treasury, asks if the Delaware Community Foundation has a published benchmark and suggests that the Delaware Community Foundation could also act as a benchmark for the three managers selected.
Mr. Marvin states uncertainty about the Delaware Community Foundation’s results, noting that they should be considered, but that backward looking selection often leads to purchasing managers at their peaks as opposed to managers who are on the rise for a variety of reasons. Mr. Marvin states a hope that the three managers chosen have slightly different market preferences.
Mr. Hoover suggests some specific splits the diverse managers might hold.
Mr. Marvin states that these specifics would be the responsibility of the managers.
Mr. Stephen McVay, Director of Finance and Treasury Services, notes that specifics would be the managers’ responsibility within the guidelines being discussed.
Mr. Chip Kurtzman, Director at Credit Suisse, notes that the wide range of guidelines will allow a dispersion of results.
Mr. Marvin states the problem with stricter guidelines as an incentive to manage funds from the perspective of job security rather than the perspective of excellent management.
Mr. Hoover asks about the administrative complexity involved in the managers potentially having a variety of asset types and thus a variety of different accounts to be audited.
Mr. Marvin states that the results should produce one memo line from each manager.
Mr. Hoover states the potential importance of transparency of investments.
Mr. Flynn asks about how this is currently reported.
Mr. Hoover explains that Delaware’s cash management is currently reported as separate accounts, but that this is less complex than is being discussed for the Fund because Delaware’s cash accounts only allow fixed income investment.
Mr. Marvin states that the managers will aggregate their investment holdings to a single reported number.
Mr. Kurtzman notes that this could lead to some very thick account statements from each manager.
Mr. Hoover asks if there will be an audited financial statement from the manager.
Mr. Flynn states the mix of assets will be monitored as part of the roll up into the manager’s memo line number.
Mr. Marvin states that the only necessary information is that the items purchased meet the quality standards set forth and that they will report an aggregate number based on the asset values of the various quality products.
Mr. Kurtzman notes that some alternative investments may not be priced monthly.
Mr. Marvin states that there will be a price for every asset than can be stated; even if that price is not updated monthly there will often be an estimated price.
Mr. McVay states a desire to ensure that managers have quality, accurate reporting in order to properly report back to the Cash Management Policy Board. McVay notes that the quality and accuracy of report will come up in the RFP process.
Mr. Hoover asks if alternative investments should have a spelled out definition.
Mr. Marvin states that a definition of alternative investments probably isn’t necessary as the managers will be held responsible for the results. Mr. Marvin notes that there are means for dealing with investments that are identified as extremely out of the ordinary via reports from Credit Suisse or requests for explanation before the Cash Management Policy Board.
Mr. Karia asks if the treasury will be able to record net gains and losses based on the aggregate top page investment summary.
Mr. Hoover confirms the request noting that the administrative work will be taking place at the manager level.
Mr. Marvin notes that the guidelines are not meant to be exhaustive and it is not the intent of the Cash Management Policy Board to discourage prudent investments that had not been considered to date.
Mr. Karia thanks the treasury employees for their work in preparing the recommendation.
Mr. Marvin highlights Mr. Karia’s efforts in researching this recommendation as well.
Mr. Marvin calls for a vote on the recommendation and it passes unopposed.
- Other Items Introduced by the Members
Mr. Flynn asks if the minimum demand on Delaware’s cash over the last ten year was an attainable figure. Mr. Flynn asks that if this number is available, does it make sense to split the management of the cash into three categories instead of two. Mr. Flynn suggests long term, intermediate term, and short term as an example of the structure suggested.
Mr. Marvin states that the prior approach has been to have the minimum plus some margin on hand. Mr. Marvin states that the margin of safety is whatever makes you feel comfortable and that this approach requires that the cash portion should always be half or a little less of the portfolio.
Mr. Hoover states that the ratio remains at 50/50 plus or minus 5%. Mr. Hoover states that when cash comes in the cash portion of the portfolio rises to 55% and then drawing down to 45% and rising back to 55% with the next cash inflow.
Mr. Marvin asks specifically about the max draw down number from the treasury.
Mr. Hoover notes that escheat refunds and revenues have made that number more volatile in recent years.
Mr. Marvin states that historical rate has trended downward since the inception of the Cash Management Policy Board and that rates here and around the world are at historically low levels. Mr. Marvin states that the odds are in favor of rates rising and is forcing people into riskier assets such as stocks or lower quality bonds. Mr. Marvin states that as a result of these conditions he is leery of long term bond purchases.
Mr. Kurtzman notes that the duration of the entire portfolio is around 1.4 years and the reserve portion is a little over 2 years.
Mr. Flynn states the driver for his questions is that both the former treasurer and the new treasurer have at times stated a focused on increasing returns for the states portfolio. Mr. Flynn states that the Treasurer’s office and the Department of Finance should work together to provide the Cash Management Policy Board with more data to allow informed responses regarding maximum and minimum draw down and the maximum flex.
Mr. Marvin states a preference for percentages of draw down and flex as opposed to absolutes.
Mr. McVay states that this information should be attainable relatively quickly and that it could be provided in either twelve month fiscal year blocks or calendar year blocks including peaks, minimums, the difference between the two and the percent of the portfolio this represents.
- Adjournment
Mr. Marvin adjourns the meeting.