Treasury and Resources
Ministerial Decision Report
Amendment to the States of jersey Investment Strategy
- Purpose of Report
Further to the decision on 6 August 2012 (decision reference MD-TR-2012-0070) to amend the ‘States of Jersey Investment Strategies’ and lodge the updated report for presentation to the States, it is recommended the Minister publish the updated ‘States of Jersey Investment Strategies’.
- Background
In compliance with Paragraph 3 of the Public Finances (Transitional Provisions) (No. 2) (Jersey) Regulations 2005, detailed investment strategies are maintained within the ‘States of Jersey Investment Strategies’ for all monies to which Chapter 1 of that regulation applies. These investment strategies include a strategic asset allocation detailing the allotment of monies across investment classes.
The Common Investment Fund (“CIF”) allows its participants access to the various investment classes through investment ‘Pools’ in order to meet their respective strategies. The ‘States of Jersey Investment Strategies’ also contains a strategy for each CIF Pool.
Currently included in the published Pool strategy are investment limitations and conditions which function on an operational rather than strategic level. These conditions are constantly monitored and frequently modified to respond to changes to market conditions.
In accordance with Paragraph 4 of the same regulation, as soon as practical after the Minister for Treasury and Resource (the “Minister”) has prepared the investment strategy, or any review of it, the Minister must present it to the States.
On 6 August 2012 (MD-TR-2012-0070) the Minister decided to amend the ‘States of Jersey Investment Strategies’ and lodge the updated report for presentation to the States. The decision was made following a recommendation that the Pools’ operational investment limitations and conditions be removed from ‘States of Jersey Investment Strategies’ and replaced by an outline of the strategic investment approach adopted by each respective CIF Pool.
In future, changes to the underlying mandate of any CIF Pool will be assessed against the strategic investment approach detailed in the ‘States of Jersey Investment Strategies’. Any mandate change deemed significant enough to modify the investment approach of the Pool will still require the ‘States of Jersey Investment Strategies’ to be presented to the States.
Specific investment limitations and conditions which are used to manage the Pools are to be maintained in the Scheme Rules.
In addition to the above, two additional investment strategies have been included in the document, reflecting investment classes which are anticipated to be included within the CIF before the year end.
A detailed summary of changes have been included in Appendix 1.
- Amendments to the States of Jersey Investment Strategy Document:
The ‘States of Jersey Investment Strategies’ has been amended to outline the ‘strategic investment approach’ adopted by each respective CIF Pool, removing the operational limitations which are used to manage the Pools. This will mean that the investment strategies will be presented to the States when strategic changes are made and obviate the need for reports when operational changes are made.
For example prior to this decision if a Bond Pool want to change its restrictions from having a maximum AAA holding of 5% to 4% the Strategy would need to be adjusted, approved and presented to the States. Following this decision this type of operational change would be included in the Scheme Rules and would not affect the Strategy so it would not require it to be re-presented to the States.
In addition, two additional investment strategies have been included in the document, reflecting investment classes which are anticipated to be included within the CIF before the year end. The additional asset classes will enable the CIF to invest in Global Absolute Return and Property so as to diversify the States investment holdings and better manage risks and return. The Treasurer of the States has taken advice from the external strategic investment advisor, Aon Hewitt, on the changes proposed in this paper.
- Recommendation
It is recommended the Minister publish the amendment to the ‘States of Jersey Investment Strategies for presentation to the States.
5. Reason for Decision
The proposed modifications to the ‘States of Jersey Investment Strategies’ separate the strategic element of the Pool Strategy from the operational. This means that the strategy will only need to be presented to the States when strategic changes have occurred.
Changes to the underlying mandate of any Pool will be assessed against their respective strategic investment approach as detailed in the ‘States of Jersey Investment Strategies’. Any mandate changes deemed significant enough to modify the strategic investment approach of the Pool will require the States of Jersey Investment Strategies to be resubmitted to the States. Specific investment limitations and conditions which are used to manage the Pools are to be maintained in the Scheme Rules.
In addition, the updated States of Jersey Investment Strategies contains two additional investment strategies reflecting investment classes which are anticipated to be included within the CIF before the year end.
6. Resource Implications
There are no additional resource implications from this decision. The changes to strategy will be administered as part of the ongoing responsibilities within the Treasury and Investment Management Team.
Report author : Finance & Investment Manager | Document date : 13th September 2012 |
Quality Assurance / Review : Head of Investment Management & Charitable Funds | File name and path: L:\Treasury\Sections\Corporate Finance\Ministerial Decisions\DSs, WRs and SDs\2012-0076 - Amendment to the States of Jersey Investment Strategy - LB\WR - Amendment to the States of Jersey Investment Strategy - LB.doc |
MD sponsor : Treasurer of the States |
Appendix 1
The following document outlines, on a strategy by strategy basis, amendments made to the Investment Strategy document. The majority of the changes have been driven by a separation of operational elements of the investment strategy from the strategic element. Operational aspects of pool strategies may be modified without changing a pools investment strategy. Further details are summarised in the explanation of the changes to the introduction section.
Significant changes to introductory section
Key changes made to the summarisation of the CIF:
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Two additional paragraphs have been added making clear the segregation of operational restrictions from the Investment Strategy. Operational rules detailing exact mandate conditions were removed from the Investment Strategy and placed in the scheme rules. These conditions are reviewed constantly and minor changes to these limits, periodically requested by investment managers or suggested by the Investment advisor and recommended by the Treasury Advisory Panel, currently necessitate reissue of the entire Investment Strategy document. The amendment to the Investment Strategy makes clear only operational changes significant enough to modify the investment approach of the pool need immediately trigger reissue of the investment strategy document.
The paragraphs added have been detailed below:
“The following section outlines the investment approach of each respective CIF pool. Each pool is managed by an investment manager operating under a specific mandate stipulating investment objectives, limitations and conditions designed to manage both the scope of investment and risk/return characteristics of the pool. These underlying investment conditions are constantly monitored and may be subject to change as market conditions shift. Key investment restrictions are maintained in the scheme rules.
Changes to the underlying mandate of any pool will be assessed against the investment approach detailed below. Any mandate changes deemed significant enough to modify the investment approach of the pool will require the States of Jersey Investment Strategies to be resubmitted to the States.”
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The list of investment pools was updated to provide additional detail regarding pools being investigated for inclusion as ‘alternative investment classes’. Prior strategies included a single line ‘alternative investments’ along with a summary of asset classes which could be included under that heading. This strategy has been updated to list three specific alternative asset classes expected to be assessed for inclusion at over the next 18 months.
Alternative assets under investment pools has been expanded to specify the following*:
Alternative Investment Pools
- UK Property Pools
- Fund of Hedge Funds Pool
- Infrastructure Investment Pools
*Within the strategy section, it is made clear that both the Fund of Hedge Funds Pool and Infrastructure Funds Pool will be investigated in 2013. No strategy is proposed for these pools at this time.
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There was a removal of a reference to the planned Corporate ‘all stocks’ pools; these units were planned during the inception of the CIF and were intended to offer ‘combined’ units in both the short and long term pools. These units are no longer planned as the short and long term corporate bond pools are to be combined effectively becoming the planned ‘all stocks’ unit.
Significant changes to specific strategies
Each of the investment pools Strategies have been summarised in consultation with the States of Jersey Investment Advisor. References to specific mandate rules have been removed and replaced by a clearer description of the overarching statement of strategic intent of the pool unencumbered by detailed investment rules reflected in manager mandates.
Details of the elements which have been removed have been detailed per investment pool and summarised below. The detailed investment limits that have been removed are to be maintained in the CIF scheme rules.
Additional strategies reflecting the alternative investment pools planned to be introduced into the CIF in the last quarter of 2012, first quarter of 2013 are detailed below this section.
Changes to existing investment strategies
UK Equities Pool
1.
The statement of strategic aim makes clear the focus of the pool is to generate returns through investing in constituents of the FTSE All Share Index. The pool may however invest a small proportion of its holdings in non constituent equity or cash. This replaces the manager specific limits relating to minimum and maximum allocation to constituents of the FTSE All Share Index.
2.
Detailed references to approved Stock Exchanges and EEA Regulated Markets published by the Joint Money Laundering Steering Group and use of collective investment vehicles which form the criteria for allowable holdings have been removed from the strategy and are maintained in the scheme rules.
3.
Statement specifically allowing investments in Jersey registered companies provided that the Jersey registered company is a constituent of the benchmark index has been removed from the investment strategy but is maintained in the scheme rules.
4.
Specific rules regarding the maximum levels of concentration of ownership in any single company have been removed from the strategy and are maintained in the scheme rules.
Global Equities Pools
1.
The global equity pools follow identical strategies with minor differences in underlying conditions (pool 1 can hold up to 5% of its portfolio in cash pool 2 can hold 10%). As their investment strategies are identical their investment strategy statement has been combined.
2.
The statement of strategic aim makes clear the focus of the pools is to generate returns through investing through constituents of the MSCI All Country World Index. The pools may, however, invest a small proportion of their holdings in non constituent equity or cash. This replaces the manager specific limits relating to minimum and maximum allocation to constituents of the MSCI All Country World Index.
3.
Detailed references to Regulated, Recognised or Designated Investment Exchanges as determined by the UK Financial Services Authority, Approved Stock Exchanges and EEA Regulated Markets, use of collective investment vehicles or use of investment trusts where the Investment Manager receives fees or shares which form the criteria for allowable holdings, have been removed from the strategy and are maintained in the scheme rules.
4.
Statement specifically allowing investments in Jersey registered companies provided that the Jersey registered company is a constituent of the benchmark index has been removed from the investment strategy and is maintained in the scheme rules.
5.
Specific rules regarding the maximum levels of concentration of ownership in any single company have been removed from the strategy and are maintained in the scheme rules.
6.
Guidelines regarding use of derivatives were simplified to make clear their use was permitted but only for the purpose of hedging foreign exchange exposure.
Global Passive Equity Pool
1.
The statement of strategic aim makes clear the focus of the pools is to mimic the returns of the FTSE World Index and will seek to do this through passively replicating the MSCI All Country World Index. This replaces the manager specific limits relating to minimum and maximum allocation to constituents of the FTSE World Index.
2.
Detailed references to non-benchmark constituent securities and/or bonds (commercial paper) and use of collective investment vehicles which form the criteria for allowable holdings have been removed from the strategy and are maintained in the scheme rules.
3.
Tracking error targets dependant on portfolio size have been removed from the investment strategy but are maintained in the scheme rules.
4.
Guidelines regarding use of derivatives were simplified to make clear their use was permitted but only for the purpose of hedging foreign exchange exposure.
Corporate Bond Pools
1.
The corporate bond pools were previously split between a short term and long term pool. The new strategy makes clear the intention to combine these pools into a single corporate bond pool allowing the manager flexibility to modify the duration of the investment portfolio in accordance with their view.
2.
The statement of strategic aim makes clear the focus of the pool is to generate returns through sterling denominated corporate investment grade debt and as before the pool may invest a small proportion of its holdings in cash. This replaces the manager specific limits relating to minimum and maximum allocation to corporate bonds.
3.
Detailed references to recognised or designated investment exchanges as determined by the UK Financials Services Authority, Approved Stock Exchanges and EEA Regulated Markets published by the Joint Money Laundering Steering Group which form the criteria for allowable holdings have been removed from the strategy and are maintained in the scheme rules.
4.
Specific bond credit rating exposure limits have been removed from the strategy and are maintained in the scheme rules.
5.
The previous strategy made no mention of derivatives, however the new strategy makes clear the limited use of derivative instruments is permitted to modify duration of the portfolio within set limits.
Government Bonds Pools
1.
The government bond pools investment position remains unchanged with the pools remaining fully invested solely in UK government debt.
2.
The pools approach has, however, moved from active to passive following the removal of the previous investment manager. The investment strategy has been adjusted to reflect this and now follows a passive ‘buy and hold’ mandate maintaining the level of duration in each pool.
3.
The government bond pools were previously split between a short term, long term and an index linked government bond pool however the investment strategies for these three pools are identical and their previously segregated strategies have been combined in a single section.
4.
The investment strategy has been amended, with reference to active limits removed.
5.
Under the new passive mandate the pool is limited to holding only UK government debt as opposed to the prior allocation limits between UK government bonds, overseas government bonds and cash.
6.
Detailed references to recognised or designated investment exchanges as determined by the UK Financials Services Authority, Approved Stock Exchanges and EEA Regulated Markets published by the Joint Money Laundering Steering Group which form the criteria for allowable holdings have been removed from the strategy as the Pool is now limited to investing purely in UK government debt.
7.
The previous strategy made no mention of derivatives, however the new strategy makes clear the limited use of derivative instruments is permitted to modify duration of the portfolio but within set limits.
Long Term Cash and Cash Equivalents Pool
1.
The statement of strategic aim clarifies the pool’s focus on generating returns through investing in cash and cash equivalents including cash deposits, commercial paper, Treasury bills, certificates of deposit and floating rate notes.
2.
The statement of strategic aim replaces the investment allocation limits in the previous strategy which specified minimum and maximum allocation to each asset types. These details are maintained in the scheme rules.
Additional investment strategies
It is expected that in the final quarter of 2012 or first quarter of 2013 two new investment classes, global absolute return bond and property, will be added to the CIF. Managers will be appointed to manage these asset classes in line with the assets published investment strategy.
The detailed operational restrictions for these managers will be written into their mandate as part of the appointment process and included within the scheme rules. If the mandate of the manager does not match the investment strategy, the document will need to be re-issued to the States of Jersey before the manager can be appointed.
The investment strategies for the new asset classes are detailed below:
Property Pools
1.
The property pools are to invest in existing pooled funds investing both directly and indirectly in UK property; this will allow diversification across a portfolio of properties without acquiring and holding property directly. The property portfolio will focus on commercial property investing principally but not exclusively in the retail, office and industrial/warehouse sectors. The pools are permitted some flexibility to invest a small portion of their overall portfolio in cash when deemed desirable by the investment managers.
2.
The pools seek to generate returns which are in excess of appropriate UK property benchmarks.
3.
The property pools seek to earn an income return and long term capital returns by allocating assets either directly or indirectly where the managers believe that over the medium term occupational demand for accommodation will be strong or supply restricted, thus providing the foundation for good relative rental growth and consequently enhanced capital values. During shorter periods of time, it is quite possible for the portfolio to produce lower returns than the risk reducing asset pools (bonds/cash). Combined with reduced liquidity due limits placed on redemptions the portfolio is particularly appropriate for Funds which choose to invest monies with a longer term horizon.
4.
The pools are not permitted to trade in derivatives such as options or futures, although the underlying funds may have exposure to derivatives.
Global Absolute Return Bond Pools
1.
The global absolute return bond pools are unconstrained debt focused pools which invest in a wide fixed income universe and have greater discretion than the corporate and government bond pools. The pools are permitted some flexibility to invest a small portion of their overall portfolio in cash when deemed desirable by the investment managers.
2.
The pools will pursue absolute return strategies and seek to consistently achieve positive returns in all market conditions.
3.
The pools tend to exhibit low correlation with fixed income benchmarks and so complement investment in the corporate bond pool to reducing the overall volatility of fixed income returns. Through active management the pool seeks to earn a higher level of income over time than is generally achievable from the cash pools.
4.
The pools are permitted to purchase forward foreign exchange contracts for the purpose of hedging or in respect of the settlement of transactions/interest receipts which are in currencies other than sterling. The pools are also permitted to utilise derivatives in the form of options and futures and can take both long and short positions.
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