slide1 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Sofia Anastopoulos , CFA Senior Manager GFOA Research & Consulting 312-578-2292, sanastopoulos@gfoa.org PowerPoint Presentation
Download Presentation
Sofia Anastopoulos , CFA Senior Manager GFOA Research & Consulting 312-578-2292, sanastopoulos@gfoa.org

Loading in 2 Seconds...

play fullscreen
1 / 50

Sofia Anastopoulos , CFA Senior Manager GFOA Research & Consulting 312-578-2292, sanastopoulos@gfoa.org - PowerPoint PPT Presentation


  • 135 Views
  • Uploaded on

I NVESTING B ASICS SC GFOA Conference Sheraton Convention Center, Myrtle Beach,South Carolina October 13, 2008. Sofia Anastopoulos , CFA Senior Manager GFOA Research & Consulting 312-578-2292, sanastopoulos@gfoa.org. Investment Framework & Policy Internal Control Safekeeping

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Sofia Anastopoulos , CFA Senior Manager GFOA Research & Consulting 312-578-2292, sanastopoulos@gfoa.org' - dinh


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

INVESTING BASICS

SC GFOA Conference

Sheraton Convention Center,

Myrtle Beach,South Carolina

October 13, 2008

Sofia Anastopoulos, CFA

Senior Manager

GFOA Research & Consulting

312-578-2292, sanastopoulos@gfoa.org

slide2
Investment Framework & Policy
  • Internal Control
    • Safekeeping
  • CDs and collateralization
t reasury i nvestment m anagement
TREASURY & INVESTMENT MANAGEMENT
  • All activities undertaken to insure liquidity and maximum investment return on government’s idle cash
  • Balancing act –
    • risk and return
    • liquidity while maximizing return
t reasury m anagement
TREASURY MANAGEMENT
  • Cash mobilization
    • Get cash in as fast as you can
  • Cash concentration
    • Investing – Do something worthwhile with cash
  • Disbursement
    • Release cash efficiently
f iduciary
FIDUCIARY
  • Individual or institution
  • Special relationship of trust with another person or group
  • Legally responsible for assets
f iduciary1
FIDUCIARY

EXAMPLES

  • Treasurers
  • Finance directors
  • Investment personnel
  • Oversight boards
  • Investment advisers
  • Brokers are NOT
f iduciary2
FIDUCIARY
  • Legally bound to:
      • Make decisions in the best interest of the beneficiary
      • Act prudently
      • Always put the beneficiaries’ interests before their own
p rudence
PRUDENCE
  • Original standard of investment care –Prudent Person
  • Consider safety and yield of an investment
    • “ to exercise the judgment and care, under the circumstances then prevailing, which persons of prudence, character and intelligence in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital.”
p rudence1
PRUDENCE
  • Limitations - did not address how investment fits into overall portfolio
  • Evolving standards of fiduciary duty
    • Prudent Investor
    • Prudent Expert
i nvestment p olicy
INVESTMENT POLICY
  • WHY?
    • Defines investment program
      • Legal & permitted activities
      • Who’s in charge
      • Measurement of results
      • Relationship to counterparties
    • Protection
    • Dynamic process
i nvestment p olicy1
INVESTMENT POLICY

COMPONENTS

  • Scope
    • Funds covered by policy
      • Different funds have different objectives
i nvestment p olicy2
INVESTMENT POLICY

COMPONENTS

  • Objectives
    • Safety
    • Liquidity
    • Yield/return (SLY)
    • Other
      • Conform to laws
i nvestment p olicy3
INVESTMENT POLICY

COMPONENTS

  • Standards of Care
    • Prudence
    • Ethics & conflict of interest
      • Existing guidelines for the entity
      • Expectations of investment personnel
      • Guidelines for handling deviations
    • Delegation of authority
      • Cite statutes
      • Identify personnel by title
      • Discuss personal liability
i nvestment p olicy4
INVESTMENT POLICY

COMPONENTS

  • Investment Instruments
    • State statutes - legality
    • Risk tolerance
    • Selection & purchase of investments
    • Collateralization
  • Authorized institutions
i nvestment p olicy5
INVESTMENT POLICY

Investing is fundamentally a balancing act

risk and return

  • So investment policy should address risk & establish a risk tolerance
      • Diversification
i nvestment p olicy6
INVESTMENT POLICY
  • Risks
    • Credit (default) risk
      • Risk that all / some of principal and interest will be lost

To mitigate credit risk:

        • know your banks and/or broker-dealers
        • Require delivery-versus-payment
        • Limit investments to those of highest credit quality
i nvestment p olicy7
INVESTMENT POLICY
  • Liquidity Risk
    • Ability to sell investment (prior to maturity)
      • Some short-term investments are relatively illiquid
    • Marketability – ability to sell security on short notice without incurring meaningful loss in price
i nvestment p olicy8
INVESTMENT POLICY
  • Market Risk
    • Risk value decreases due to changes in market
      • Interest rate risk
  • Reinvestment Risk
    • Risk that cash flows from securities reinvested at a lower rate than original investment
      • callable
i nvestment p olicy9
INVESTMENT POLICY
  • Reputational Risk
    • Risk that mistakes negatively harm reputation of government and official
    • Loss of stature
gfoa rp d iversification
GFOA RP-DIVERSIFICATION

Fiduciary responsibility to reach objectives: safety, liquidity, return

  • Greater risk typically increases returns
  • Effective management of risk critical to achievement of objectives
gfoa rp d iversification1
GFOA RP-DIVERSIFICATION
  • Diversification-useful strategy for managing risk
    • Establish risk profile
    • Use profile to determine levels of diversification
    • Can be achieved by investing in variety of securities with dissimilar risk characteristics
    • Areas where diversification can be achieved include:
      • Maturity distribution
      • Sector allocation
      • Issuer allocation
      • Structures
gfoa rp d iversification2
GFOA RP-DIVERSIFICATION

Recommendations

Government investors should:

  • Define objectives
  • Prepare cash flow – determine liquidity
  • Consider political climate
  • Use LGIPs, repos, MMMF to ensure liquidity day-to-day
  • Establish limits on
    • specific securities
    • specific business sectors
gfoa rp d iversification3
GFOA RP-DIVERSIFICATION

Recommendations

Government investors should:

  • Develop guidelines for investing in single classes
  • Limit investments in securities with high credit and/or market risk
  • Limit particular structures
  • Define maturity/duration ranges
  • Establish risk profile for portfolio
i nvestment p olicy10
INVESTMENT POLICY

COMPONENTS

  • Safekeeping
    • Third-party
    • Delivery versus payment (DVP) settlement
  • Internal Control
i nvestment p olicy11
INVESTMENT POLICY

COMPONENTS

  • Accounting
    • GAAP
  • Reporting
    • specify types and frequency of reports
      • provide information for wide audiences
      • both technical and easy-to-read
  • Monitoring and adjusting the portfolio
      • marking-to-market
i nvestment p olicy12
INVESTMENT POLICY

COMPONENTS

  • Performance evaluation
      • Benchmarks
        • Criteria for selecting benchmarks
        • Minimum yield standards
        • Methods of calculation
i nvestment p olicy13
INVESTMENT POLICY

COMPONENTS

  • Appendices
    • Authorized personnel - title
    • Statutes, ordinances, etc.
    • Authorized broker-dealers
    • Authorized depositories
    • B-D questionnaire and certification
i nvestment p olicy14
INVESTMENT POLICY

COMPONENTS

  • Appendices (cont’d)
    • Master repurchase agreement
    • Safekeeping agreement
    • Wire transfer agreement
    • Collateralization agreement
    • Sample investment reports
    • Formulas for returns
    • Internal control checklist
    • GFOA recommended practices
i nvestment p olicy15
INVESTMENT POLICY

ADDITIONALPOLICYTHOUGHTS

  • Internal document
    • Involve staff responsible for investments
  • External document
    • Distribute to outside parties
  • Board approval
    • As resolution, ordinance, etc.
  • Annual reviews & updates
i nvestment p olicy16
INVESTMENT POLICY

HELP

  • Government Finance Officers Association

“Sample Investment Policy”

www.gfoa.org

i nternal c ontrol1
Citizens/tax payers have 2 expectations for their money

Safeguarded

Spent wisely for authorized purposes

INTERNAL CONTROL
i nternal c ontrol2
Process

determined by an organization's people and information technology (IT) systems

designed to help the organization accomplish specific goals

helps direct, monitor, measure entity’s resources

protects from fraud, misuse, poor decisions, errors, loss

INTERNAL CONTROL
i nternal c ontrol3
INTERNAL CONTROL

ORGANIZATIONAL STRUCTURE

Management’s attitude

  • Familiarize staff with formal procedures and internal control
  • Train managers to detect erratic employee behavior
  • Mandate reporting of perceived impropriety or errors
  • Implement and communicate consequences
  • Provide professional development
i nternal c ontrol4
INTERNAL CONTROL

ORGANIZATIONAL STRUCTURE OR DESIGN

Segregate duties

  • Authorization of transactions
    • Clear lines of authority and authorizations
    • Level of authorizations spelled out in procedures
    • One “go-to” person for questions
  • Execution of transactions
  • Recording of transactions
  • Reconciling of transactions
  • Maintaining custody / control of assets
    • Custody separate from accounting collusion
i nternal c ontrol5
INTERNAL CONTROL

ORGANIZATIONAL STRUCTURE OR DESIGN

Segregate duties

  • Harder for small entities but “do-able”
  • Management’s awareness of issue helps
    • Perhaps other controls implemented
    • Mandatory vacations
    • Rotating tasks
i nternal c ontrol6
INTERNAL CONTROL

ORGANIZATIONAL STRUCTURE

HR – PERSONNEL

  • Pre-employment screening
    • Check references and credentials
    • Strict screening for financial positions with bona fide security requirements
      • Check background and credit
    • Test skills, knowledge and accuracy
    • Require drug tests
i nternal c ontrol7
INTERNAL CONTROL

ORGANIZATIONAL STRUCTURE

HR –Human Resources

  • Mandatory Vacations
    • Hard to cover up when someone else takes over the position
  • Document policies
  • Train, train, train
i nternal c ontrol8
INTERNAL CONTROL

PRE-EMPLOYMENT SCREENING

  • Check references and credentials
  • Strict screening for financial positions with bona fide security requirements
    • Check background for criminal activity
  • Test skills, knowledge and accuracy
  • Require drug tests
i nternal c ontrol9
INTERNAL CONTROL

TRAININING

  • Minimize loss from judgment errors and technical mistakes
  • Familiarize staff with formal procedures and internal control
  • Train managers to detect erratic employee behavior
  • Mandate reporting of perceived impropriety or errors
  • Provide professional development
i nternal c ontrol10
INTERNAL CONTROL

RISK ASSESSMENT

Asses risks, determine risk tolerance and develop response

  • Identify - What loss could occur?
  • Evaluate - What is probability it might occur? frequency ? magnitude of loss or negative effect?
  • Risk appetite
  • What is our response? avoid?
  • Do the costs of establishing IC outweigh benefits ?
i nternal c ontrol11
INTERNAL CONTROL

IMPLEMENTATION

  • Employees must buy into and understand the need for controls
  • Procedures should be understandable and make sense
  • Consequences for noncompliance or willful neglect of procedures should be established and enforced
i nternal c ontrol12
INTERNAL CONTROL

MONITORING

  • Internal audits
    • Authorization and execution
    • Recording and accountability
    • Exception monitoring
    • Safeguards
  • External audits
    • Routinely change external audit firms
i nternal c ontrol13
INTERNAL CONTROL

RED FLAGS OF FRAUD

  • Ineffective IC
  • Limited or NO segregation of duties
  • No reconciliation
  • Lifestyle changes
    • New cars, jewelry, houses, trips
  • Significant personal problems
    • Debt or credit problems
  • High turnover
  • Refusal to take vacation
  • Reluctance to provide info to auditors
  • Frequent disputes with auditors
  • Frequent changes in external auditors
i nternal c ontrol14
INTERNAL CONTROL

RED FLAGSOF FRAUD

  • Excessive number of checking accounts
  • Frequent changes in banking accounts
  • Excessive year end transactions
  • Photocopied or missing documents
  • Stuff that just doesn’t seem right
s ecurity d elivery
SECURITY DELIVERY
  • Strongly recommend delivery vs. payment (DVP) ONLY
    • Settlement procedure where payment for securities is simultaneous to transfer of purchased securities.
      • Ensures funds are released only upon receipt of securities, thus protecting government
    • Delivered to your custodian who is your agent
    • Perfected ownership
    • In your control through your custodian
slide49

CONCLUSION

  • Plan
  • Policies and procedures
  • Internal Control
slide50

LEARN MORE

  • http://www.gfoa.org/
    • GFOA
    • Cash Committee
    • Resources
      • Reference Library
        • samples, agreements