Welcome to the ONE Update

November 27, 2017

The prudent investor standard is good news for Ontario’s municipalities. The One Investment Program has been advocating for this change because it offers municipal governments more options for investing, which can help put communities on a better financial footing.

But where there is change, there are questions. This update will be sent to the One Program’s municipal investors regularly to keep you posted on the new regulation, and provide you with insights and tips as we move into this new world.

For nearly 25 years, One has been focused solely on meeting the investment needs of Ontario’s municipal community. Through both advocacy and planning, we are working hard to ensure that all municipalities can benefit from the prudent investor standard as we move forward.

In 2016, One created an Investment Advisory Committee of financial and investment experts – all of whom have experience with the prudent investor standard. You’ll see some of their perspectives shared in these updates as well.

We also want to answer your questions and get feedback. So we’ll be providing space in this newsletter for you to send us your thoughts and inquiries.

At any time, if you need more information, please contact our Program Manager, Eleonore Schneider at 416-971-9856 ext. 320 or via email at eschneider@amo.on.ca, or Donna Herridge, Manager of Accounting and Corporate Services, MFOA/CHUMS, at 416.362.9001 ext. 233 and via email at donna@mfoa.on.ca.

What Does “Prudent” really mean?

Currently, the Province sets out a ‘legal list’ of eligible investments that municipal governments are allowed to invest in. The list mostly includes bonds and money market securities. There are also some equities and long-term corporate bonds available through the One program. Adding any security to the list involves the long process of changing a provincial regulation. This doesn’t allow municipalities to react quickly to changing markets and new opportunities.

Soon, municipalities who qualify will be able to invest in any security provided that the portfolio is ‘prudent’ for their circumstances. In this way, they can build appropriate and diverse investment portfolios that better meet local needs while better managing risk.

How do we demonstrate prudence?
Municipal investors will be required to exercise the “care, skill, diligence and judgement” of a prudent investor.

The truth is, you are already demonstrating a duty of care when you manage your current investments even with the protection of the ‘legal list’, says James Clark, President of Dunhelm Consulting Inc. and a member of the One Investment Program’s Investment Advisory Committee. Even when choosing from the “legal list,” you are selecting a portfolio to manage the risks, while looking for the best returns.

Your Council-approved investment policy under the prudent investor standard will be based on the same kinds of questions any investor should ask:

  • What are your investment goals and objectives?
  • How much risk are you willing to take?
  • How will you define and measure risk?
  • What is your time horizon?
  • Do you need liquidity?
  • Are there any other unique considerations?

Now, instead of being limited to a list of approved securities, you’ll be able to build a diverse portfolio that truly meets your municipality’s investment goals and needs, while better managing risk. We expect that the regulation will require oversight and monitoring to demonstrate prudent investing under the new standard – but you should already have these procedures in place for your existing portfolios.

Who else uses the prudent investor standard?
The prudent investor isn’t new. There is a lot of experience across the investing world with this standard by pension fund managers and trustees. In fact, trillions of dollars in investments across Canada are managed under this standard. Members of One’s Investment Advisory Committee have plentiful experience with the prudent investor standard.

What does the change mean for me?

When will change happen?
Consultation on the regulation closed on November 20. The new regulation is expected soon, with an anticipated effective date of January 1, 2018. But it will take everyone some time to implement the new prudent investor standard model.

Who will qualify?
The new standard will apply to municipalities with a $100 million minimum investment balance or with net assets of more than $50 million. It looks like about 40 municipalities will independently qualify for this standard, but we will need the regulation to know more about eligibility.

Given our experience and municipal expertise, the One Investment Program will aim to offer the same options for those municipalities that don’t qualify under the new regulation, by combining investments to reach the $100 million minimum.

If I don’t qualify, does anything change for me?
Nothing changes in the short-term. The One Program is seeking interested municipal investors, so that even municipalities who don’t qualify can benefit from the new standard. Given the changes, we encourage you to hold steady until the Province shares more information.

What will I need to do differently?
Municipal governments will need to pass a by-law in which they agree to invest under the prudent investor standard. You’ll also need a Council-approved investment policy – this is similar to what you do now. The prudent investor standard will require some additional formal oversight, policies and monitoring measures. Those details will be better understood once the regulation is made public.

Some people have been concerned that it will require special steps to revoke the by-law. But given the broader range of investment options, passing the by-law will make sense for a lot of municipalities. It doesn’t really change how you invest – it expands the choices available to you.

What is your single biggest question/concern about Prudent investor?
Email the ONE Investment team with your questions/concerns.

Prudent Investor
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