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HomeMy Public PortalAboutR3030 RESOLUTION NO. 3030 WHEREAS, this resolution will supersede Resolution No. 2749 that was adopted on November 8, 2007 and revises the Employees’ Pension plan actuarial return target and asset allocation mix, Resolution 2563 that was adopted on June 10, 2004 and establishes the Employees’ Pension Plan asset allocation mix, Resolution No. 2193 that was adopted on August 10, 1995 and documents the Proxy Voting Policy for the investment managers serving the Employees’ Pension Plan, and Resolution No. 2177 that was adopted on April 20, 1995 and documents the brokerage guidelines for the investment managers serving the Employees’ Pension Plan, and WHEREAS, The Metropolitan St. Louis Sewer District has established an Employee Pension Plan in accordance with provision of the District's Plan, Section 3.020, paragraph 22, and through the enactment of Ordinance No. 4641 as amended which provides for the pensioning and other retirement benefits of employees of the Metropolitan St. Louis Sewer District and spouses and minor children of deceased employees, and provides for the payment of public funds for such purposes, in accordance with the Missouri Constitution of 1945, as amended, and the Missouri Statutes enacted authorizing said Pension Plan, and the Plan of The Metropolitan St. Louis Sewer District, and WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District shall select the manner of funding the Pension Plan, whether by insurance or annuity contracts, trust agreement, or any other means, and shall have authority to select or change any Carrier, Pension Trustee or depository with which said contracts or trust agreement shall be entered into and with which monies of the Pension Fund shall be held, managed and invested, and WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District in fulfilling its fiduciary responsibility for the Pension Plan, periodically reviews the benefits, investments of pension funds, and general administration of the pension plan, and WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District presently receives services from New England Pension Consultants, per Ordinance No. 11515, adopted June 12, 2003, to generally advise the Board of Trustees on the evaluation as to how the plan assets have been invested for the benefit of the current and prospective retirees and their beneficiaries, and WHEREAS, New England Pension Consultants has conducted a review and evaluation of the Employee Pension Fund investment activities, and has assisted the District in developing a statement of investment policy, objectives and guideline, and WHEREAS, The Metropolitan St. Louis Sewer District seeks to create a codified document entitled, “Statement of Investment Policy, Objectives and Operating Guidelines” (the “Investment Policy”) that will serve as the guideline for the various pension investment managers serving the Employees’ Pension Plan, and, NOW, THEREFORE BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT that the accompanying codified document entitled “Metropolitan St. Louis Sewer District, Statement of Investment Policy, Objectives and Operating Guidelines” including all appendices represent the Investment Policy, Objectives and Operating Guidelines of the Employees’ Pension Plan, and will serve to supersede Resolution No. 2749 that was adopted on November 8, 2007and updates the Investment Policy document and asset allocation mix; Resolution No. 2563 that was adopted on June 10, 2004 and establishes the Employees’ Pension Plan asset allocation mix; Resolution No. 2193 that was adopted on August 10, 1995 and documents the Proxy Voting Policy for the investment managers serving the Employees’ Pension Plan; and Resolution No. 2177 that was adopted on April 20, 1995 and documents the brokerage guidelines for the investment managers serving the Employees’ Pension Plan, and BE IT FURTHER RESOLVED, that any and all current and future managers will acknowledge in writing that they have read, understand and will comply with the terms set forth in this document. The foregoing Resolution was adopted May 10, 2012 by the following vote – Ayes – E. Ross, A. Mandel, J. Goffstein, R. Berry, J. Buford, and M. Yates. Nays – None. Secretary-Treasurer METROPOLITAN ST. LOUIS SEWER DISTRICT STATEMENT OF INVESTMENT POLICY, OBJECTIVES AND OPERATING GUIDELINES INVESTMENT POLICY GUIDELINES I. Introduction II. Identification of Duties A. Board of Trustees B. Investment Committee C. Office of the Secretary-Treasurer D. Investment Consultant E. Investment Manager F. Custodian III. Investment Goals and Objectives IV. Asset Allocation A. Policy Target and Ranges B. Rebalancing Procedures C. Style Neutrality V. Investment Manager Appointment VI. Investment Manager Guidelines -- General A. Compliance Monitoring B. Prohibited Transactions C. Use of Pooled Funds D. Derivative Guidelines VII. Investment Manager Guidelines – Asset Class Specific A. Domestic Equity Managers B. International Equity Managers C. Passive Equity Managers D. Domestic Core Fixed Income Managers E. Domestic High Yield Managers F. Global Bond Managers G. Market Neutral Managers H. Global Asset Allocation Managers I. Absolute Return Managers J. Real Estate Managers VIII. Standard of Investment Performance A. General Guidelines B. Manager Probation and Termination IX. Manager Reporting Requirements A. Immediately B. Quarterly C. Annually X. Implementation and Approval Appendices Appendix I: Asset Allocation Appendix II: Performance Benchmarks Appendix III: Manager Specific Guidelines and Exceptions METROPOLITAN ST. LOUIS SEWER DISTRICT STATEMENT OF INVESTMENT POLICY, OBJECTIVES AND OPERATING GUIDELINES I. INTRODUCTION A. The Metropolitan St. Louis Sewer District Pension Plan (the “Plan”) is a defined benefit plan which was established to provide retirement benefits to participants in accordance with the benefit structure adopted by the Board of Trustees (the “Board”). The Plan is maintained to provide benefits, and toward that end, invests contributions and reinvests investment proceeds for the exclusive benefit of plan participants and beneficiaries. Investments of the Plan shall be managed in accordance with applicable federal, state and local statutes, as well as with the Plan document. B. This Statement of Investment Policy, Objectives, and Operating Guidelines (the "Policy Statement") is set forth so that all fiduciaries, including the Board, investment managers (the “Manager(s)”), the investment consultant (the “Consultant”), and other Plan advisors will have a clear understanding of what is expected in the course of managing the assets of the Plan (the “Fund”). C. It is the intent of this Policy Statement to establish an attitude and/or philosophy that will assure the achievement of the desired results. It is intended that this Policy Statement be sufficiently specific to be meaningful but sufficiently flexible to be practical. Specifically, this document is set forth to: 1. Briefly outline the investment related-responsibility of the Board and the Managers it retains. 2. Establish formal, yet flexible investment guidelines incorporating prudent and realistic asset allocation and performance goals. 3. Establish investment guidelines regarding the selection of Managers, permissible investments and diversification of assets; 4. Provide a framework for regular constructive communication between the Board and its Managers. 5. Create standards of investment performance by which the Managers agree to be measured over a reasonable time period. D. This Policy Statement upon adoption by the Board shall supersede and replace all prior Policy Statement(s) and are hereby incorporated into all existing and any future Investment Manager Agreements. E. This Policy Statement may be amended by the Board both upon its own initiative and upon consideration of the advice and recommendation from the Consultant, the Managers, and other fund professionals. Proposed modifications should be documented in writing to the Board. At least annually, the Board will review this Statement for relevance to and consistency with governing law and the financial objectives of the Fund. II. IDENTIFICATION OF DUTIES This document will set forth specific duties and responsibilities for the investment-related parties as they carry out their specific roles towards achieving the objectives of the Fund. A. Board of Trustees The role of the Board is to oversee and make policy decisions regarding the investment of the Fund. As fiduciaries, the Board shall invest the Fund 1. for the exclusive purposes of providing benefits to participants and for defraying reasonable expenses of administering the Plan; and 2. with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Board shall, 1. With the advice of the Consultant, Actuary and Managers, establish and develop the Plan’s Policy Statement, including the development of the long-term asset allocation and the appropriate mix of the Manager styles and strategies; 2. Periodically review and modify the Policy Statement in light of any changes in actuarial variables and market conditions; 3. Diversify the investments of the Plan to minimize the risk of large losses, unless under the circumstances, it is clearly prudent not to do so; 4. Select qualified Managers and Consultants to manage and advise on the Plan’s assets, as appropriate; 5. Monitor and review the investment performance of the Fund and Managers to determine achievement of goals and compliance with policy guidelines; 6. Establish a procedural due diligence search process; 7. Conduct manager searches when needed for policy implementation 8. Act in accordance with the laws, documents and instruments governing the Plan. B. Investment Committee 1. The Investment Committee shall assist the Board in developing and modifying policy objectives and guidelines, selecting Managers and in performing other duties and activities delegated to it by the Board. C. Office of the Secretary-Treasurer The Office of the Secretary-Treasurer is responsible for all day-to-day administrative functions require to support the Policy Statement, including 1. Overseeing the day-to-day activities of all Plan Advisors; 2. Coordinating the review of contracts when new service providers are engaged, and as necessary with incumbent providers; 3. Coordinating funding of and withdrawals from the Managers; 4. Reviewing reports from the Managers, Consultant and other Plan Advisors and bringing to the attention of the Board items requiring Board review or action; and 5. Employing such assistance as necessary from the Managers, Consultant and other Plan Advisors. D. Investment Consultant The Consultant, acting as a fiduciary to the Fund, shall assist the Board and Investment Committee in: 1. Developing and monitoring investment objectives and guidelines, including the Fund’s assets allocation strategy and mix of Managers; 2. Measuring and evaluating the performance results of the Fund and Managers on an on-going basis and advising the Board as to their continued appropriateness; 3. Keeping the Board and Office of the Secretary-Treasurer informed of all significant matters pertaining to the Fund’s investments; 4. Providing timely written or oral information on the Managers and other related issues, as requested by the Board or the office of the Secretary-Treasurer ; and 5. Conducting such other duties as may be mutually agreed upon by the Board and the Consultant within the scope of the contractual agreement. E. Investment Manager All Managers must agree in writing that they are fiduciaries, as defined in ERISA, with respect to the investment of all Plan assets over which they have investment discretion. The duties and responsibilities of each Manager include: 1. Managing the portion of the Fund under its discretion in accordance with prudency standards required by ERISA; (i.e., the Manager’s portfolio must be invested with the care, skill, prudence, and due diligence under the circumstances then prevailing that an experienced professional investment manager acting in a like capacity and fully familiar with such matters would use in the investment of like assets with like aims.); 2. Complying with all provisions and responsibilities under this Policy Statement. Except in the case of investments in mutual funds or commingled accounts, each Manager is required to comply with the policies and guidelines set forth in this Policy Statement. To the extent that the policies and guidelines in this Policy Statement are more restrictive than a Manager’s separate Investment Management Agreement with the Board, the Manager must follow the more restrictive rules in this Policy Statement. 3. Initiating communication with the Board, Office of the Secretary-Treasurer and Consultant when the Manager believes that this Policy Statement is inhibiting and/or should be changed. A Manager may suggest a modification to any policy or guideline with respect to the portfolio it manages by providing the Investment Committee and Consultant with a written submission describing the requested change, the reasons supporting the change, and any other relevant information. No deviation from the guidelines is permitted until the Board has approved the Manager’s requested changes. Failure to comply with any applicable policy or guideline may result in the Manager being liable for any corresponding loss to the Plan and/or in the Manager being terminated; 4. Exercising full discretion within the policy guidelines stated herein. Such discretion includes the decisions to buy, hold, and sell securities in amounts and proportions reflective of the Manager’s current invest strategy; 5. Using its best effort to ensure that portfolio transactions are placed on a “best execution” basis. (The Managers are expected to avoid all conflicts of interest when using Plan assets to pay brokerage expenses and to ensure that all trading expenditures are made for the exclusive benefit of the Plan.); 6. Exercising ownership rights, where applicable, through proxy voting in the best interests of the Plan's participants and beneficiaries; 7. Responding to funding requests within mutually agreed upon timelines; 8. Meeting with the Board, Office of the Secretary-Treasurer, and Consultant upon request; and 9. Providing monthly reports to the Custodian Bank in a timely fashion to meet the Bank’s timeline. (Does not apply to real estate Managers.) F. Custodian The duties and responsibilities of the Custodian Bank include 1. Cash management, including: • Daily sweep of idle cash balances; • Interest and dividend collections; • Collecting proceeds from maturing securities; 2. Processing of the Managers’ transactions, and coordinating the availability of securities for the securities lending program and other deliveries as directed, if applicable. 3. Accounting for Managers’ transactions and holdings, including • pricing of holdings; • providing monthly statements sorted by Managers' accounts, either by hard copy or electronically as requested, and a consolidated statement of all assets in a timely fashion; • working with the Managers, Consultant and the Office of the Secretary- Treasurer to ensure accuracy in reporting; • providing monthly custody statements which allow custody and Managers’ accounting statements to be reconciled in a timely manner, including setup of new accounts and reporting assets in the new account in the month’s statement when a new account is established; • Researching transaction information as requested by the Office of the Secretary-Treasurer; • Reporting asset, account, and other information in a consistent manner. 4. Notify Investment Managers of proxies, tenders, rights, fractional shares or other dispositions of holdings. 5. Managing the Fund’s securities lending program, if applicable. 6. Providing the Office of the Secretary-Treasurer with an electronic interface to facilitate monitoring of cash equivalent balances, and additions to or withdrawals from the Fund’s accounts, and all other Fund transactions. 7. Disbursement of all income or principal cash balances as directed by the Office of the Secretary-Treasurer. III. INVESTMENT GOALS AND OBJECTIVES A. The Fund shall be invested to ensure that principal is preserved and enhanced over time, both in real and nominal terms. In addition, the Fund is expected to perform above average relative to comparable Funds without assuming undue risk, and to add value through active management, specifically, 1. The long term nominal rate of return objective is to meet or exceed the assumed actuarial rate of return of 7.25%. Additionally, an objective is to earn a real rate of return of 4.0%. The real rate of return shall be measured as the amount by which the nominal return exceeds inflation, as measured by the Consumer Price Index (“CPI”), using the CPI for all Urban Consumers. 2. The Fund’s total return shall meet or exceed the return of the Fund's Policy Index, which is the return the Fund would earn if the assets were invested according to the target asset class weightings and earned index returns. 3. The Fund’s return is expected to rank in the top half of the Consultant’s total public funds universe. 4. Risk, as measure by the standard deviation of returns, is expected to rank in the midrange (25th to 75th percentile) of a universe of comparable funds. 5. The return expectation for the individual Managers are listed in Appendix II and are also expected to exceed the median return of an appropriate peer universe. 6. Normally, results will be evaluated over a three- to five-year time horizon, but shorter-term results will be regularly reviewed and earlier action taken if the Board, in it’s sole discretion, determines such action to be in the best interest of the Fund. IV. ASSET ALLOCATION A. Policy Target and Ranges. The current asset allocation targets and permissible ranges, reflected in Appendix I, will be pursued by the Board on a long-term basis, but will be revised if significant changes occur in the Plan’s liability structure, plan assumptions or economic environment. B. Rebalancing Procedures. The Office of the Secretary-Treasurer and the Consultant will review the Fund's asset allocation quarterly to determine if the allocation is consistent with the established exposure ranges. If an asset class is at or beyond the maximum/minimum range as determined at the quarterly asset allocation review, the Office of the Secretary-Treasurer, with the assistance of the Consultant, will develop a plan to rebalance the allocation to target. At a minimum, a rebalancing plan will move the allocation to the midpoint between the maximum/minimum limit violated and the target allocation. Market conditions and transaction costs will be considered, as well as any other relevant factors when rebalancing, but the predisposition shall be to transfer funds from asset classes that are out performing to asset classes that are under performing. C. Style Neutrality. Under normal circumstances, the equity portfolio is expected maintain a neutral bias with respect to style allocation (growth versus value). The Board recognizes that over the long run, returns from growth and value investing tend to approximate each other; over shorter periods, however, returns between the two can be significantly different. The Board and the Consultant will use appropriate judgment and care when rebalancing portfolios, but will have a predisposition to transfer monies from styles that are out performing to styles that are under performing. V. INVESTMENT MANAGER APPOINTMENT A. When, in consultation with the Consultant, the Board determines that a Manager search is warranted, the Board will direct the Consultant to institute, coordinate and summarize the findings of the search. The Consultant, working with Board and Office of the Secretary-Treasurer, will establish certain consistently applied minimum criteria for an investment manager to be considered eligible to participate in the search B. All qualified candidates will receive fair consideration. The Board will strive to hire Managers that offer the greatest incremental benefit to the Fund, net of fees and expenses, in accordance with, but not limited to, the criteria listed below 1. Length of firm history: 2. Tenure of key professionals; 3. Appropriateness of investment philosophy and process; 4. Fit between product and existing plan assets, liabilities and objectives; 5. Absolute and relative returns, and variability of returns; 6. Stability of the firm’s client base and assets under management; 7. Ownership structure; 8. Compensation structure; 9. Fee structure; and 10. References and professional qualifications. VI. INVESTMENT MANAGER GUIDELINES – GENERAL A. Compliance Monitoring. Each Manager shall monitor compliance with all guidelines on an on-going basis, based on current market values. Securities that, at purchase, would move the Manager's portfolio out of compliance with these guidelines, based on the Manager’s most recent valuation, may not be purchased. In the event that a Manager's portfolio moves out of compliance with these guidelines (as identified in the Manager’s regular review of the portfolio) through changes in market conditions or other changes outside the Manager’s control, the Manager shall 1. Bring the portfolio back in compliance with the guidelines within the earliest time frame the Manager considers prudent; 2. Inform the Board, Office of the Secretary-Treasurer and Consultant as soon as feasible that the guideline has been breached, and of the Manager’s plan for addressing the issue. B. Prohibited Transactions. For Managers not participating in the Real Estate, Global Asset Allocation, Absolute Return, and Market Neutral programs, the following guidelines are to be adhered to, unless prior approval from the Board has been granted. All approved exceptions are listed in the Manager Specific Guidelines in Appendix III. • There shall be no use of commodities; • Uncollaterized options or futures contracts may not be purchased; • Uncollaterized short positions are not permissible; • There shall be no use of financial leverage; • Private placements, except those eligible for resale under SEC rule 144A, are prohibited; • Mutual funds and other pooled vehicles are prohibited unless explicitly authorized, as discussed in paragraph (C) below. All such authorizations are noted as guideline exceptions in Appendix III C. Use of Pooled Funds. Mutual funds, collective trusts and other types of commingled investment vehicles provide, under some circumstances, lower costs and better diversification than can be obtained with a separately managed fund pursuing the same investment objectives. However, commingled investment funds cannot customize investment policies and guidelines to the specific needs of individual clients. Therefore, the written guidelines and policies of the commingled fund or the prospectus or statement of additional information for the mutual fund and any provisions set forth in any investment management agreement will replace this Policy Statement. 1. The Manager or other fund representative must provide the Board with a copy of the applicable commingled or mutual fund guidelines, policies, prospectus and other governing documents (and any amendments or updates thereto). 2. In addition, the Manager or other fund representative of any commingled fund or mutual fund must provide periodic reports and other communications to the Board as may be agreed to separately between the Board and the Manager or other representative D. Derivatives Policy 1. A derivative is a security or contractual agreement, which derives its value from some underlying security, commodity, currency, or index. 2. Types of Derivative Contracts a. Forward-based derivatives, including forward contracts, futures contracts, swaps, and similar instruments. b. Option-based derivatives, including put options, call options, interest rate caps and floors, and similar instruments. 3. Types of Derivative Securities a. Collateralized Mortgage Obligations (CMOs) b. Structured Notes 4. The use of derivative securities is permitted as described under Section IV (A) (2). 5. Where appropriate, Managers may use derivative contracts for the following reasons: a. Hedging. To the extent that the portfolio is exposed to clearly defined risks and there are derivative contracts that can be used to reduce those risks, the Managers are permitted to use such derivatives for hedging purposes, including cross-hedging of currency exposures. b. Creation of Market Exposures. Managers are permitted to use derivatives to replicate the risk/return profile of an asset or asset class provided that the guidelines for the Manager allow for such exposures to be created with the underlying assets themselves. 6. Managers may not use derivative contracts or securities for the following purposes: a. Leverage. Derivatives shall not be used to magnify overall portfolio exposure to an asset, asset class, interest rate, or any other financial variable beyond that which would be allowed by a portfolio’s investment guidelines if derivatives were not used. b. Unrelated Speculation. Derivatives shall not be used to create exposures to securities, currencies, indices, or any other financial variable unless such exposures would be allowed by a portfolio’s investment guidelines if created with non-derivative securities. VII. INVESTMENT MANAGER GUIDELINES – Asset Class Specific A. Domestic Equity Managers 1. All domestic equity securities must be listed on a US stock exchange or traded in NASDAQ/OTC markets. 2. The shares of foreign companies that trade publicly in the US, including American Depository Receipts (ADRs), may comprise up to 15% of the market value of a Manager’s portfolio. . 3. Convertible bonds, warrants, and rights may be purchased as equity substitutes so long as they meet the equity guidelines. 4. Equity Managers will be expected to manage their holdings in order to maximize net long-term returns. It is contemplated that equity specialist Managers shall normally be fully invested, maintaining a 95-100% equity commitment level. 5. Equity holdings in any one company, except mutual funds, should not exceed 5% of the market value of the Manager’s total portfolio without the consent of the Board. 6. No purchase shall be made, which would cause a holding to exceed 5% of the market value of the issue outstanding. 7. Short selling, securities lending, use of financial futures or other specialized investment activity are expressly prohibited. 8. Equity Managers may invest up to 5% of their portfolio holdings in reserve and cash equivalent investments and up to 10% of the portfolio in foreign stocks listed on US stock exchanges. 9. Additional guidelines for equity specialist managers are included in Appendix I. B. International Equity Managers 1. International equity securities are expected to be issued by non-U.S. corporations, although the Manager has latitude to hold U.S. securities provided that such investments are consistent with attainment of the portfolio’s investment objective. 2. These portfolios should be considered as “equity funds” and shall normally be fully invested, maintaining a 95-100% equity exposure. 3. Short-term reserves may be held in U.S. dollar denominated securities or investment vehicles available through the Fund’s custodian. 4. Decisions as to the number of issues held and their geographic distribution shall be left to the Manager provided that equity holdings in any one company, excluding mutual funds, do not exceed 5% of the market value of the Manager’s portion of the Fund’s portfolio without the written consent of the Board. 5. Managers may employ an active currency management program and deal in futures and options within the disciplines of that currency management program subject to the derivatives guidelines set forth in Section VI. D. Derivatives Policy 6. Managers with specific emerging markets equity mandates are expected to invest in the emerging (non-established) markets, subject to the guidelines listed above (except for the 10 percent restriction on emerging markets securities that applies to Investment Managers with established international equity mandates). 7. Additional guidelines for international equity managers are included in Appendix I C. Passive Equity Managers 1. The guidelines listed below shall apply to all passively managed equity portfolios, unless otherwise specifically noted: a. Passive strategies are expected to have characteristics similar to the underlying benchmark. For example, a large cap passive equity portfolio shall have similar capitalization and sector exposure to the S&P 500 or Russell 1000 benchmark. D. Domestic Core Fixed Income Managers 1. Domestic fixed income securities are permitted and may include U.S. Government and Agency obligations, corporate bonds, asset backed securities, agency guaranteed mortgage pass-through securities and low risk collateralized mortgage obligations of comparable or lower risk, such as Planned Amortizations Class Level 1 and Sequentials, commercial paper, certificates of deposit. Managers may also invest in U.S. dollar denominated issues of international agencies, foreign governments and foreign corporations (i.e., Eurodollar and Yankee bonds). 2. "Active" bond management (i.e., over- or underweight sectors, securities, maturities, duration relative to benchmark) is encouraged, as deemed appropriate by the Managers. Fixed income specialist may vary the bond commitment from 95-100% of assets under their discretion. 3. The overall average quality rating of each high-grade portfolio shall be at least AA or equivalent rating. 4. The diversification of securities by maturity, quality, sector and coupon is the responsibility of the manager. 5. No security, excepting issues of the US Government or its agencies or mutual funds, shall comprise more than 5% of the Manager’s total portfolio of assets, measured at market. Further, no individual portfolio shall purchase more than 5% or hold more than 8% of its assets in the securities of any single issuer, excepting issues of the US Government or its agencies. (For mortgage-backed securities, an issuer is defined as a separate trust.) 6. There shall be no use of options, financial futures or other specialized investment activity without the prior written approval of the Board. 7. The average duration (interest rate sensitivity) of an actively managed portfolio shall not exceed seven years. 8. Additional guidelines for fixed income managers are included in appendix II E. Domestic High Yield Fixed Income Managers 1. The guidelines for domestic fixed income Managers apply to high yield fixed income Managers, except for the following differences: a. There is no limit on the portion of a high yield portfolio which can be invested in securities rated below investment grade. However, bonds rated below B- by S&P (or an equivalent rating) are expected to comprise no more than 10% of the market value of a portfolio. b. Non-rated issues may be purchased, provided that the Manager determines that, if such issues were rated, they would be allowed under the above limitations. c. Each portfolio shall maintain an average quality rating of B+/B1 or better. d. No more than 25% of a portfolio may be invested in a single industry, as defined by the Lehman Brothers High Yield Index. F. Global Bond Managers 1. Securities selected for this portfolio are expected to be U. S. and non-U.S sovereign debt as well as U.S. and non-U.S. corporate debt. Generally defined, the Citigroup World Government Bond Index (unhedged) represents the benchmark set for this portfolio. The benchmark serves as a reference and does not prohibit investment in securities outside the index. 2. No single non-government debt security shall constitute more than 6% of each global bond portfolio, at market value. Securities issued by AAA Rated Supranational Organizations (such as the World Bank) shall be considered to be government equivalents. 3. Short-term reserves may be held in U.S. dollar- or local currency-denominated securities or in investment vehicles available through the Custodian Bank. 4. Managers may enter into forward contracts on currency provided that use of such contracts is designed to dampen portfolio volatility rather than lever portfolio risk exposure beyond the limits described in this Policy Statement. Opportunistic currency positioning may be utilized, in the Manager's discretion, to hedge and cross-hedge the portfolio’s currency risk exposure or in the settlement of securities transactions. The Manager may vary the total portfolio’s exposure to currency from fully unhedged to fully hedged. 5. Managers may purchase or sell currency on a spot basis to accommodate securities settlements. 6. Decisions as to the number of issues held and their geographic distribution shall be the responsibility of the Manager. 7. Emerging market debt securities may be utilized subject to a 30% limit per portfolio. 8. The average duration (interest rate sensitivity) of a global fixed income portfolio shall not differ from the passive benchmark by more than 25 percent 9. G. Market Neutral Investment Managers 1. All market neutral investments are made through commingled vehicles. The investment guidelines for these vehicles are governed by vehicle documents. 2. Market neutral investments are chosen for their ability to contribute to the overall diversification of the Fund by generating a return which is uncorrelated with other assets H. Global Asset Allocation (GAA) Managers 1. The purpose of employing a GAA manager is to provide an additional layer of diversification with the twin goals of increasing return and decreasing risk. Global asset allocation Managers have the ability to invest in more than one asset class and full authority to adjust the weighting of the asset classes under their discretion. 2. Strategies may allow either passive or active approaches with regards to the underlying asset classes. 3. Strategies my entail the use of hedge funds that are conservative relative to the universe of alternative investments. 4. While the Plan will likely invest in commingled accounts with overriding policy statements, generally speaking, the return goal of these portfolios should be in one of two formats: an absolute return objective (e.g., T-bills + 5%) or a blended benchmark (60% S&P 500 + 40% LB Aggregate) 5. Due to the global nature of these mandates, managers are expected to be evaluating and/or investing in non-US instruments, to include derivative instruments allowing for market exposure or risk mitigation (e.g., index futures and currency forwards). I. Absolute Return Managers The investment objective of this portfolio is to achieve attractive long-term, risk-adjusted, returns in a variety of capital market conditions. The fund-of-funds portfolio should achieve this objective by purchasing investment funds that utilize a broad range of absolute return oriented investment strategies. J. Real Estate Managers 1. The role of the real estate segment is to provide a stable return premium, after inflation, and to increase the diversification of the overall fund. 2. Real Estate Managers will have full discretion to invest portfolios in accordance with the terms of their advisory agreements. It is expected that the Managers will adhere to their stated philosophies and that any material deviations will be communicated promptly to the Board. 3. It is expected that the Real Estate investment program shall be broadly diversified with respect to property type and geography, and primarily be in the equity of real property, which may or may not be levered. 4. The majority of real estate investments shall be “core” investments, with the remainder being styles complementary to core, such as “value-added” and “opportunistic”. (Individual vehicles, however, may be entirely committed to a single style.) 5. All investments shall be in commingled funds, including but not limited to limited partnerships, LLCs, insurance company commingled separate accounts, and private REITs. Funds shall primarily be open-ended, although closed-end funds may be used as appropriate, particularly for value-added and opportunistic styles. (This is not intended to prevent domestic equity managers from holding public REITs.) VIII. STANDARD OF INVESTMENT PERFORMANCE A. General Guidelines 1. Performance of the Fund and individual Managers will be evaluated on a quarterly basis to determine their success in achieving the investment objectives outlined in this document over an appropriate time horizon. The Board realizes that most investments go through cycles; therefore, interim fluctuations should be viewed within the long-term perspective. Consideration will be given to the degree to which performance results meet the goals and objectives as set forth in these policy guidelines 2. In addition to reviewing each Manager’s results, the Board will re-evaluate, from time to time, its own progress in achieving the objectives set for the Fund overall. This re-evaluation will involve an assessment of the continued appropriateness of: (1) the overall asset allocation; (2) the allocation of assets among the Managers; and (3) the investment objectives for the Fund. 3. Risk as measured by volatility, or standard deviation, should be evaluated after twelve quarters of performance history and periodically thereafter. Performance dispersion of each individual Manager relative to other managed accounts of a similar style will be assessed from time-to-time. Such assessments will take into account the nature of the Manager’s style, portfolio constraints, and the market environment. B. Manager Probation 1. Managers may be placed on a watch list or probation in response to the Board’s concerns about significant changes in ownership structure, turnover in key personnel, changes in investment process, recent or long term investment results, failure to comply with the investment guidelines, or for any other reasons which the Board deems appropriate. 2. A Manager on the watch list or on probationary status will not be eligible to receive additional investment funds. 3. Attainment of investment objectives does not guarantee continued employment by the Board, nor does failure to achieve these guidelines ensure dismissal. Managers serve at the discretion of the Board. IX. MANAGER REPORTING REQUIREMENTS The Board shall meet with the Managers at least annually to review the status and prospects of their portfolios relative to established benchmarks and objectives. It is expected that the Managers will provide in writing to the Trust the following: A. Immediately 1. A significant change in personnel, organization, philosophy, strategy or assets under management); 2. Discovery of a violation of the investment guidelines contained in this Policy Statement; 3. A significant change in investment strategy, portfolio structure, or market value or liquidity of managed assets; 4. A significant change, in the ownership affiliations, organizational structure, financial condition, or clientele of the Manager; 5. Sanctions against the firm or its employees by any state or federal governmental or regulatory agency, or by NASD, to the extent permissible by law. 6. Cash position exceeds the required maximum of 5% of their portfolio. 7. Quality ratings on any bond held in a Manager’s portfolio that falls below the minimum quality rating required under these guidelines. B. Quarterly 1. A Summary of Investment Guidelines a. A statement certifying compliance with the Policy Statement throughout the quarter; or, if the portfolio has been out of compliance, an explanation b. Brief review of investment process; c. Discussion of any changes to the investment process; d. Investment strategy used over the past year and underlying rationale; e. Evaluation of strategy's successes/disappointments; f. Comment on the Manager’s assessment of the current liquidity of the portfolio and the market(s) in which the portfolio is invested 2. Performance Review a. Present cumulative total fund and asset class returns for last calendar quarter, year-to- date, last year, last three years, last five years and since inception versus designated benchmarks both on a gross and net fee basis; b. Discuss performance and portfolio characteristics relative to benchmarks; provide attribution analysis, which identifies returns due to allocation and selection decisions, as appropriate; c. Provide portfolio holdings listing individual securities, as appropriate, by sector, asset class, or country; d. Each Manager that invests Fund assets in derivatives shall also report on derivative positions held during the quarter and how the position affected the risk exposure of the total portfolio C. Annually Each separate account equity manager shall provide the following to the Office of the Secretary-Treasurer and Consultant 45 days after the end of the calendar year 1. Proxy Voting The Board shall delegate responsibility for the exercise of ownership rights through proxy voting to the Managers, who shall exercise this responsibility strictly for the economic benefit of the Fund and its participants. Managers shall adhere to the proxy voting guidelines set forth in the Proxy Voting Resolution No. 2193 of the meeting dated August 10, 1995 which is attached as Exhibit 1. 2. Commissions & Trading Costs The annual commission report should be delivered to the Board, Office of the Secretary- Treasurer, and Consultant within forty-five (45) days of the end of each calendar year. The Manager’s brokerage and trading activities share adhere to Resolution No. 2177 of the April 20, 1995 meeting which is attached as Exhibit 2. X. IMPLEMENTATION AND APPROVAL All monies invested for the Fund by its Managers shall conform to this Policy Statement after its adoption. It is understood that this investment policy is to be reviewed periodically by the Board to determine if any revisions are warranted by changing circumstances including, but not limited to, changes in financial status, risk tolerance, changes in the Fund or changes involving the Managers. Chairman of the Board of Trustees Date Investment Manager Acceptance This Policy Statement has been reviewed and is hereby accepted on behalf of: ____________________________________ ____________________________________ _____________________________________ Name (please print or type) _____________________________________ (Signature) _____________________________________ (Title) _______________________________________ (Firm’s Name) APPENDIX I – ASSET ALLOCATION The nominal long-term rate of return objectives for the Plan is 7.5%. In order to have a reasonable probability of achieving this return, the Board has adopted the asset allocation policy outlined below. Policy Benchmark Target (%) Allowable Range (%) Equity Large Cap Equity Russell 1000 Index 20 16-24 Smid Cap Equity Russell 2000 5 3-7 International Equity MSCI EAFE Index 10 8-12 Emerging Markets Equity MSCI Emg. Markets 3 2-5 Total Equity 38 Fixed Income Domestic Core Bonds Lehman Intermediate Gov./Corp Index 13 10-20 Emerging Fixed Income JP Morgan GBI EM Global Diversified 5 3-7 Opportunistic Credit Custom benchmark 2 0-5 High Yield Bonds Merrill Lynch High Yield Cash Pay Index 5 3-7 Global Bonds Citigroup World Government Index (unhedged) 8 6-10 Total Fixed Income 33 Real Estate NCREIF Index 5 3-7 Global Tactical 65% MSCI World /35% Lehman Agg 10 8-12 Market Neutral 90-day T-bill + 3% 5 3-7 Real Assets Custom Index 5 3-7 Absolute Return CPI plus 5% 4 3-7 Total 100 The current asset allocation of the Plan may deviate from the strategic asset allocation target due to differences in returns among asset classes and individual Managers. The current allocation will be evaluated quarterly and may be rebalanced from time to time at the discretion of the Board. APPENDIX II - PERFORMANCE BENCHMARKS This Appendix to the Fund’s guidelines is written to provide specific guidance regarding individual Manager assignments or classification and benchmarks. This Appendix, combined with the applicable sections of the Policy Statement provides a complete statement of investment objectives, rules, and guidelines for each of the Fund’s Managers, exclusive of rules or guidelines directly incorporated into contracts or other similar agreements. Asset Class Style Asset Class Benchmark Universe Universe Global Asset Allocation Global Asset Allocation 65% MSCI World/35% Lehman Agg Balanced NA Domestic Large Cap Equity Domestic Large Cap Core Domestic Large Cap Growth Domestic Large Cap Value S&P 500 Russell 1000 Growth Russell 1000 Value Large Cap Equity Funds Large Core Large Growth Large Value Domestic Small/Mid Cap Equity Domestic Small Cap Growth Domestic Mid Cap Value Russell 2000 Growth Russell Mid-Cap Value Small/Mid Cap Equity Funds Small Growth Mid-Cap Value International Equity International Developed MSCI EAFE Index Estab. Int’l Equity Int’l Core Emerging Markets Equities MSCI Emg. Markets Domestic Fixed Income Lehman Intermediate Government/Corp Fixed Income Funds Core Bonds Emerging Markets Fixed Income JP Morgan GBI EM Global Diversified Emerging Fixed Income Funds NA Opportunistic Credit Custom benchmark High Yield Fixed Income Funds NA High Yield Fixed Income Merrill Lynch High Yield High Yield Fixed Income Funds High Yield Bonds Global Fixed Income Citi World Gov’t Bond Index Global Bond Funds Market Neutral 90-day T-bills +3% Core Bond Funds N/A Real Assets Custom benchmark Commodity Funds NA Absolute Return CPI + 5% Core Bond Funds NA Real Estate (Core) NCREIF Index Real Estate Funds NA APPENDIX III – Manager Specific Guidelines and Exceptions (EXHIBIT 1) RESOLUTION NO. 2193 WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District is mindful of its fiduciary obligations with respect to the voting of proxies of companies whose securities are owned by The Metropolitan St. Louis Sewer District's Pension Plan, and WHEREAS, because of the complexity of issues, and further because of the direct impact on investment values involved, it is the Board's considered belief that the Investment Managers that are employed by the District are best suited to vote the proxies of shares held in the portfolios they manage, NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT, That, as part of the District's Investment Policy and the Investment Managers' guidelines, the Board hereby directs and instructs the Investment Managers to vote proxies of shares held in the portfolios they manage in accordance with said Investment Managers' own guidelines and policies and in the best interests of the Pension Plan beneficiaries. BE IT FURTHER RESOLVED, That all Investment Managers voting proxies shall provide to the Board their firms' proxy policies, and shall provide semi-annual reports to the Board showing securities voted, issues involved, and the vote made. The foregoing Resolution was adopted August 10, 1995. (EXHIBIT 2) RESOLUTION NO. 2177 WHEREAS, the Board of Trustees of The Metropolitan St. Louis Sewer District acts as fiduciary to the members and beneficiaries of the District's Pension Plan, and WHEREAS, as fiduciary, said Board has the responsibility for the evaluation and management of Pension Plan transaction costs for the exclusive benefit of members and beneficiaries, and WHEREAS, it is the intent of said Board that all Pension Plan transactions of publicly traded securities be effected through brokerage firms, regardless of location, in order to obtain the best execution and lowest cost of the transaction, and WHEREAS, it is the intent of said Board to establish guidelines for the selection of broker/dealer firms to be used by the District Pension Plan Investment Managers, NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF TRUSTEES OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT, that the Trading and Brokerage Policy as attached hereto and made a part hereof is and hereafter shall be the policy of the District for the selection of broker/dealer firms to be used by the District Pension Plan Investment Managers for all Pension Plan transactions of publicly traded securities. THE METROPOLITAN ST. LOUIS SEWER DISTRICT EMPLOYEE PENSION PLAN INVESTMENT POLICY STATEMENT TRADING AND BROKERAGE POLICY A. Security Transaction Policy 1. Introduction The Board of Trustees of The Metropolitan St. Louis Sewer District (District) intends to fulfill its responsibility for the evaluation and management of transaction costs for the exclusive benefit of participants and beneficiaries. To assist in accomplishing these duties, this Security Transactions Policy and these Guidelines for the Selection of Brokerage Firms have been approved by the Board. 2. Basic Principles The Board of Trustees requires that these principles guide all transactions for the Plan: • Best execution and lowest cost (including commission costs and market impact) and providing benefits exclusively for participants and beneficiaries of the District must apply to each trade. • Efforts to reduce trading costs, in terms of both commissions and market impact, provided the investment returns of the Pension Plan are not jeopardized, will be ongoing. • Only brokerage firms who meet the District's Guidelines for Selection with appropriate trading capabilities and market expertise should be utilized. • The Board will retain the ability to enter into brokerage commission recapture agreement(s). • The Board may evaluate transaction activity annually through a Trading Cost Analysis. Provided that the total return of a manager's portfolio is not adversely affected or that the investment process is not affected so as to place the Plan in a disadvantageous position relative to the investment manager's other accounts, and provided that best execution and lowest cost are obtained, each manager is to direct a percentage of its trading to specified firms for the purpose of brokerage commission recapture programs. The Board will select the brokerage firms and establish the expected level of trading to be directed. B. Guidelines for Selection of Brokerage Firm 1. Introduction and Basic Principles The primary responsibility of the Board of Trustees is to act as a fiduciary to the members and beneficiaries of the District's Pension Plan. It is the intent of the Board of Trustees that all transactions of publicly traded securities be effected through brokerage firms, regardless of location, in order to obtain the best execution and lowest cost of the transaction. Brokerage firms are an integral part of the investment process. Their services can significantly affect the investment performance of the fund. Hence, the Board of Trustees, in fulfilling their fiduciary responsibilities, is establishing guidelines for the selection of broker/dealer firms to be used by the Plan's investment managers. Each investment manager will be responsible for the selection of brokerage firms, or automated trading systems, through which trading will be completed for the Pension Plan. Their selection must in all cases be for the exclusive benefit of the Plan's participants and beneficiaries and should strive for best execution with lowest cost for each trade. 2. Guidelines for Selection The broker/dealer firm must: • Be in compliance with applicable Federal and State of Missouri laws relevant to the conduct of business as a broker/dealer. • Be a member in good standing of the major financial exchanges worldwide. • Have on-site, in-house trading capability and direct access to major markets. • Have in-house access to trading support equipment. • Be able to trade for competitive rates. • Have the financial capability to accommodate a capital commitment trade over a five day settlement period. • Have the ability to clear and settle trades without unnecessary delays or fails, and a record of doing so. • Have been in business as a broker/dealer for a reasonable period of time to ensure financial and operational stability. 3. Review/Evaluation At least annually, the Board of Trustees may review the brokerage firms utilized by the Plan's investment managers and all transactions for compliance with these policies and procedures through an annual trading Cost Analysis. With the assistance of the District's custodian, the Board may monitor manager commission costs on a routine basis. The foregoing Resolution was adopted April 20, 1995.