Investment Policy

Investment Policy and Objectives

 

Adopted by the Trustees on 27 November 2006

Introduction

This Statement of Investment Policy and Objectives (the “SIPO”) prepared by the Trustees (the “Trustees”) of the ASB Community Trust (the “Trust”) sets out the objectives, policies and beliefs governing decisions about investments in relation to that Trust’s assets.

This SIPO takes account of the requirements of

• The Trust Deed constituting the Trust;
• The Trustee Act 1956; and
• The Community Trusts Act 1999.

A copy of this SIPO will be sent to all investment managers appointed by the Trusts.

The Trustees intend to review this SIPO annually or more frequently if there is a significant change in the Trust’s circumstances.

 

 

Nature of the Trusts

The ASB Bank Community Trust was formed on 30 May 1988 through the creation of a Trust Deed in compliance with the Trustee Banks Restructuring Act 1988. Under the terms of the Trust Deed the Trust was settled with 60 million, $1 prepaid ordinary shares in ASB Bank Limited representing 100% of the issued capital. In 1989 45 million shares were sold to the Commonwealth Bank of Australia for $252,000,000 which was then donated to establish the ASB Charitable Trust.

On the 3rd of October 2000 the remaining 25% shareholding was sold to the Commonwealth Bank for $560 million which lifted the collective value of the ASB Bank Community Trust and the ASB Charitable Trust to over $1 billion.

On 31 March 2006 the corpus of the ASB Charitable Trust was distributed to the ASB Bank Community Trust.

On 17 July 2006 the ASB Bank Community Trust was renamed ASB Community Trust.

 

Investment Objectives

The Trustees will adopt a policy of investing the assets of the Trust across a broad range of investments designed to achieve the following objectives:

• Maintain the real value of the capital of the Trusts with regard to inflation.
• Maintain equity between present and future generations in terms of the amounts available for distribution on an annual basis.
• Maximise the total amount of income that can be provided by the investments of the Trusts over the long term subject to a prudent level of portfolio risk.

 

Responsible Investment Policy

Motivations

As a responsible member of the world community the Trust aims to demonstrate leadership by advancing universal principles and responsible corporate citizenship to make the global economy more sustainable and inclusive.

The Trust supports the United Nations Global Compact and its principles.

Principles

Human Rights

• Businesses should support and respect the protection of internationally proclaimed human rights
• Make sure that they are not complicit in human rights abuses.

Labour

• Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining
• the elimination of all forms of forced and compulsory labour
• the effective abolition of child labour
• the elimination of discrimination in respect of employment and occupation

Environment

• Businesses should support a precautionary approach to environmental challenges
• undertake initiatives to promote greater environmental responsibility
• encourage the development and diffusion of environmentally friendly technologies

Anti-Corruption

• Businesses should work against all forms of corruption, including extortion and bribery

The ten principles enjoy universal consensus being derived from;

• The Universal declaration of Human Rights
• The International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work
• The Rio Declaration on Environment and Development
• The United Nations Convention Against Corruption

The Trust screens its investment portfolio against allegations of breaches of the United Nations Global Compact principles.

Full details of allegations are provided by an external service provider together with explanations as to how this has been interpreted and whether the companies have taken appropriate actions to address the issues. The progress of issuers that are in breach of the above principles will be monitored over an extended period (approximately three years).

Following a lack of any evidence that the company has made a commitment to either engage or make any improvement to the identified issue, and after;

• consultation with the relevant fund manager holding the company
• direct engagement with the company
• advice from the Trust’s Responsible Investment advisers

the company will be considered for divestment by the Trust.

 

Investment Policies

The Trustees have adopted a number of specific investment policies designed to assist in meeting the investment objectives identified in section 3 above.

• Trustee responsibilities under the Trust’s Trust Deed and under common law and statute (including the Community Trusts Act 1999 and the Trustee Act 1956) must be met. The following policies will be interpreted and applied subject to this policy.
• An appropriate level of portfolio risk will be determined and accepted by the Trustees in consultation with professional advisors.
• The portfolio will accept risks in a prudent manner and investment risk will be minimised for the expected level of return.
• An appropriate level of diversification across asset classes, securities, sectors, and countries must be maintained.
• Consistent with the stated objectives, the Trustees will demonstrate a preference for investment choices that provide an income flow from the portfolio to allow for stability of grants.
• A disciplined reserving policy will be implemented and a general reserve maintained to allow stability in available funding for grants, having regard to the Trust’s other objectives.
• The inflation-adjusted capital of the Trust’s shall not be used for grants.
• The capital of the portfolio will be preserved on a quarterly basis by adjustments for changes in the Statistics New Zealand All Groups CPI.
• Liquidity must be considered and maintained at an appropriate level.
• The investment structure must be able to accommodate changes in the Trust’s requirements and the investment environment.
• The portfolio and investment managers will be monitored on an ongoing basis.
• All aspects of the investment process and functions must be reviewed three- to five-yearly.

 

 

Risk

The Trustees regards ‘risk’ as the likelihood that the Trust fails to achieve the objectives set out in section 3 above. To mitigate this risk, the Trustees have adopted a formal reserving policy and set a strategic asset allocation strategy.

 

Reserving Policy

 

The Trustees have adopted a formal reserving and grants policy. The reserving policy is a key risk management tool to aid the fulfilment of the Trust’s objectives.

Each year, the value of the Trust’s assets is compared to the Real Capital Value of the Trust to calculate the level of reserves. The target grants level each year is calculated according to the reserving position of the Fund.

 

 

Asset Allocation Strategy

The Trustees regard the choice of asset allocation policy as the decision which has the most influence on the likelihood that it will achieve its investment objectives. The Trustees have retained responsibility for this decision which is made on the advice of the Trust’s investment consultants, who have carried out an asset-allocation study to assess the likelihood of the Trustees’ objectives being met.

The strategic asset allocation shown in Table 1 overleaf was agreed by the Trustees in December 2005, following the Investment Strategy Review. The Trustees have decided to further diversify their portfolio by investing up to 25% of the Trusts’ assets in alternative investments.
It is anticipated that it will take some time for the investments in alternatives to be funded and there will be a gradual shift in the asset allocation from the current strategy to the target strategy.

For each asset class, the Trusts seek to reduce risk by investing in a globally diversified portfolio.

It is the Trustees’ policy to review the above asset allocation policy every three years. If, in the opinion of Trustees, there is a significant change in the capital markets or the circumstances of the Trust an earlier review will be conducted accordingly. The next triennial investment strategy review is planned in 2008.

The investment strategy review examines the likelihood that different possible asset allocations will meet the Trust’s objectives. The review makes assumptions about the behaviour of various asset classes. It is assumed that:

• Equities are expected to outperform other asset classes in the long-run but may be more volatile in the short-run. Bonds, in turn, can be expected to outperform cash but with greater variability.
• Asset classes do not perform in the same way at the same time; some may increase in value while others decrease. Holding a diversified portfolio of assets can help reduce the overall variability of returns.
• Alternative investments offer considerable benefits to diversify the Trust’s investment portfolios because of the low correlations with traditional asset classes. The lower portfolio volatility is expected to translate into higher average grants over time.

   

 

Derivatives Policy

The use of derivatives as part of the investment strategy is permitted by external managers and may include the following:

• to manage risk or hedge against movements in interest rates, values or prices in relation to permitted investments and movements in foreign currency exposures held within the fund.
• to achieve or reduce exposure to assets, all or part of any asset class and foreign currency ; and
• to achieve transactional efficiency or reduce the transactional cost of achieving required exposures.

Derivatives will not be used for investment activity where derivative exposure combined with physical exposure results in a net exposure for that asset class or the portfolio as a whole that is inconsistent with the Trusts asset allocation strategy.

External managers may be permitted to use derivatives in pursuit of excess returns or to provide market exposure provided that such use is consistent with the investment guidelines given to that manager.

 

 

Absolute Return Funds Policy

The investment in Absolute return funds as part of the investment strategy is permitted by the external managers where the following criteria are satisfied:

1. the investment is through a fund of Absolute return funds with the following attributes:

a bias towards non-directional strategies;

• an experienced management team with the resources necessary to research Absolute Return fund strategies and managers;

   

• a portfolio of Absolute Return funds well diversified across managers and strategies; and

   

• a strong process and commitment to operational and legal due diligence.

   

2. the fund of Absolute Return funds has sufficient liquidity and the manager experienced in dealing with institutional investors.

3. any currency exposure resulting from the fund of Absolute Return funds investment is hedged in accordance with the Trust’s Currency Policy.

4. the investment does not give an exposure greater than the amount invested.

 

Currency Policy

It is assumed that:

• Hedging the foreign currency exposure of offshore bonds significantly reduces the volatility of these investments. Hedging the foreign currency exposure of offshore equities marginally reduces the volatility of these investments.

   

• An exchange risk premium exists for New Zealand investors, whereby hedging the foreign currency exposure increases the expected returns for offshore investments.

   

The Trustees have adopted a strategic decision to hedge 100% of the currency exposure resulting from offshore investments to the New Zealand Dollar. The hedge ratio was increased to 75% in December 2005. Following external presentations and extensive discussion on 24 July 2006 it was agreed to increase to the hedge ratio to 100% when practical. The hedge ratio was increased to 100% following the review and replacement of incumbent global equity managers in Jan 2007.

 

 

Rebalancing Policy

It is anticipated that, as a result of market movements and other cash-flows, the Trust’s asset allocation will at times deviate from the strategic asset allocation policy. The Trustees have adopted a formal policy to rebalance the portfolio to the strategic asset allocation policy.

The Trust’s assets are compared to the strategic policy on a monthly basis. In the event that the weight in any asset class falls outside the rebalancing ranges set out in Table 2 below, the asset classes will be rebalanced to the policy weight.

Table 2: Rebalancing ranges

Assett class	Current strategy	Rebalancing ranges
NZ Equities	10%	±3%
Global Equities	35%	±3%
Collateralised Commodities	5%	±3%
Property	3%	±3%
Total Growth	53%	±3%
NZ Fixed Interest	19.5%	±3%
Global Fixed Interest	22.5%	±3%
Cash	5%	±3%
Total Income	47%	±3%

The rebalancing ranges will be reviewed as the Trust moves to the target strategic asset allocation.

 

Investment Management Structure

The Trustees have decided to employ active management for the majority of their investments. Active management provides the expectation of a higher return but also results in higher management fees. The Trustees expect that over time, the higher return deriving from active management will outweigh the higher costs. The return from active management is uncertain and at times may not occur.

Investment managers are appointed by the Trustees on their ability to meet the Trust’s objectives. The Trustees will continuously assess the ability of the managers to meet the Trusts’ objectives.

To diversify the risk associated with an individual manager underperforming the benchmark, where practical, the Trustees have appointed multiple active managers. Table 3 lists the current managers appointed by the Trust.

 

Performance Measurement & Reporting

The Trustees have appointed an independent party to measure the returns of the Trusts. Reporting is provided to the Trustees on a quarterly basis. Quarterly performance reports are prepared by JP Morgan and Russell Investment Group.

The returns of the Trust’s assets will be monitored by the Trustees in relation to the strategic asset allocation specified in Section 8 above.

The performance of each investment manager will be monitored on a quarterly basis against an appropriate published index. The Trustees understand that over the short-term, investment managers may underperform the benchmark. A greater emphasis will be placed on the longer-term (at least 3 years) performance of the investment managers.

 

 

Date for next review of the SIPO

The Trustees intend to review this SIPO annually, or if there is a significant change in the Trusts’ circumstances.

 

 

Version Control

Version Approved / Updated

1. Approved 19 December 2005: Revised Asset Allocation Strategy

2. Approved 26 June 2006 : Ethical inclusion to Investment Objectives

3. Approved 30 October 2006: Inclusion of Derivatives Policy.

4. Approved 27 November 2006: Inclusion of Responsible Investment Policy; Inclusion of Absolute Return Funds Policy.

5. Updated 23 July 2007: Updated to reflect changes in fund managers.