The purpose of this policy is to provide the Board of Directors’ Statement of Investment Goals and Policy on how the Fund shall be invested. The Statement is prepared to ensure continued prudent and effective management of the Fund. Investments shall be selected in accordance with the criteria and limitations set forth herein and in accordance with all relevant legislation.
This policy applies to the investing and monitoring of the Accident Fund (the “Fund”) for WorkSafeNB.
This policy is supplemented by related policies and directives, such as:
WorkSafeNB is an independent agency of the Government of New Brunswick and is accountable to the Minister responsible for the WHSCC & WCAT Act.
WorkSafeNB administers a variety of benefit and vocational rehabilitation programs designed to assist both injured workers and employers within the Province of New Brunswick.
As such, WorkSafeNB has raised over the years a Fund (The Accident Fund) to be used to pay long-term benefits awarded to injured workers. The Fund has two investment portfolios: The Pension Fund Investment Portfolio and the Accident Fund Investment Portfolio.
It is recognized, however, that in most cases, benefits are defined independent of the value of the Fund assets. The Fund assets serve as security that awarded benefits will be met and are, in effect, held in trust for injured workers.
WorkSafeNB has appointed a Financial Services Evaluation Committee (“the Committee”). It is the responsibility of this Committee to ensure that the Fund is managed in accordance with the policy set out herein and in the related policies and directives.
The roles and responsibilities of the Board of Directors, the Financial Services Evaluation Committee and staff with respect to the management of the Accident Fund are defined in Policy 34-205 – Statement of Investment Philosophy and Beliefs.
Any member of the Committee who has a conflict of interest arising out of the investment activities of the Fund shall, at the first opportunity, disclose the existence and the nature of the conflict of interest to the chairperson of the board of directors and shall not participate in any discussion of, shall not influence or attempt to influence the outcome of, and shall not vote or otherwise participate in respect of the matter to which the conflict of interest relates (see Appendix A).
The policy set out in this statement will be reviewed by the Committee every 12 months, or more frequently if deemed appropriate, to ensure that it remains reasonable.
2.0 Investment Policy for the Pension Fund Investment Portfolio
Regulation 82-210 under the Workers’ Compensation Act calls for the establishment of a pension fund investment portfolio for the payment of pensions in accordance with sections 38.22, 38.54 and 38.7 of the Act.
The Pension Fund Investment Portfolio shall be invested in the same asset mix and with the same investment policy as the Accident Fund Investment Portfolio.
3.0 Investment Policy for the Accident Fund Investment Portfolio
The Policy Asset Mix
The Board of Directors’ policy asset mix is it’s long-term allocation to various broadly defined classes of investments (i.e., bonds, equities, real estate, etc.). The policy asset mix is a significant determinant of the future return and risk of the Fund. There is no one correct policy for all investment funds. Differences in missions, liability profile, risk tolerances, and financial positions all affect the asset mix decision.
It is the Board’s policy to rely on periodic asset liability studies performed by external consultants to ensure that WorkSafeNB’s assets are structured properly in light of the related liabilities. In the asset liability study, the consultant will help the Board to assess:
Given all this information, the consultant will help the Board determine an acceptable long-term policy asset mix and funding policy that reflects the Board’s return objectives and risk tolerance.
The Board of Directors hired Morneau Shepell to conduct an asset liability study in 2016. After the study, the Board adopted the new target policy asset mix described below, with a plan to transition to this target mix over the following few years.
Funding the increase in Infrastructure is expected to take a few years as our Infrastructure managers are not expected to have capacity for additional capital for some time. Until then, staff will source cash withdrawals from other parts of the portfolio, which should increase the Infrastructure weight relative to the other asset classes.
The current policy asset mix and the new target asset mix are listed below:
Policy Asset Mix
International (EAFE) Equities
Emerging Markets Equities
Real Return Bonds
|Absolute Return Investments|
As staff transition the portfolio from the current policy asset mix to the new target policy asset mix, the benchmark portfolio will adjust to the actual allocations to each asset class at the time that they are made, rounded to the nearest full percentage point. The benchmark portfolio will be adjusted at the beginning of the first full month after the reallocation has been executed.
The Committee will ensure that the total asset mix for the Fund is maintained within accepted ranges of variance of the Board’s policy asset mix, as described below in accordance with Directive 34-205.05 Investment Portfolio Rebalancing Guidelines.
Directive 34-205.05 Investment Portfolio Rebalancing Guidelines.
Policy Asset Mix – Allowable Ranges
International (EAFE) Equities
Emerging Markets Equities
Real Return Bonds
|Absolute Return Investments|
WorkSafeNB believes in a disciplined policy of re-balancing the fund’s various asset classes to their targets as expressed in the policy asset mix. The methodology for rebalancing the portfolio at the asset class level and at the individual manager level is described in Directive 34-205.05 Investment Portfolio Rebalancing Guidelines.
For all asset classes except real estate and infrastructure, WorkSafeNB will rebalance to the policy asset mix when the market value allocations fall outside the minimum or maximum allowable ranges expressed herein. Because real estate and infrastructure can be illiquid and may require some time to buy or sell, these asset classes are permitted to be outside the target range identified above for periods of time, and may be rebalanced at staff discretion. When real estate or infrastructure have breached their allowable ranges and are not being rebalanced, the Committee shall be informed and staff shall provide a plan for completing the rebalancing.
For rebalancing purposes, cash held by investment managers as part of normal operations will be considered to be invested in the asset class(es) for which the manager has been retained. Emerging Markets equities held by WorkSafeNB’s International (EAFE) managers will be considered to be invested in the International (EAFE) equities asset class. The allowable range for the dedicated emerging markets manager will be between 3% and 5%.
For the 3% allocation to cash, the allowable range will be 2.7% to 3.3%.
The opportunistic mandate has the ability to invest in a wide variety of asset classes and strategies with minimal constraints. The alllocations within this strategy should not be added to the other asset class weights when determining the actual weight, but shall be reported separately under the “opportunistic” mandate, and rebalanced accordingly.
Foreign Currency Exposure
The Policy Asset Mix contains a significant allocation to securities that are denominated in foreign currencies (U.S. Equities, International (EAFE) Equities, Emerging Markets Equities, some of the Infrastructure allocation, some of the Real Estate allocation, and some of the Opportunistic allocation). By holding securities denominated in foreign currencies, the fund is exposed to the risk of exchange rate fluctuations relative to the Canadian dollar for those currencies. These fluctuations impact the value of any gains or losses in foreign investments. This volatility in returns from non-Canadian securities can have an impact on WorkSafeNB’s funded ratio or assessment rate.
Empirical evidence shows that there is a “tendency for currencies to return to a fundamental equilibrium value in the long run, even though prices may diverge substantially from this equilibrium in the short run.”1 A value oriented strategy that buys/overweights currencies that are cheap (trading below their long term equilibrium value) and sells/underweights currencies that are expensive (trading above their long term equilibrium value) has been shown to produce positive returns.2
Consequently, the Board has adopted a policy to employ a dynamic currency hedging manager that uses a value approach to hedge the foreign currency exposure of the Accident Fund and the Pension Fund. For each of the various currency exposures in these Funds, the manager will have the discretion to adopt a hedge ratio of between 0% and 100%, depending on their view on the relative attractiveness of that currency. The benchmark or equilibrium position for developed market currency exposures will be 50% hedged. At the managers discretion, some currencies may not be hedged due to the size of the exposure (too small to have a meaningful impact) and/or due to the expense of hedging outweighing the estimated benefit.
It is expected that this dynamic, value-based approach should increase performance and reduce risk over the long term, relative to an unhedged portfolio and to a passive 50% hedging policy.
Additional guidance on the implementation of the currency hedging policy is provided in Directive 34-205.10 Currency Hedging.
Active managers of foreign currency denominated assets may hedge the currency exposure they assume through their specific mandates, at their discretion.
Guidelines pertaining to each individual manager are contained in the specific manager mandates.
i) No investment in private placement bond or equity issues, venture capital or other securities not publicly traded (other than real estate or infrastructure), will be permitted without prior approval of the Board of Directors.
ii) No ownership of options or futures contracts will be permitted without prior approval of the Board of Directors. The Board has approved the use of forward contracts as described in Directive 34-205.10 Currency Hedging. The Board has approved the use of options and futures contracts within the opportunistic mandate.
iii) To ensure a prudent level of diversification, no more than 5% of the market value of the Fund shall be invested in the aggregate securities of any one entity. This limitation does not apply to those securities issued or guaranteed by the Government of Canada or the Treasury of the United States, or to securities issued by one of Canada’s major chartered banks, or to pooled funds.
iv) No bond holding with a lower rating than "BBB", as determined by the Dominion Bond Rating Service, Standard & Poors or Moody’s, will be included without the prior approval of the Committee. Should the rating drop below the approved level, the manager will be obliged to dispose of the bond in a timely manner, unless the Committee approves the holding. This rating restriction does not apply within the opportunistic mandate.
v) Individual managers will not normally be allocated more than 20% (no restriction in the case of passive specialty managers or passive pooled funds) of the entire portfolio.
Investment Manager Structure
The Committee is responsible for the strategic management of the portfolio, which includes the following items:
Day-to-day administration is delegated to staff.
The management structure of the Fund will be constructed in accordance with Directive 34-205.04 Investment Portfolio Management Structure. This directive outlines the number of managers, styles, target weights and ranges for each asset class in the Fund.
Each mandate can use balanced or specialty managers and may be implemented using either separate accounts or pooled funds, as long as that manager is considered the best candidate for the mandate and Directive 34-205.02 Process & Criteria for Hiring an Investment Manager, is used to govern the selection process.
Managers will be terminated in accordance with Directive 34-205.03 Terminating an Investment Manager.
WorkSafeNB has two options for the investment of its assets: active management or passive management. Active strategies try to add value by outperforming the market portfolio, while passive strategies simply try and replicate the performance of the market (or an index which represents the market).
The Board of Directors believes that markets are not perfectly efficient all the time, and they endorse the use of active management to enhance the returns generated by the policy asset mix. The Board recognizes that adding value through active management is difficult, and there is no guarantee that it will be successful, but the Board believes the potential rewards justify an active approach.
4.0 Performance Evaluation
Although there are numerous methods to measure the success of this approach, the following sets out the parameters that the Board of Directors has adopted.
Real Return Objective
The policy asset mix, as denoted above, reflects the Board of Directors’ desire to maximize returns at an acceptable level of risk.
The Board believes, based on the most recent asset liability study, that the policy asset mix should generate a long-term rate of return of at least 3.75% in excess of the increase in the Consumer Price Index (CPI) as published by Statistics Canada. This return objective equals the actuarially assumed liability growth rate, or discount rate. This objective will be measured on a four (4) year moving average basis.
The purpose of this objective is to show the impact of investment performance on the funded position of WorkSafeNB. If the real return on the Accident Fund is greater than the 3.75% objective, holding all other things equal, the funded status should increase.
The Board recognizes that with the current policy asset mix there will be significant volatility in investment returns, particularly over shorter time periods. Morneau Shepell provided some analysis that shows that from 1926 to 2016, this asset mix would have generated 4-year rolling real returns between –3% and +16.5%. There also would have been sustained periods of time when the rolling 4-year and even the rolling 10-year (and longer) real returns would have fallen short of the 3.75% real return objective. However, historically, over longer time frames (rolling 40-year periods), the current policy asset mix has been successful at achieving this objective.
This objective is measured on a rolling four year basis, even though the Board recognizes there will be four year (and longer) periods when the objective is not met. The four year measurement period will keep the Board aware of recent performance and its impact on the funded position of WorkSafeNB. It will also require staff to explain the reasons why the objective has or has not been met over the most recent four year period.
Benchmark Portfolio Objective (Active Management)
The Board of Directors, in adopting an active management approach to the Fund’s investments, has the following objective for the total Fund:
The benchmark portfolio return is the return that the Fund would have earned if it was passively managed with the asset mix maintained at the policy targets.
The benchmark portfolio constitutes a “neutral position”, and represents the portfolio that would be used if the fund were to be passively managed (i.e., no active short term asset mix movement, with each asset class managed to achieve the return of its respective broad market index). Such a fund could be managed at a low cost, and the returns generated would be those of the invested asset class indices, less the aforementioned management costs.
The purpose of this performance objective is to show the value added (or lost) through active management.
The rate of return for the benchmark portfolio will be calculated in accordance with the following parameters: (The weights will change as the policy targets change towards the new target asset mix.)
Asset Class - Target Percentage - Benchmark Index
The benchmark indices will be rebalanced quarterly.
The value-added objectives at the individual manager level are set out below. Managers are expected to meet these objectives over a full market cycle. It is understood that all managers will underperform their respective market index for shorter periods of time when their approach is out-of-favour. Manager performance relative to these objectives is reported on in the Staff Performance Relative to Value-Added Targets Scoresheet, described in Directive No. 34-205.07 Guidelines for Reporting to the Financial Services Evaluation Committee.
The Real Estate managers do not have value added objectives. The Canadian manager’s performance is expected to be similar to the REALpac / IPD Canada Annual Property Index over long periods of time, but they are not necessarily expected to exceed this index. The European manager’s performance is expected to exceed the IPD Pan-European Property Index. The real estate allocation was made to provide diversification and inflation hedging benefits to the total portfolio and not with the intention of exceeding either IPD index return. The IPD Canada Annual Property index is a database of over 2,351 properties owned by 42 different institutional investors in Canada. The IPD Pan-European Property index is a database of over 50,000 properties owned by 965 different institutional investors in Europe. Neither index is an investable alternative like the other market indices for bonds and equities listed above. There is no investible passive alternative for real estate. The Canadian real estate managers were selected to provide broadly diversified Canadian real estate portfolios, which should provide similar long-term returns to IPD, but not necessarily exceed it. The European manager was selected to provide a more opportunistic European real estate strategy, which should outperform IPD over the life of the fund, but will not necessarily track it very closely.
Similarly, there is no investible passive alternative for Infrastructure, therefore there is no value-added objective for Infrastructure.
For the purpose of measuring rates of return of the investments, all returns shall be measured before investment management fees but after transaction costs. All manager mandates will be evaluated over rolling four year periods. All index returns shall be total returns.
Attribution analysis shall be prepared each calendar quarter to evaluate the respective contributions of asset mix and security selection decisions to overall returns. The returns on individual asset classes will be compared to the relevant index. Furthermore, individual investment managers will be evaluated relative to the appropriate asset class index return, as well as other criteria as may be contained in the applicable manager mandates. Additional information on metrics to be measured and reported to the Committee are described in Directive 34-205.07 Guidelines for Reporting to the Financial Services Evaluation Committee, and in Directive 34-205.06 Manager Monitoring.
Performance will also be compared with the median return of a recognized universe, both at the individual manager level and at the asset class and total Fund level. WorkSafeNB recognizes that its asset mix is significantly different than that of the typical investment portfolio, whose returns are reflected in the median performance of most publicly available universes. Consequently, WorkSafeNB places less emphasis on the median return of a recognized universe comparison at the total Fund level. On the other hand, WorkSafeNB believes that comparisons of returns with those of various universes represent a valuable performance management tool at the asset class and active management level, but only if truly comparable universes are available.
5.0 Risk Management
The Board of Directors defines risk as it relates to the Accident Fund as the likelihood of a permanent loss of capital. The primary risk management tool that the Board employs to reduce this risk is the disciplined approach to the management of the Accident Fund that is described in the policies and directives governing investments.
These policies and directives include things like establishing an effective governance structure, hiring qualified, experienced staff, maintaining adequate segregation of duties, following a disciplined approach in setting the long-term policy asset mix, disciplined rebalancing, reducing volatility through diversification, disciplined manager selection, termination and monitoring, measuring performance and reporting, education, adherence to a code of ethical conduct and adhering to the discipline, once established.
In addition to the disciplined approach described above, the Board will monitor the standard deviation of returns as a proxy for risk. Standard deviation is a commonly used statistical measure of the dispersion of returns around the mean. Finance theory suggests that the greater the historical volatility of returns, the greater the risk.
Standard deviation will be used to measure total portfolio variability and individual manager variability against their respective benchmarks and other portfolios in an external universe of plan sponsors or managers. This analysis will be performed quarterly. The total Fund standard deviation is expected to approximate the expected annualized standard deviation of 8.4% modeled in the 2016 asset liability study.
While standard deviation is widely used, there are certainly shortcomings, as described by David Swensen from Yale University, “Standard deviation of returns…fails to capture much of what concerns fiduciaries. Simply understanding the historical volatility of returns provides little useful information regarding the efficacy of a particular investment strategy. The fundamental risk of the underlying investment matters, not the security price fluctuation. In a world characterized by excessive price volatility, security prices mask true investment risk. Prudent investors employ risk measure with care, supplementing the science with careful interpretation.”3
In considering risk, the Board, Committee and staff will weigh other factors besides the statistical measures of risk, such as valuation, liquidity, counterparty risk and leverage.
The Board of Directors believes that the volatility of returns can be minimized through prudent and thoughtful diversification. This approach minimizes the impact of poor returns in any single asset class by investing in a variety of assets that behave differently in various economic environments. Diversification is achieved by investing in different asset classes and by diversifying by investment style, geographically, and by sector. In addition, bond portfolios are diversified into various issuers and by term to maturity.
It is intended that any new allocation to an asset class (cash, equity, fixed income, real estate or alternative investment), and any allocation by manager type or style, should improve the risk/return profile of the total portfolio.
The method of monitoring and reporting compliance with the policies and directives governing the Fund, and of monitoring the volatility of the investment portfolio is described in Directive 34-205.07 Guidelines for Reporting to the Financial Services Evaluation Committee, and in Directive 34-205.06 Monitoring of Investment Managers.
6.0 Proxy Voting
The Board of Directors views the voting of proxies as an important part of the investment decision-making process. Therefore, the Board delegates the voting of all proxies to its investment managers.
7.0 Related Party Transactions
Purchase of debt securities or other marketable securities issued by the Province of New Brunswick or the Province of Prince Edward Island, which are directed by WorkSafeNB’s external investment managers are permitted.
Other related party transactions must be approved in advance by the Financial Services Evaluation Committee.
1. Momtchil Pojarliev and Richard M. Levich, A New Look at Currency Investing, (The Research Foundation of CFA Institute 2012), p. 5.
2. Momtchil Pojarliev and Richard M. Levich, A New Look at Currency Investing, (The Research Foundation of CFA Institute 2012), p. 30.
3. David F. Swensen. Pioneering Portfolio Management, An Unconventional Approach to Institutional Investment (New York: Free Press, 2009), 335, 338.
WorkSafeNB – means the Workplace Health, Safety and Compensation Commission or "the Commission" as defined by the Workplace Health, Safety and Compensation Commission and Workers’ Compensation Appeals Tribunal Act (WHSCC & WCAT Act).