HomeMy WebLinkAboutResolution No. 2021-05KENAI
CITY OF KENAI
RESOLUTION NO. 2021-05
Sponsored by: Administration
A RESOLUTION OF THE COUNCIL OF THE CITY OF KENAI, ALASKA, DESIGNATING THE
INVESTMENT AND ALLOCATION PLAN FOR THE CITY'S PERMANENT FUNDS AND
ESTABLISHING APPROPRIATE BENCHMARKS TO MEASURE PERFORMANCE FOR
CALENDAR YEAR 2021.
WHEREAS, pursuant to KMC 7.30.020 (a) (2) the Council of the City of Kenai annually approves
an Asset Allocation Plan for investment of the City's Permanent Funds; and,
WHEREAS, KMC 7.30.020 (b) permits investment of the Permanent Funds in various asset
classes and the Council believes that establishing asset allocation criteria for these various asset
classes is in the best interest of the City of Kenai; and,
WHEREAS, the annually approved Asset Allocation Plan will provide benchmarks to measure
investment performance.
NOW, THEREFORE, BE IT RESOLVED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA,
Section 1: That the Council adopts the Asset Allocation Plan for calendar year 2021 as
follows:
The Asset Allocation Plan and Target Weightings with range restrictions are:
ASSET CLASS TARGET % WEIGHTING RANGE %
Cash
5
0-10
Fixed Income
30
20-45
Large -Cap Domestic Equity
22
17-27
International Equity
12
7-17
Mid -Cap Equities
12
7-17
Small -Cap Equities
6
0-11
International Emerging Markets
8
0-13
Real-estate equities
2
0-5
Infrastructure equities
3
0-6
Section 2: The performance of the Fund and investment managers will be measured as
follows:
Performance measurement of the Fixed Income allocation will be measured against the Target
weighting, using the Bloomberg Barclays U.S. Aggregate Bond Index for the benchmark.
Performance measurement of the Large -Cap Domestic Equity allocation will be measured against
the Target weighting, using the Standard & Poor's 500 Index for the benchmark.
Resolution No. 2021-05
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Performance measurement of the International Equity allocation will be measured against the
Target weighting, using the Morgan Stanley Capital International Europe, Australasia and Far
East (MSCI EAFE) index for the benchmark.
Performance measurement of the Mid -Cap Equity allocation will be measured against the Target
weighting, using the Standard & Poor's 400 Mid -Cap Index as the benchmark.
Performance measurement of the Small -Cap Equity allocation will be measured against the
Target weighting, using the Standard & Poor's 600 Small -Cap Index as the benchmark.
Performance measurement of the International Emerging Markets allocation will be measured
against the Target weighting, using the Morgan Stanley Capital International Emerging Markets
index as the benchmark.
Performance measurement of the Real -Estate Equities allocation will be measured against the
target weighting, using the Standard & Poor's US REIT Index as the benchmark.
Performance measurement of the Infrastructure Equities allocation will be measured against the
target weighting, using the STOXX Global Broad Infrastructure Index as the benchmark.
Performance measurement of the Cash allocation will be measured against the Target weighting,
using the Citi Group 90 Day T -Bill Index as the benchmark.
Section 3. That this Resolution takes effect immediately upon passage.
PASSED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, this 3rd day of February 2021
ATTEST:
�f
Jamie Heinz, CIVIC, City Clerk
Approved by Finance:2_"L,-4—
�" S
BRIAN GABRIEL SR., MAYOR
OF.KEH9i
K E N A
City of Kenai 1210 Fidalgo Ave. Kenai, AK 99611-77941907.283.7535 1 www kenaixity
MEMORANDUM
TO: Mayor Gabriel and Council Members
THROUGH: Paul Ostrander, City Manager
FROM: Terry Eubank, Finance Director
DATE: January 21, 2021
SUBJECT: Resolution No. 2021-05 — The Investment Allocations Of And
Establishing Appropriate Benchmarks To Measure Performance Of
The City's Permanent Funds For Calendar Year 2021.
Pursuant to KMC 7.30.020 the Council annually designate by resolution, the authorized
investments and allocation plan for the City's Permanent Funds. Resolution No. 2021-05
establishes the allocation plan and evaluation benchmarks to be used for calendar year 2021.
This year's allocation differs from last year's plan. It is recommended to increase the allocation
to equities, stocks of publicly traded companies, from 50% to 60% of the portfolio with a
corresponding decrease in the fixed income, bonds, portion of the portfolio from 40% to 30% of
the portfolio total. The sharp reduction in short-term interest rates that occurred by the Federal
Reserve Board in response to the COVID-19 pandemic coupled with the projection for continued
low rates for the foreseeable future resulted in a reduction in the portfolio's expected long-term
rate of return from 5.9% a year ago to 5.3% moving forward. 5.3% is below the income level
needed to provide the established 4% average draw from the permanent funds and provide
inflation proofing of the fund's corpus. Long-term annual projections of inflation are 2.0%.
The recommendation to Increase the portfolio's equity allocation and decreasing the fixed income
allocation will provide a projected annual rate of return of 6.0% providing the return necessary to
provide for a 4% annual draw and 2% for inflation proofing of the fund's corpus. As with any
investment, in order to increase the expected rate of return the investor must assume additional
risk. The 2020 asset allocation is projected to provide returns between -12.3% and 23.7%
annually over the next ten -years with an average rate of return of 5.3%. The recommended asset
allocation is projected to provide returns between -14.9% and 28.0% annually over the next ten -
years with an average rate of return of 6.0%.
Other options were discussed including the addition of high yield bonds of United States
Corporations. High yield bonds have a credit rating below investment grade, below BBB. Also
considered was inclusion of high yield bonds of United State Corporations and an asset class
know as Alt Beta. Alt Beta funds are relatively new investments that attempt to replicate the risk
and return characteristics of hedge fund strategies by following a systematic investment process.
Both of these options produced projected returns equivalent the recommended allocation at
slightly lower risks. The Administration will continue to analyze these other options and may
recommend incorporation of one or both in coming years but feels more comfortable with the
recommended allocation for the current year.
There are no changes to the recommended benchmarks by which the portfolio's performance is
to be evaluated. The following is a comparison between the 2020 asset allocation and the
recommended 2021 asset allocation for your review.
Your support for adoption of Resolution 2021-05 is respectfully requested.
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The City of Kenai I www.kenai.city
2020
2021
Asset
Asset
Allocation
Allocation
Difference
Equities
US Large Cap
20%
22%
2%
US Mid Cap
10%
12%
2%
US Small Cap
5%
6%
1%
International Equities
10%
12%
2%
Emerging Market Equities
5%
8%
30/0
50%
600/1
10%
Alternatives
Real Estate
2%
2%
%
Infrastructure
3%
30/0
%
5%
5%
Fixed Income
US Aggregate
40%
30%
(10)%
Cash
5%
5%
_%
45%
35%
(10)%
1550/1
SQQ%
Expected Average Annual Return
5.68%
6.54%
0.86%
Expected Risk (one Standard Deviation)
8.99%
10.72%
1.73%
Return Range
-12.3% to 23.7%
-14.9% to 28.0%
-2.6% to 4.3%
Long-term Expected Return
5.30%
6.00%
0.70%
Your support for adoption of Resolution 2021-05 is respectfully requested.
Page 2 of 2
The City of Kenai I www.kenai.city