City Bonds Over On GIC Withdrawl
It may be a case of the right hand not knowing what the left hand was doing when it comes to recent transactions approved by the Investment Committee.
The apparent oversight by the Royal Bank of Canada's (RBC) investment manager for the City saw the Investment Committee hold one meeting to approve a partial withdrawal of a Guaranteed Investment Certificate (GIC) only to rescind it at a subsequent meeting.
At their June 24th meeting the Investment Committee took RBC advice to redeem part of a GIC.
The recommendation was for the Moderate Term Pool to redeem $1 million of 2021 and $1 million of 2022 GICs to take advantage of the premium price; and 1,000,000 of GIC proceeds plus $487,523 interest be invested into the equity portfolio to December 2020 (approx. $211,428 per month); and further $1,000,000 be invested into a Bond Pool to take advantage of the yield spread opportunity.
Presenting the Investment Committee report committee member Councillor Scott McMann said the initial motion had to be rescinded because the GIC issuer would not allow a partial withdrawal.
The move had the committee meeting a second time on July 17th.
“Our service provider would not allow those withdrawals on those terms,” Councillor McMann said.
The issuer or service provider for the GICs is RBC.
The inability to do a partial withdrawal meant a GIC in its entirety had to be withdrawn.
“So it was a larger amount it was about $8.4 million (we had to withdraw) versus $5.4 million we were trying to do partial withdrawal on,” he said.
In order to accomplish the transaction a GIC set to mature in 2024 was redeemed.
The committee left a 2021 GIC for cash flow purposes. Additionally GICs for 2022 and 2023 will also not be touched.
The extra approximate $3 million will be invested in a global bond fund.
In questioning Councillor Brian Swanson made light of the fact RBC provides investment strategy and advice to the City and the GICs which could not be partially redeemed were issued by RBC.
“So the RBC financial advisor we had didn’t know RBC wouldn’t allow a partial disbursement of the GIC?” Councillor Swanson asked.
“That is my understanding. It’s how it happened,” Councillor McMann replied. “They were trying to see if they could get an exception approval done…the spread on the premium we got actually increased from the time of the first meeting to the second (meeting) so we went with that.”
He admitted not being able to do a partial redemption of a GIC was something the money manager should have been aware of.
“It should have been something they should have known about but didn’t. So I guess we know now.”
Councillor Swanson then raised two concerns he had regarding the City's investment strategy.
The first concern was the maximum ratio of the new low cost bonds yielded – about .49 versus the City's original blue chip bond strategy.
“The City had a pretty respectable bond portfolio (from 3.5 to four percent that were sold and now we are going to enter into a bond fund and I can assure you the yield on these bonds is considerably less than the portfolio bonds we sold,” he said.
The second point Councillor Swanson made was the amount of money being paid to manage the City's investments.
“We pay the RBC group approximately $500,000 a year to manage our portfolio. And it seems a lot of our portfolio is going to mutual funds so we have a consultant pick a consultant for us…we are paying a lot of fees that we never paid before for the management of our money.”
The previous City investment strategy was based upon the finance department buying secure blue chip bonds.
The present strategy works on a mixed approach of investment products including GICs, equities, bonds and cash.
Councillor Swanson has been a local critic of the new strategy.
In the end the committee's minutes were approved in a 6 – 1 vote with Councillor Swanson opposed.
It should be noted only Councillors McMann and Swanson addressed Council on this issue.