The City’s Capital Markets Section manages the working capital and investments for all of the City’s divisions as well as most of its agencies, boards and commissions.
The City of Toronto Act, 2006 prescribes the eligible investments to be used by the City. These consist mainly of fixed income securities such as bonds and chartered bank deposits notes.
Management must incorporate both the legislative constraints and the risk profile of each portfolio. The City has investment policies which provide guidelines for each portfolio that are approved by Council annually.
Although specific policy limits with respect to issuer names and credit quality limits vary among the portfolios, the primary objectives for all City investment activities are to:
The Province recently approved amendments to Ontario Regulation 610/06, Financial Activities, under the City of Toronto Act 2006, to provide a framework for the City to invest according to the prudent investor standard. These amendments allow the City to add securities such as equities to its current holdings. This standard has been in place for a number of years in Ontario for pensions and endowments. This Regulation comes into force on January 1, 2018 and will provide the City greater flexibility in its investment powers.
As a result, Council recently approved the establishment of an Investment Board to manage and invest City funds which are not immediately required, pursuant to the Regulation.
The City has mainly two fixed income investment portfolios, each of which has specific investment objectives and constraints.
Another factor that impacts investor returns is the amount of risk that an investor is willing to bear. This is because borrowers will offer higher returns on instruments that carry a higher risk of default.
However, safety of principal is a primary City investment objective so overall risk exposure on the City’s investment portfolios has been kept low.
One of the principal factors affecting the performance of the City’s investment portfolios is the general level of interest rates that can be earned on fixed income investments.These interest rates have remained unusually low for an extended period following the 2008 financial crisis.
Although 10-year Government of Canada bonds generated an average yield of 4.388% during the pre-crisis period in 2003-2007, these 10-year bonds only generated an average yield of 1.25% in 2016. Similarly, one-year treasury bills generated an average yield of 4.388% during the 2003-2007 pre-crisis periods while the average yield in 2016 was only 0.54%.
The 2016 distribution of investment earnings and their respective annual investment return is summarized in the following table:
|Portfolio ($millions)||Year End Book Value||Earned Income||Annual Investment Return*|
|Total General Funds
*Based on weighted average balance