Item - 2023.EX10.7

The Executive Committee recommends that:

1. City Council receive the report (November 9, 2023) from the Controller for information.

The purpose of this report is to provide the following information:

1.  Performance of the Funds for the six month period ending June 30, 2023

2.  General Market Update and Benchmark Performance

3.  City of Toronto Investment Policy and Procedures

The City's General Group of Funds ("General Fund") hold the working capital and amounts designated for the City's reserves and reserve funds.  The General Fund is comprised of two pools of investments: (a) the Short Term Fund (liquidity funds managed internally), and (b) the Long Term Fund (funds not immediately required are managed by the Toronto Investment Board).  The General Fund had a book return of 3.6 percent and generated $187.4 million for the six months ending June 30, 2023.

Since the start of the pandemic in 2020, the General Fund has held a larger balance in the Short Term Fund to enhance the liquidity and to generally lower the overall risk (risk management).  On average, the Short Term Fund, including the short-term investments of the Long Term Fund, was about 65% of the overall General Fund in 2022 compared to 48% from the pre-pandemic level in 2019.  This higher weighting in the Short Term Fund provided significant protection, as well as increased returns as short-term rates moved higher.

The City's Sinking Fund portfolio is separate from the General Fund and holds the investment funds for future debt repayments.  For the six months ending June 30, 2023, the Sinking Fund had a book return of 2.3 percent and generated $27.3 million in income.

Since January 1, 2018, the City's long-term investments (Long Term Fund and Sinking Fund) have been managed by the Toronto Investment Board ("Board") under a Council adopted Investment Policy which is based on the prudent investor standard. The investment portfolios have been progressively phased in to make use of the broader range of investments that have become available. Although the overall portfolio risk has been reduced through asset mix diversification, the potential for volatility in total returns over the short-term investment horizon still exist while the risk-adjusted total returns over the long-term investment horizon are expected to be higher.

The Board manages four external fixed income managers and four external global equity managers engaged in managing the long-term investments. Both fixed income and equity investment classes are fully funded in accordance with the target asset mix in the Investment Policy with 70 percent allocated to fixed income and 20 percent to global equities.  As of June 30, 2023, approximately 90 percent of both the Sinking Fund and the Long Term Fund were managed by external fund managers.  The remaining 10 percent will be allocated to real assets, which is currently at the contract negotiation phase with the Board selected investment managers.  Adding real assets to the current investment portfolios, which already compose of fixed income and global equity, will help to enhance the portfolios' risk-adjusted investment return and align with the Council-approved policy target asset mix. The Board continues to evaluate opportunities in the real asset category.

The Long Term Fund has an asset mix of both equity investments and fixed income investments. Following the weak and volatile second half of 2022, the first half of 2023 was calmer with strong returns in both the equity and fixed income markets. For example, the major fixed income and global equity markets benchmarks, FTSE Canada Universe Bond Index and MSCI ACWI, had a 1-year return of 3.1 percent and 20.2 percent respectively as of June 30, 2023. 

In response to the City Council's request to the Toronto Investment Board and the Chief Financial Officer and Treasurer to monitor and report on the performance of the external investment firms as contracted by the Board with respect to Environmental, Social, and Governance ("ESG") factors, the Board has engaged an independent third-party ESG rating service provider, MSCI ESG Research LLC ("MSCI").  This investment fund-level ESG reporting process complements the existing corporate-level ESG performance report.  MSCI ESG overall score has three categories: Leader, Average, and Laggard.  As measured by MSCI, the City's ESG overall score is in the "Leader" category and is aligned with the selected market benchmark as depicted in the investment policy.    The Board will continue to review the independent third-party reports from MSCI on a regular basis and investigate external investment managers that may not align with current ESG standards.

For the year 2022 and during the first six months of 2023, all funds managed are compliant with the Investment Policy. The City's auditor, KPMG LLP, performed the Investment Policy audit during the second half of 2023 and no issues were noted.