Item - 2024.EX15.8

The Executive Committee recommends that:

1. City Council receive the report (May 31, 2024) from the Chief Financial Officer and Treasurer for information.

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

1.  Performance of the Funds for the year 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 managed by the Toronto Investment Board).  The General Fund had a book return of 4.0 per cent and generated $444 million for the full year 2023. 

As a result of the pandemic, the General Fund has held a larger position in the Short Term Fund (STF) 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 (LTF), was about 67 per cent of the overall General Fund in 2023 compared to 48 per cent 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 in recent years.

Staff re-assessed the City's liquidity position in late 2023 and advised the Chief Financial Officer and Treasurer (CFO&T) that excess funds within the Short Term Fund were available for longer term investment.  At that time, a plan was set for $2 billion to be transferred from STF to the LTF in four quarterly installments during 2024.  The CFO&T maintains the right to halt these transfers if circumstances change and there are higher needs for liquidity.

The City's Sinking Fund portfolio, which holds the investment funds for future debt repayments, had an earned income basis return of 1.2 per cent and generated $29.0 million for the twelve months ending December 31, 2023. 

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. Investment portfolios of different asset classes have been progressively phased in to make use of the broader range of investments that have become available. Although, the potential for volatility in total returns over the short-term investment horizon still exist, the overall portfolio risk has been reduced through asset mix diversification. The overall risk-adjusted total returns over the long-term investment horizon are expected to be higher.

The Board currently provides oversight of four external fixed income managers and four external global equity managers that invest 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 per cent allocated to fixed income and 20 per cent to global equities. 

As at December 31, 2023, approximately 90 per cent of both the Sinking Fund and the Long Term Fund were managed by external investment managers.  The remaining 10 per cent of each fund will be allocated to real assets, which is currently in the contract negotiation phase with the Board's selected investment managers.  Adding real assets to the current investment portfolios, which already compose of fixed income and global equity, will enhance the overall 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 to fulfill the target asset mix.

It is a legislative requirement that the Investment Policy be reviewed annually. Staff have reviewed the Investment Policy and no changes are recommended at this time given that policies have only been in place since 2018 and in that time we have experienced several years of volatility triggered by COVID-19 impacts.  The City of Toronto Investment Policy can be reviewed in Attachment 1 of this report.

Although the prudent investor standard has only been in place for five years, and was carefully phased in, the change has been monitored for effectiveness versus the previous prescribed list (prior to 2018).  This report also provides a comparison of returns between the previously used prescribed list versus the currently used prudent investor standard. The review shows the current regulation has been beneficial to the Long Term Fund by approximately $260 million over the five years it has been in place.

For the year 2023, all funds managed are compliant with the Investment Policy. KPMG LLP, the City's auditor, will conduct the Investment Policy audit during the second half of 2024.

The Toronto Investment Board has contracted a third-party data provider in order to monitor and report on the high-level Environmental, Social, and Governance (ESG) attributes of the City's long-term investment portfolio. This investment fund-level ESG reporting process will complement the existing corporate-level ESG performance report. At the end of 2023, the City's long-term investment portfolio's score is in the "Leader" category and is aligned with the selected market benchmark as depicted in the investment policy.

Subsequent to 2022, with a moderation of inflation and other related economic data, it would seem many central banks, such as the Bank of Canada, have now paused any further short-term interest rate increases. Since it would appear the actions of central banks are near a terminal point, with the prospect of lower interest rates in the future, long-term assets have rebounded to provide significantly higher returns in 2023.