(A) Mitigating credit risk in the portfolio. Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The town shall mitigate credit risk by adopting the following: diversification. The investments shall be diversified by:
(1) Limiting investments to avoid overconcentration in securities from a specific issuer or business;
(2) Sector (excluding U.S. Treasury securities);
(3) Limiting investment in securities that have higher credit risks;
(4) Investing in securities with varying maturities; and
(5) Continuously investing a portion of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations.
(B) Mitigating market risk in the portfolio.
(1) Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The town recognizes that, over time, longer-term/core portfolios have the potential to achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The town shall mitigate market risk by providing adequate liquidity for short-term cash needs, and by making longer-term investments only with funds that are not needed for current cash flow purposes. The town further recognizes that certain types of securities, including variable rate securities, securities with principal paydowns prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments.
(2) The town, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
(a) The town shall maintain a minimum of three months of budgeted operating expenditures in short term investments to provide sufficient liquidity for expected disbursements;
(b) The maximum stated final maturity of individual securities in the portfolio shall be five years, except as otherwise stated in this policy; and
(c) Liquid funds will be held in the State Pool or in money market instruments maturing one year and shorter.
(d) Longer term/core funds will be the defined as the funds in excess of liquidity requirements. The investments in this portion of the portfolio will have maturities between one day and five years and will be only invested in higher quality and liquid securities. Exception to five-year maturity maximum: reserve or capital improvement project monies may be invested in securities exceeding five years if the maturities of such investments are made to coincide as nearly as practicable with the expected use of the funds.
(Prior Code, § 3.A08.100) (Ord. 2018-22, passed 12-12-2018)