All WLUFA investment plans must be reviewed with the goal of attaining high security of principal, high liquidity and low risk. The funds should be available for the needs of the Association at the time the need occurs. Such needs may arise from strikes, arbitrations, donations, etc. Thus our investment goals should be low risk and have a relatively short-term horizon.
a) Security of Principal
We should not be undertaking any investment where the principal is not secure.
• The principal is secure for investments such as:
i. GIC’s and deposits with Canadian Chartered banks and major Canadian Trust companies.
ii. Short term Canadian federal bonds, provincial bonds and government guaranteed bonds
• The principal is not secure for investments such as:
i. Corporate bonds
ii. Common and preferred shares
iii. Deposits with small Trust companies
iv. Deposits with offshore financial institutions
b) Liquidity (holding period)
If we are required to redeem our investment prior to maturity then we may suffer an early redemption loss. The cash (early redemption) value of a bond falls as interest rates rise. Some GIC’s have penalties if redeemed early and some GIC’s cannot be redeemed early.
• For GIC’s we should limit the term to maturity to permit up to one fourth of WLUFA’s investments to be placed in longer than two year terms to achieve higher returns. The maturities should be laddered such that every year some investments mature.
• Normally government bonds should have a maximum remaining term to maturity of two years. Government bonds may have longer maturities if they can be redeemed annually for their full principal value plus accrued interest. All bonds should be saleable at anytime in the bond market.
c) Risk – exchange rate
• The investment should be denominated in Canadian currency. This eliminates any currency risk.
d) Portfolio Strategy
• We should develop a portfolio of investments rather than relying on a single institution or single type of investment. The portfolio should have a variety of terms to maturity represented.
• We should not be making portfolio decisions that require substantial monitoring and renewal effort unless the additional effort brings substantial benefits to WLUFA.