102 KAR 1:175. Investment policies.

 

      RELATES TO: KRS 161.430

      STATUTORY AUTHORITY: KRS 161.310, 161.430(1)

      NECESSITY, FUNCTION, AND CONFORMITY: KRS

161.310 requires the Teachers' Retirement System Board of Trustees to promulgate

administrative regulations for the administration of the funds of the

retirement system and for the transaction of business. KRS 161.430(1) requires

the board of trustees to promulgate administrative regulations to establish

investment policies and procedures to carry out its responsibilities and

provides that the board of trustees shall have full power and responsibility

for the purchase, sale, exchange, transfer, or other disposition of the

investments and money of the Teachers' Retirement System. This administrative

regulation establishes investment policies and procedures to carry out these

responsibilities.

 

      Section 1. (1)(a) The board of trustees

shall appoint an investment committee in accordance with the provisions of KRS

161.430(1). The trustees shall be named at the beginning of each fiscal year.

      (b) The executive secretary shall act on

behalf of the investment committee in administering the investment policies and

procedures established in this administrative regulation.

      (c) To ensure a timely market

transaction, the executive secretary and the chief investment officer may make

a purchase or sale of an investment instrument without prior board approval if

the action conforms to the provisions established in this administrative

regulation.

      (2) The staff investment

personnel employed by the board under KRS 161.430(1) may be delegated

transaction responsibilities under the supervision of the chief investment

officer and the executive secretary.

      (3)(a) Contracts with contracted investment

counselors employed under KRS 161.430(1) shall be on

a fiscal year basis for twelve (12) month periods, except that contracts entered into on or after the start of a fiscal

year shall not extend beyond the end of the fiscal year in which the contract

is entered.

      (b) The system may invest in either

separately-managed accounts or commingled funds.

      (c) The investment committee shall make

recommendations to the board regarding employment of investment counselors and

the renewal or nonrenewal of contracts.

      (d)1.The system may utilize the services

of a consultant to advise the investment committee, as well as to assist in

evaluating the effectiveness of investment counselors.

      2. A consultant may advise the investment

committee with regard to asset class allocation and the combined effect of the

various portfolios on the system’s overall risk and expected long-term return.

      (e) Investment counselors shall provide

reports documenting their results at least quarterly and meet with the

investment committee if requested.

      (f) An annual report on the performance

and service of each investment counselor shall be provided to the board with

recommendations from the investment committee.

      (4) The following procedures shall be

followed with regard to all investment transactions, whether internally or

externally managed:

      (a) The board shall be provided a

quarterly report reflecting a complete record of each investment transaction

that occurred during that quarter;

      (b) The investment committee shall be

provided a complete record of each investment transaction or holding;

      (c) The staff shall maintain a file of

investment directives that indicates the committee's separate review of each

specific long-term investment; and

      (d) An "authorization for

investment" shall be approved or denied by the executive secretary or the

chief investment officer.

 

      Section 2. Asset Allocation. (1) In order

to preserve the assets of the system and produce the required rate of return

while minimizing risk, assets shall be prudently diversified among various

classes of investments.

      (2) In determining asset allocation

policy, the investment committee and the board shall be mindful of the system’s

liquidity and its capability of meeting both short and long-term obligations.

The limitations established in this subsection shall apply to the asset classes

in which funds are invested.

      (a) There shall not be a limit on the

amount of investments owned by the system if the investments are guaranteed by

the United States government.

      (b) The amount invested in corporate debt

obligations shall not equal more than thirty-five (35) percent of the assets of

the system.

      (c) The amount invested in common stocks

or preferred stocks shall not equal more than sixty-five (65) percent of the assets

of the system.

      (d) The amount invested in a stock portfolio

designed to replicate a general stock index shall not equal more than

twenty-five (25) percent of the assets of the system.

      (e) More than thirty (30) percent of the

assets of the system shall not be invested in the

stocks of companies domiciled outside of the United States. An amount of this type if invested shall be included in the

sixty-five (65) percent limitation established under this subsection.

      (f) The amount invested in real estate

shall not equal more than ten (10) percent of the assets of the system. Real

estate shall include real estate equity, real estate lease agreements, and

shares in real estate investment trusts.

      (g) The amount invested in alternative

investments shall not equal more than ten (10) percent of the assets of the

system. This category may include private equity, venture capital, timberland,

and infrastructure investments.

      (h)1. The amount invested in an

additional category or categories of investments shall not equal more than

fifteen (15) percent of the assets of the system.

      2. The board shall approve or deny by

resolution any additional category or categories of investments.

 

      Section 3. Fixed Income Investments. The

specific guidelines associated with a fixed income investment shall be

established in this section.

      (1) Unless the issuer is the United States government or a government sponsored enterprise (GSE), the amount invested in

the securities of a single issuer shall not equal more than five (5) percent of

the assets of the system.

      (2)(a) A fixed income investment shall be

rated at the time of purchase as investment grade by at least one (1) of the

major rating services.

      (b) A private placement debt investment

shall be subject to the same credit qualifications as each fixed income

investment.

      (c) The fixed income investment portfolio

as a whole shall maintain an average rating of investment grade by at least one (1) of the

major rating services.

      (3) Investments in mortgages or

mortgage-backed securities shall consist of first mortgages on property located

in the United States unless the mortgage is guaranteed by the United States government.

      (4) A foreign debt purchase shall comply

with all

other fixed income restrictions in this section. Foreign debt shall not in

aggregate equal more than ten (10) percent of the assets of the system.

 

      Section 4. Equity and Real Estate

Investments. The requirements established in this section shall apply to equity

and real estate investments.

      (1)(a) The system's position in a single

stock shall not exceed two and one-half (2.5) percent of the system's assets.

      (b) The system's position in a single

stock shall not exceed five (5) percent of the outstanding stock for that

company unless the investment is part of a venture capital program.

      (2) A real estate purchase that is conducted

on a triple net lease basis shall involve a company that at the initial agreement

generates one (1) of the three (3) highest credit ratings by a national credit

rating service.

      (3)(a) A real estate investment shall be

judged on its total return potential.

      (b) The system shall not acquire

undeveloped land unless development plans are imminent.

      (c) This provision shall not preclude

investment in timberland.

      (4) The system shall not buy bullion,

stamps, rare coins, or other collectibles, unless approved by the board as an

additional category of investment. The board shall approve these assets as an

additional category of investment only in exceptional circumstances if there is

a potential investment in these assets that provides a high value opportunity

and lowers the risk of the portfolio overall. (TRS-26; 1 Ky.R. 464; eff.

3-12-75; Am. 17 Ky.R. 3214; eff. 7-5-91; 24 Ky.R. 129; 559; eff. 9-4-97; 31

Ky.R. 1873; 32 Ky.R. 45; eff. 8-5-2005; 33 Ky.R. 3431; eff. 7-19-07; 37 Ky.R.

2039; 2375; eff. 5-6-2011.)