The ICPP Investment Oversight Committee established a rules based active management approach for the ICPP Accumulation Fund:
Rule 1: The ICPP Accumulation Fund may only invest in companies that are included in the ICPP Total Index. New companies, and industries, are added to the ICPP Total Index with approval from the Investment Oversight Committee and input from the portfolio manager. Companies that no longer qualify for the ICPP Total Index are removed using the same process.
Rule 2: The portfolio manager is required to hold a regular position in at least one company in each industry pair defined in the ICPP Total Index. This ensures that there will always be sufficient diversification in the ICPP Accumulation Fund.
Rule 3: The portfolio manager must rebalance at each quarter end using the rules established for the fund. The result is a fund that typically holds approximately equal weighting in all of industries covered by the ICPP Total Index at any point in time. The portfolio manager could hold as many as all 80 companies listed in the ICPP Total Index.
Rule 4: The portfolio manager must sell a portion of any company that represents more than 3.5% of the total market value of the ICPP Accumulation Fund at a quarter end to the point where the value of the company held is below 3.0% of the market value of the Fund.
Rule 5: The portfolio manager is prohibited from adding to any company that already represents more than 2.0% of the total market value of the fund at the previous quarter end.
The portfolio manager’s job is to ensure that the investment guidelines are achieved. The portfolio manager is also expected to ensure that the companies and industries that make up the ICPP Total Index continue to meet the Fund’s viable expectations with respect to long-term sustainability.
The Investment Oversight Committee set out to establish a fund that follows the ICPP Total Index relatively closely, but that adds value from time to time through active management. The active/passive nature of the investment process removes many traditional portfolio biases, such as failing to sell outperformers and buy underperformers as part of the regular process. It avoids timing the market tendencies and irrational devotion to particular companies.
The use of the ICPP Total Index as a foundation removes a significant focus of many investment firms that look around the world for the next best investment idea. Instead, the portfolio manager oversees and monitors well-funded, large capitalization companies that make a difference in the Canadian economy and will add to a Canadian’s retirement portfolio.
In practice, the portfolio manager reviews the ICPP Total Index allocations for the Fund at the end of each month to ensure the investment held in each industry follows the ICPP Total Index. The portfolio manager also completes an analysis of the actual ICPP Accumulation Fund allocations as compared to the ICPP Total Index allocations to identify which companies are over and underweight the Index.
The portfolio manager also reviews the historical price share movements for each company, noting large discrepancies between pair members which may trigger additional research.
Finally, the portfolio manager reviews the performance of the Canadian and the U.S. dollar based Completion portions of the Fund separately to ensure there are no currency issues.
The ICPP Payout Fund was specifically designed to meet the needs of the uninsured variable annuity that is used as one payout strategy in the Ideal Canadian Pension Plan. As a result of its design, the investment mandate adopted for this purpose may be used by any investor looking for inflation protected pension income through reliable asset growth in the long term. The ICPP Payout Fund invests 50% in the ICPP Accumulation Fund and 50% in the iShares XBB Canadian Bond Universe exchange traded fund. The portfolio is rebalanced quarterly. The resulting fund is suitable for any registered pension plan with a "balanced" mandate.
The ICPP Accumulation Fund was selected as a foundation for the Payout Fund because it is designed to provide sustainable long-term investment returns at a low cost. The XBB ETF was selected because it provides the Universe of Canadian bond exposure at a low cost over the short term.
The portfolio manager is only required to rebalance this portfolio each quarter end and to manage cash flow needs. The ICPP Payout Fund is expected to have a very low turnover. The work required is therefore minimal, allowing ICPP Funds Ltd. to offer this fund at substantially reduced fees.
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