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H.Russell Fogler Ph.D1032 N.W. 94th Street Gainesville, Florida 32601 November 15, 1975 Mr. Robert M. Hopkins City Manager City of Clermont 1 West Gate Plaza Clermont, Florida 32711 Dear Bob: I am happy that you and the City Council have accepted me as a consultant. As an initial task, I have drawn up the tentative set of guidelines which you requested. During your consideration of the guidelines, the following specific points should be kept in mind: (a) The purpose of guidelines is to set appropriate ranges for different types of investments for long-term policy. These guidelines should be changed very infrequently, although the City Council might make specific authorizations for a given year (example: keep 20% in short-term securities until the prime rate drops below 10% and either the Consumer or Wholesale Price Indexes drop for two consecutive months); (b) The percentage ranges proposed in the guidelines have been developed because of the low liquidity needs of Clermont's General Employee Fund; if pension payments were to rise drastically in proportion to cash inflows (contributions, dividends, and interest), the percentage range for common stock should be lowered, however, this will not occur within the next several years; (c) It is recommended that Preferred Stocks be avoided; preferred stocks pay a divident yield generally slightly higher than the yield on medium-quality bonds; however, during difficult times, if this dividend is dropped, little is available in terms of legal recourse; for example, Avco chose to pass its preferred dividend during the recent liquidity crisis; if income and "ufcty are desired, bonds should be purchased instead; if a Mr. Robert M. Hopkins November 15, 1974 Page Two more risky posture is desired, common stock is appropriate; a preferred stock has the worst features of both--no appreciation potential and risk of no fixed income--with only a slight offset in yield; (d) Changes in portfolio composition to achieve the new guidelines should be achieved via new contributions not sales of present holdings; two exceptions to this are the NCNB Bonds which have inadequate call protection and the Norton Simon Preferred Stock; these two issues should be sold when market conditions improve, but not now; (e) These guidelines are for the General Employees' Fund, not for the Firemen and Policemen Funds; presently the small size of these latter funds suggest that invest- ments in Treasury Bills and savings accounts is rea- sonable; as they become slightly larger, we can explore the possibility of first moving to several no-load-mutual funds, and then to a set of guidelines similar to the General Fundi (f) The above guidelines were established assuming that cash contributions will be made at regular planned intervals; this requirement allows the trustee to accumulate funds for periods of market decline; further, it insures periodic review of pension contributions by the City Council. I have taken the trouble to list the above considerations because they are an integral part of the guidelines. I hope that you will attach these comments to your file on the Guidelines so that future Council members may be aware of these thoughts. Again, I am glad to be working for Clermont, and I look forward to hearing from you after the Council has read the enclosed draft. Sincerely, H. Russell Fogler, Ph.D. HRF: lrd Enc. Statement of Investment Authorization The fallowing rules provide investment guidelines for th0 l~qal trustee of the City of Clermont's General Employee Hetircment Fund. The rules contain certain limits which the trustee must not violate. Within these limits, the trustee is allowed discretionary authority, unless otherwise authorized by the City of Clermont. Savings Accounts and Short-term Securities. The total funds invested in Saving Accounts and Short-term (two year maturity or less) Securities should be between 0% and 20% of the total market value of the portfolio. Not more than lO% of the total portfolio should be in savings accounts. These savings accounts should be in the financial institution offering the highest yield on passbook savings and insurance by the federal government. The actual percentage should vary in a way to allow security purchases during periods of market decline. Short-term securities could include either Treasury Bills and/or purchase of a no-load short-term money mutual fund managed by any of the ten largest national investment firms. Because of the size of the Clermon~ fund, inadequate diversification would occur if individual purchases of bank certificates of deposit or commercial paper were undertaken, and thus these should not be directly invested in. Fixed Income Securities. Fixed Income Securities (Bonds) should be between 25% and 35% of the total market value of the portfolio and: (a) rated "A" or higher by both Moody's and Standard and Poor's; (b) have adequate protection against being called if interest rates drop; (c) maturities will be evenly staggered over a range up to twenty-five year maturity; (d) new purchases should be in the longest maturity (twenty- five years) after an initial evenly staggered portfolio has been developed; (e) be well diversified between industrial, utility, and financial issues. Common Stocks Common stocks should be between 50% and 70% of the total market value of the portfolio; they should be bought for above average appreciation and long-term inflation protection. Also, the following portfolio policy should be followed: (a) at least 90% of the common stocks should be in well- established companies with a dividend history of at least the last eight consecutive years and sales of at least $300 million; (b) not more than 10% of the companies should be of a risk class such as are often called "emerging growth stocks" or "small growth companies" and such investment should be made only in companies with sales over $lOO million. (c) all stocks in both of the above categories should be listed on the New York Stock Eschange; (d) the 90% in well-established companies should maintain an approximate composition of 50% high quality growth and 40% high quality-low price/earnings ratio industrials. The word "low" is relative to the average market price- earnings ratio and should be interpreted as ratios below or within two points of the price/earnings ratio of the Standard and Poor's Average; naturally, this limit can be violated as a result of individual stock price movements, but not as a result of purchases; (e) between 15 and 25 stocks should be in the portfolio, with not more than lO% of the common stock portfolio invested in anyone stock; (f) at least 15 different industries should be represented, with no single industry comprising more than lO% of the common stock portfolio; (g) buy-and-sell turnover should not exceed 20% ever, and should be below 5% on the average. Preferred Stock Preferred stocks should not be purchased.