City of Toronto Investment Report for the Year 2021

The City of Toronto invests with a longer term view and investment horizon and has experienced solid returns over the 4-year period (annualized) ending December 31, 2021. The City's General Group of Funds ("General Fund") hold the working capital and amounts designated for the City's reserves and reserve funds. The Long Term Fund portion of this portfolio managed by external managers returned 2.8 percent for the year 2021 and 5.1 percent on an annualized basis for the four year period ending on December 31, 2021. Overall, including the Short Term Fund, the fund had a total return of 1.6 percent for the year 2021, and a 3.1 percent total return on a 4-year annualized return basis, outperforming the weighted market benchmark by 0.6 percent and 0.4 percent respectively. When the unrealized gains and losses are excluded from the total return, the book return for the General Fund was 1.2 percent (earned $107.0 million) for the year 2021. During the pandemic, the General Fund has held a larger position in the Short Term Fund to enhance the liquidity and to generally lower the overall risk (risk management) while accepting some lower investment returns. On average, the Short Term Fund was about 58.6% of the overall General Fund in 2021 compared to 47.7% from the pre-pandemic level in 2019. The City's Sinking Fund portfolio, which holds the investment funds for future debt repayments, earned a 6.0 percent annualized total return for the two year period ending December 31, 2021. On a shorter term basis, the fund had a total return of 2.0 percent for the year 2021, outperforming the weighted market benchmark by 0.6 percent. When excluding the unrealized market gains and losses, the City's Sinking Fund portfolio earned 0.9 percent (earned $18.5 million) for the year 2021 on a book income basis. The customized benchmark index used for this portfolio as required by the Investment Policy does not yet have enough history for the 4-year measurement. Since January 1, 2018, the City's long-term investments have been managed by the Toronto Investment Board ("Board") under a Council adopted Investment Policy which is based on the prudent investor standard. The investment portfolios have been progressively phased in to use of the broader range of investments that have become available. Although the overall portfolio risk has been reduced through asset mix diversification, the potential for volatility in total returns over the short term investment horizon still exist while the risk-adjusted total returns over the long term investment horizon are expected to be higher. It is a legislative requirement that the Investment Policy be reviewed annually. The Toronto Investment Board completed an asset mix review during the first six months of 2021 given the impact of the pandemic. The Board decided not to recommend any changes to the asset mix at this time. Staff has also reviewed the Investment Policy and are not recommending any changes as well. A copy of the current Investment Policy is included as Attachment 1 to this report which was last adopted by Council in December 2021. In total, there are now four fixed income managers and four global equity managers engaged in managing the long-term investments under the Toronto Investment Board. Both fixed income and equity investment classes are fully funded in accordance with the target asset mix in the Investment Policy with 70 percent allocated to fixed income and 20 percent to global equities. As at December 31, 2021, approximately 90 percent of both the Sinking Fund and the Long Term Fund were managed by external fund managers with the remaining 10 percent to be allocated to real assets. The Board continues to evaluate opportunities in the real asset category. Adding real assets to the current investment portfolios, which already compose of fixed income and global equity, will help to enhance the portfolios' risk-adjusted investment return and align with the Council-approved policy target asset mix. For the year 2021, all funds managed are compliant with the Investment Policy. The City's auditor, KPMG LLP, will perform the Investment Policy audit during the second half of 2022. The Toronto Investment Board is in the process of hiring a third-party data provider in order to monitor and report on whether or not external investment firms hired are compliant with the terms of the Investment Policy governing Environmental, Social, and Governance (ESG) Factors. This process has taken longer than expected due to unforeseen issues. Capital Markets staff continue to collaborate with the City's procurement team and the prospective vendor to resolve these issues. It is anticipated this information and data regarding climate change risk from these reviews be available for the next investment report and will continue to be reported to City Council on a semi-annual basis. This investment fund-level ESG reporting process will complement the existing corporate-level ESG performance report. Although the Russian invasion of Ukraine occurred in February 2022 and was a subsequent event to the time period covered by this report, it should be noted that all contracts with external investment managers include clauses prohibiting investment in sanctioned companies and countries. These contracts also include clauses that focus on anti-terrorism and anti-money laundering policies and prohibiting dealing with any sanctioned companies or countries in this regard. More specific to the Russia/Ukraine situation, the Board has started to monitor the City's investment portfolios in regard to direct holdings in Russia and exposure to companies specifically named in sanctions, and there were none reported as of March 31, 2022.