BUSINESS WEALTH MANAGEMENT

Best Practice Investment Management

Key Elements of Investment Policy - a roadmap to navigate all investment decisions

Prepared by:

David Tagg Nicole McCormackHead of Wholesale Investments Manager Wholesale Investments & Not For Profits Business Wealth Management Business Wealth Management 02 9118 7003 02 9118 7007

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Important Information

The information contained in this presentation is of a factual nature only and is not intended to constitute financial product advice. It does not take into account your particular investment objectives, financial situation or needs. You should consider the appropriateness of the information having regard to your own objectives, financial situation and needs. You should consult the relevant professional for advice before making any decision on the basis of this information. A Product Disclosure Statement (PDS) outlines specific information relating to a financial product. You should read the relevant PDS prior to making any decisions about whether to acquire a product.Superannuation, taxation and social security considerations are general and based on present superannuation, taxation and social security laws, rulings and their interpretation as at June 2009. Case studies outlined are hypothetical examples based on our understanding of typical customers and are for illustrative purposes only.Past performance is not indicative of future performance. Commonwealth Financial Planning Limited ABN 65 003 900 169 AFSL No. 231139 is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124.

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Agenda

Part 1 – Case Study: Not Getting the Foundation Right

Part 2 – Key Learnings: Role of Investment Policy & Corporate Governance

Part 3 – Case Studies

Part 4 - Questions for you to consider

Part 5 - Investment Ideas for NFPs

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Part 1 - Case Study

Credit Ratings/Investment Ratings & Delegations

Ratings Maximum InvestmentS&P Credit Rating

or EquivalentS& P Star Rating

or EquivalentDirect Investment Managed Funds

AAA ***** 100% 100%AA+ AA AA- **** 100% 100%A+ to A- *** 100% 10%BBB+ to BBB- ** 10% 0%BB+ or below * 0% 0%Unrated 0% 0%

A Typical Investment Policy Summarised

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First ¼ Finance & Audit Committee Meeting

Initial Investment

1First meeting

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Second ¼ Finance & Audit Committee Meeting

Initial Investment

1First meeting

2Second Meeting

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Third ¼ Finance & Audit Committee Meeting

Initial Investment

1First meeting

2Second Meeting

3Third Meeting

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14Told you so

19I’ll buy in again. It’s

cheaper than last timeanyhow

15You what??

16What the???

18This is it! I knew thiswas going to happen

all along!

1Ah, the price is going

up, let’s watch the market

3I missed the

consolidation, but if I waitany longer, I won’t profit

from the trend. LET’S BUY!

4Good thing I didn’t wait!

2The trend is holding - I’ll buy at the next

consolidation

9OK, let’s wait for it to recover-

otherwise this will have to be a really looooong-term investment 13

It’s going to tank again anyway

8I don’t believe it! It’s down

to 8.25 It has hit its absolutebottom!

10What is the ASX doing

about this?!?!?!?!?11

Enough! I’m selling out! And staying out

12Good thing I sold

everything!

5I’ll use this correction to increase my position...

6Brilliant! At this price, let’s

double it!7

Ouch. As soon as itgoes back up, I’m selling out!

Other Comments…

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Gaps Identified

Credit ratings and exposure limits only.

Benchmarks must be clearly defined.

No specifics on authorised/non authorised investments.

No ongoing investment review events.

Inability to make quick decisions – contingent on timing of Board/Finance Meetings.

Gaps in Corporate Governance framework.

No linkage to organisation’s Strategic Plan.

Impact on fundraising to support services/programs.

10

Policy

Business Plan / Strategy

Advice

Strategic Asset Allocation

Policy

Business Plan / Strategy

Advice

Strategic Asset Allocation

Investments

Business Plan / Strategy

Policy

Business Plan / Strategy

Policy

Business Plan / Strategy

Advice

Not just the ‘tip’ of the Iceberg

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Most importantly…

There is no strategy until there is a policy

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Part 2 - What is an Investment Policy?An investment policy is a governing document that articulates an organisation’s:

investment philosophy and strategy;

overall risk appetite;

investment objectives & expectations;

stipulate ongoing investment management & decision making processes;

identified roles for those involved in the investment process;

requirement for compliance with the policy's goals and procedures; and

demonstrate financial prudence to all stakeholders.

Transparency, Consistency and Clear Methodology

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Elements of an Investment Policy

2. Investment ParametersPreservation of CapitalDiversificationMarketsLiquidityPassive vs Active ManagementStrategic vs Tactical Asset AllocationPortfolio Investment Management StyleOptimal Number of ManagersDirect Investment ParametersEthical /Legislative Overlay

1. Investment Philosophy & Risk Management requirements of the Organisation

Market SegmentationCurrency ManagementCustodian RiskFees & TaxesAlternative Asset ClassesInvestment Credit Rating StandardsPortfolio BenchmarksPortfolio Management PolicyPortfolio Review eventsPerformance MeasurementLegislative Compliance

3. Investment Policy Decision Making Process & Ongoing Investment Management

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Corporate Governance

Role of Board

Delegations by the Board

Terms of Reference - FAC/Investment Committee, Role & Responsibilities

Key Decision Makers

Conflicts of Interest Policy

Breach Reporting Policy

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Part 3: Case Studies

1. Research Organisation – Asset / Liability matching, 3 reserves.

2. Charity - Strategy and Tax – All in US equities, no review events, no policy.

3. Private Health Insurer – Credit Rated focused policy, Reverse MBS Investments, Frozen Funds, Investment correlation = 1.

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Example Reserve Pools

• Supports Operational & Liquidity Requirements• Requires Short Term Investments• Benchmark: UBS Bank Bills Index

Cash (Short Term) Reserve

• This reserve is to be held to support implementation of the projected 3-year budget in Group’s Strategic Plan.

• Requires Short – Medium Term Investments• Benchmarks: UBS Bank Bills Index, UBS Australian

Composite Bond Index All Maturities, BarCap Global Aggregate Index Hedged $A

Strategic Spending (Intermediate Term) Reserve

• This reserve is to be held to generate income and capital growth for the Group, in order to support the Cash and Strategic Spending Reserve and create an endowment.

• Requires Long Term Investments Benchmarks: Multiple Asset Class Benchmarks

Investment (Long Term) Reserve

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Part 4 - Key Questions to Consider

Do we have an Investment Policy? Last reviewed? Pre/post GFC?

Who is responsible for investment decisions?

How quickly can we enter or exit an investment?

How do we demonstrate good governance / prudence to stakeholders?

Would a more robust process assist in gaining government grants / corporate sponsorship?

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Part 5 - Investment Ideas for NFPs

Conservative & we see a lot of cash & bonds in this segment.

Investing in Volatile Times

Is there a better way & what are some options?

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Term Deposit Rates - Over 1 Year

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Current Themes: Capital Structure

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Comparison Term Deposit Returns vs Fixed Income Fund Returns

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Comparison Term Deposit Returns vs Fixed Income Fund Returns

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Fixed interest PORTFOLIO risks?

A portfolio = diversification.

Good example – can you see the impact of the Lehman default on the UBS Composite Bond Index in 2008?

It’s there, but it’s impact was swamped by the returns being delivered by all the other risks in this portfolio at the time. Lehman was only one of the many securities in the index, and had only a small weight.

Of course – we believe that active management can achieve even better outcomes!

UBS Australia Composite Bond Index – daily index value through 2008

Source: Bloomberg, UBS Australia

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Term Deposits vs Fixed Income (bonds)

Term Deposit Advantages Term Deposit Disadvantages

Certainty No flexibilityHistorically higher nominal rates Reinvestment Risk - don’t move with

the market (current rate issues)Liquidity – one way bet if you exit earlyAdministrative & in house management between banks

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Recap

Strategy starts with Policy

Role of an Investment Policy

Elements of an Investment Policy & Corporate Governance

Key Questions for you to consider

Investment Ideas for NFPs but still remaining Conservative

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Our Team & Our Service

Business Wealth Management – $2.5bn in Funds Under Management.

Investment Advisory Service to NFPs & Board controlled structures.

Single point of management drawing on full investment capability of CBA Group.

Our Investment Approach – Conservative, risk management, long term investors, truly diversified and Investment Policy focus.

Backed by the full resources of CBA

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Service

Governance & Policy

Investment Strategy:

Term Deposit Management across 6 banks – all electronic

Research and Advice for Investment holdings

Conservative Investments in volatile times

Ongoing Service

Online access

Quarterly Board Presentations

Research & Economic Briefings

Integrated Investment & Banking team

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Thank you

David Tagg Nicole McCormack Head of Wholesale Investments Wholesale Investments & Not For Profits02 9118 7003 02 9118 7007david.tagg@cba.com.au nicole.mccormack@cba.com.au