FC 92/5(c)ii

FINANCE COMMITTEE

Table of Contents

I. Background

II. Management Arrangements

III. Policy Guidelines, Activity and Performance

The Investment Committee

Advisory Committee on Investments

I. Background

1. This document is submitted to the Finance Committee for information, in accordance with Financial Regulation IX, which provides, in part, as follows: "The Director-General may invest moneys not needed for immediate requirements seeking, wherever practicable, the advice of the United Nations Investments Committee. At least once a year the Director-General shall include in the financial statements submitted to the Finance Committee a statement of the investments currently held".

2. The Staff Compensation Plan, which was introduced on 1 January 1956, provides compensation benefits for staff members (and/or their dependants) in case of injury, illness, or death, attributable to the performance of official duties. The Organization's liability under the Plan is funded, currently at 0.129% of payroll for Regular Programme and other Headquarters Staff and 0.266% for Field Staff. These rates were confirmed by the Finance Committee at its Seventy-seventh Session (21-30 September 1993).

II. Management Arrangements

3. The Committee will recall that at its Ninetieth Session held in September 1998, the Finance Committee was advised of the proposed changes to the oversight function including the strengthening of the external Advisory Committee on Investments (ACI) through the increase in its membership from three to five members. The criteria for the appointment of additional members are based on the basis of expertise in financial markets and/or direct portfolio management background. The terms of reference of this Committee and that of the internal Investment Committe have been revised and shown in Appendix A.

4. The Committee will also recall the measures outlined for the restructuring of the internal Investment Committee by combining the Credit Committee and the Investment Committee into one. This Committee assumes the functions previously performed by the United Nations Investment Committee (UNIC) with respect to the management of the Organization's asssets. In addition to the restructured role and composition of the Committee, the appointment of an independent investment consulting firm ensures that the Committee is provided with expert advice on Treasury and Investment Operations.

5. While the management of the day-to-day trading activities are carried out by professional portfolio managers, they would operate under financial guidelines and policies approved by both the internal and external Investments Committees and the Director-General.

6. The Committee will note that the above revised arrangements provide a greatly enhanced framework for the supervision and monitoring of the Organization's assets, bringing in outside expertise to ensure an independent appraisal on the policies, operations and performance relating to investments.

III. Policy Guidelines, Activity and Performance

7. The balance in accordance with the terms of the funding arrangements amounted to US$ 38,805,445 on 31 December 1998. The cash resources set aside to cover this liability are invested in internationally diversified equities and bonds, in order to produce income and provide capital growth.

8. Following extensive discussions with the investment adviser, Fiduciary Trust Company International (FTCI), a more defined benchmark was established in 1998. The asset allocation of 65% in equities reflected both the actuarial position of both funds and the general tone of the UNIC asset allocation guidelines. For this portion of the fund, the MSCI All Countries Index ("MSCI All Country") was chosen as the most comprehensive index covering all investible countries. For the bond section of 35%, the JP Morgan World Government Broad Index was chosen for the same reason. This combination replaced the narrower market indices previously used as a reference which were the MSCI World and the Salomon World Government Bond index. This benchmark combination provides a yardstick for performance measurement consistent with the aims of achieving both growth and income from a portfolio of internationally diversified stocks and bonds.

9. During 1998, the asset allocation was kept in a relatively defensive posture for most of the year with a marginally underweight position in equities, given the uncertain outlook for corporate profits. In terms of currency, the fund had a US Dollar bias for the year. US Treasuries and Gilts were consistently overweighted, since the yields were high compared with that of the Euro bloc and Japan. The Yen was also underweighted on interest rate and economic grounds versus the US Dollar.

10. The performance of the Fund over one, three and five years respectively are shown in Appendix B. The results show consistent outperformance against the benchmark.

11. Appendix C hereto contains a Summary of Investments held at 31 December 1998, with information provided on both cost and market value for each category of investment.

APPENDIX A

The Investment Committee

• The Investment Committee shall be composed of at least three and up to five members, two of whom may be outside experts. All members, including the Chairman, shall be appointed by the Director-General, FAO for terms of up to three years and may be reappointed. The Committee shall meet at least four times a year to review performance and any other issues.

The Committee shall be responsible for:

1. developing investment policies for each distinct pool of assets;
2. developing strategies for each pool of assets, including the mix of external and internal management, appropriate investments including the currency composition of such investments, the number and type of external managers, and the benchmarks for such managers;
3. monitoring the performance of external and internal managers against the benchmarks;
4. appointing, monitoring and, where necessary, terminating external managers;
5. determining appropriate fees for such managers;
6. appointing such other agents and advisors, including custodian banks, consultants, attorneys, actuaries and accountants, as it deems necessary, and determining appropriate fees for such services.

• The Committee will also establish credit risk policy and approve specific treasury hedging and borrowing transactions.
• A decision of the Committee shall be considered approved when the minutes of the meeting at which such decision took place have been approved and signed by the Chairman and approved by the Director-General.
• The Committee will have available to it the services of expert consulting advice where required and may delegate such of its responsibilities as it deems appropriate to an internal or external person or organization, when such delegation is approved by the Director-General.

Advisory Committee on Investments

• The Director-General FAO or his replacement shall chair the ACI. In addition to the Chairman, the Committee shall be composed of at least four and up to six outside experts on investments. Each member will be appointed for a term of up to three years and may be reappointed. The purpose of the Committee is to give the Director-General and independent view on the policies, plans, operations and performance of the various FAO investment portfolios and on any other aspect of FAO financial management on which the Director-General seeks the Committee's advice.
1. the performance of each portfolio against its benchmarks for the previous calendar year;
2. for each portfolio, projections on cash flow over the coming two years;
3. the outlook for the coming year and any proposed changes in investment policy and strategy;
4. a report on operations and costs for the previous year measured against plans at the beginning of the year;
5. operational plans for the coming year; and
6. any other financial management issues on which the advice of the ACI should be sought.


• The Senior Treasury Officer (STO) will submit the Annual Report to the Investment Committee. The Investment Committee will approve the annual report by the end of March. The report will then be submitted to the ACI, which will meet each year by the end of April or as soon as practical thereafter.
• The ACI will review the Annual Report and make recommendations to the Director-General on any aspect of the report or any other matter on which it deems appropriate to comment. The ACI will give also their outlook for the coming year. The STO will prepare minutes within one week of the meeting. The minutes will detail the ACI recommendations and the proposed FAO response to them. The STO will submit the minutes to the Investment Committee, which will approve them within two weeks and forward them to the Director-General for distribution to the Advisory Committee on Investments.

APPENDIX B

FOOD AND AGRICULTRUE ORGANIZATION OF THE UNITED NATIONS - Performance

	1 Year	3 Years	5 Years
FAO - CPRF	20.8	15.2	13.3
Benchmark	19.4	12.8	12.1

APPENDIX C

COMPENSATION PLAN RESERVE FUND