HomeMy WebLinkAbout2009 08 24 Regular 600 Investment Report Quarter Ending June 30, 2009 Prepared by PFM Asset Management LLCCOMMISSION AGENDA
ITEM 600
August 24, 2009
Meeting
CONSENT
INFORMATIONAL
PUBLIC HEARING
REGULAR X
MGR /DEPT U
Authorization
REQUEST: The City Manager requests acceptance of the Investment Report for the
Quarter Ending June 30, 2009 as prepared and presented by PFM Asset
Management LLC.
PURPOSE:
The purpose of this agenda item is to request acceptance of the attached investment report for
quarter ended June 30, 2009.
CONSIDERATIONS:
On February 23, 2009, a revised Investment Policy was adopted (Resolution No. 2009-18). PFM
Asset Management LLC will be presenting the second quarterly investment report for
investments purchased under these new guidelines.
Hereinafter, the quarterly investment report as prepared by PFM Asset Management LLC will be
presented as an informational agenda item only. As such, a representative of PFM will not be in
attendance as presenter.
FUNDING: N/A
RECOMMENDATION: It is recommended that the City Commission accept the attached
investment report.
ATTACHMENTS:
Investment Report for quarter ended June 30, 2009
COMMISSION ACTION:
City of Winter Springs
Investment Performance Review
Quarter Ended June 30, 2009
Investment Advisors
Steven Alexander, CTP, CGFO, Managing Director
Mel Hamilton, Senior Managing Consultant
David Jang, Senior Managing Consultant
Gregg Manjerovic, CFA, Portfolio Manager
Rebecca Dole, Consultant
PFM Asset Management LLC
300 S. Orange Avenue, Suite 1170 One Keystone Plaza, Suite 300
Orlando, FL 32801 North Front & Market Streets
(407) 648-2208 Harrisburg, PA 17101-2044
(407) 648-1323 fax 717-232-2723
717-233-6073 fax
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
Table of Contents
Tab I.
Section A Market Review
Tab II.
Section B Executive Summary and General City Account Portfolio Performance
Section C Asset Allocation Chart
Tab III. June 30, 2009 PFM Month-End Statement
This material is based on information obtained from sources generally believed to be reliable and available to the public,
however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for
general information purposes only and is not intended to provide specific advice or recommendation. The information
contained in this report is not an offer to purchase or sell any securities.
Table of Contents Section i
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
Strong performance by Federal Agency and corporate securities boosted
second quarter fixed income portfolio returns in a period when money market
yields hovered near zero, and returns of longer-duration Treasuries were
depressed by rising long-term interest rates.
As the economy showed signs of bottoming and the stresses that wracked the
financial markets seemed to subside, risk-adverse investors increased
holdings of Federal Agency securities and began once again to buy
corporates. These actions produced a sharp contraction in the spreads of
these securities relative to risk-free U.S. Treasury obligations and boosted the
returns of sectors other than Treasuries.
In markets like this, asset allocation and duration management were
unusually powerful forces in producing excess returns. PFM's disciplined
strategy - recognizing that the market distortions of 2008 would unwind as
market conditions returned toward normal - resulted in strong performance
in the second quarter, as it did in the first three months of the year.
INTEREST RATES AND RETURNS
The rise in long-term rates reflected improving prospects for the economy
and an outlook for record U.S. Treasury borrowings. As illustrated in the
following chart, higher long-term rates caused the U.S. Treasury yield curve
to steepen to record levels. The spread between the 2-year and 10-year U.S.
Treasury note ended the quarter at approximately 240 basis points (2.40%),
up from about 185 basis points on March 31St and 145 basis points on
December 31. 2008
U.S. Treasury Yield Curve
March 31, 2009 versus June 30, 2009
5%
4%
30/ ------------
2%
---•--- 3/31/2009
1% t 6/30/2009
3111 6m nA e ? S 4)FS 34v?°
Time to Maturity
Source: Bloomberg
PFM Asset Management LLC
Higher long-term rates signal investor concern that once an economic
recovery is firmly underway the Federal Reserve will be less accommodative
and price pressures could return to the economy as demand for goods and
services accelerate. Investors in intermediate- and longer-term securities
demanded compensation for such risks and pushed the yield on the 10-year
U.S. Treasury up from 2.21% at the end of last year to a high of 3.95% in
mid-June.
The market has had to absorb a large volume of U.S. Treasury issuances in
the second quarter. In the final week of the quarter, the U.S. Treasury
auctioned $104 billion in U.S. Treasury notes, a then-record for issuance in a
single week. U.S. Treasury borrowing has surged as it is estimated that the
U.S. Treasury will issue almost $2 trillion in debt during the fiscal year
ending this September. Market participants have begun to question the U.S.
Treasury's ability to continue to successfully sell such a record volume.
With short-term yields tied to the low Fed Funds target rate and longer-term
yields influenced by expectations of an economic recovery in the next few
years, intermediate-term interest rates were range-bound for most of the
quarter with the 2-year U.S. Treasury trading between 0.80% and 1.10%.
Even a modest rise in rates from their current low levels can erode income
earned. Thus, as the following chart shows, most U.S. Treasury benchmarks
generated negative returns for the quarter, giving back some of the strong
positive results that were realized in 2008.
Merrill Lynch U.S. Treasury Indices
Prior Quarter, 12-Month, and 5-Year Average Returns as of June 30, 2009
8% ......................................................................
6% ¦ Quarter 1 Year 5 Years ...................................................................
4% ............................
2% ...............................:: .............................. .............................. ............................
0%
-2% ..........................................................................................................................................................................
-4% ....................................................................................................................................................................................
3mo 1-3yr 1-5yr 3-5yr
Source: Bloomberg
Section A - 1
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
Short-duration U.S. Treasury benchmarks, like the Merrill Lynch 3-month
U.S. Treasury Index, outperformed longer-term benchmarks during the
quarter as intermediate- and longer-term interest rates rose and short-term
interest rates remained near zero. However, returns on longer-duration
benchmarks over the past one and five years continued to outperform as they
benefited the most from the sharp declines in interest rates and the
appreciation in market values over these periods.
0.95%
4.10%
0.20%
0.41%
2.24%
4.66%
DURATION MANAGEMENT
-0.11% -0.87% -2.10% -2.12%
-0.06% -0.33% -0.54% -0.54%
4.39% 5.48% 7.18% 6.12%
1.56%
Duration management played a large role in portfolio performance in the
second quarter. As the U.S. Treasury finances its deficit and increases the
federal debt burden, the volume of new-issue U.S. Treasury securities has
caused the durations of U.S. Treasury benchmarks to increase. As shown in
the following graph, the duration of the Merrill Lynch 1-3 Year U.S.
Treasury Index has steadily lengthened by over 14% in the past year alone
Increase in Duration of Merrill Lynch 1-3 Year Treasury Index
June 2008 - June 2009
2.0 -
1.9
1.8
1.7
1.6 Effective Duration .
1.5
Jun-08 Sep-08 Dec-08 Mar-09 Jun-0
Source: Bloomberg
PFM anticipated the higher likelihood of rising rates and the greater
sensitivity of benchmarks to rising rates, and actively and prudently
positioned portfolio durations short of the benchmark.
SECTOR ALLOCATION
As U.S. Treasury yields rose, intermediate-term Federal Agency and
corporate rates fell, driving spreads to more neutral valuations. Interest rates
declined by approximately 20 basis points for 2-year Federal Agencies, and
dropped by approximately 200 basis points for 2-year AA corporate
securities. Spreads between 2-year U.S. Treasury and Federal Agency
securities ended the quarter under 30 basis points (see following chart). The
spread was nearly 200 basis points (2.00%) in November of 2008 and has
now collapsed to pre-credit crisis levels.
Source: Bloomberg
By the end of the quarter, short-term Agency securities (i.e., discount notes)
traded with essentially no yield benefit relative to comparable maturity U.S.
Treasury bills. Factors of the remarkable decline in Agency spreads include:
(i) stabilization of the overall financial markets;
(ii) confidence in the federal government's increased support for
Fannie Mae and Freddie Mac;
(iii) the market's improving appetite for risk;
(iv) the Federal Reserve's purchase program for Federal Agency
debt and mortgage-backed securities; and
(v) light issuance by the government sponsored enterprises.
PFM Asset Management LLC Section A - 2
Per Unit of Risk** 2.31% 2.07% 1.85%
Source: Bloomberg
* * Return per unit of risk equals the periodic return divided by index duration.
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
At current spreads, PFM has begun to favor Treasuries over Agencies for
maturities two years and under.
Investment-grade corporate bond spreads to comparable Treasuries narrowed
even more than Federal Agency spreads in the second quarter. Corporate
bond yields and benchmark rates, such as 3-month LIBOR, experienced
significant drops during the quarter as some of the heightened premium for
credit risk disappeared. The efforts of central banks and financial institutions
from around the world to stabilize the financial markets appeared to be
somewhat successful.
With deposits up by approximately $400 billion over the past six months,
U.S. banks are now flush with liquidity. This has reduced their dependence
on short-term funding markets and interbank lending. Outstanding
commercial paper has declined from $1.8 trillion a year ago to $1.3 trillion
on June 30th. Financial firms have also been helped by the steepening U.S.
Treasury yield curve, which has improved their net interest margins, as they
pay near zero for deposits and other liquid funds, and then invest them in
longer-maturity securities.
Duration-Adjusted Returns of Merrill Lynch 1-3 Year Indices
Quarterly & Last 12 Months Returns as of June 30, 2009
7% .................................................................................................................
.
6% ¦ Quarter ................................................................................
5% Last 12 Months
4% ............................... .............. ................................ ............................ ...............
3% ................................ .............. ................................. ............................ ...............
2% ................................. .............. ................................. ............................ ...............
1% ............................... .............. ................................. ............................ ...............
0%
-1% .................................................................. ................................................................................................................................
..
TSY AGY AA/AAA Corp.
Source: Bloomberg
SIGNS OF STABILIZATION IN THE SECOND QUARTER OF 2009
Some peril remains in corporate credit, however, as the true value of illiquid
securities is not known, and prolonged weakness in the economy could raise
default rates on housing and commercial loans.
With tightening spreads and higher initial yields, Federal Agency and
corporate indices outperformed similar duration U.S. Treasury indices by
considerable margins. Investment-grade corporate securities, especially
those issued by corporations considered systemically vital, experienced
exceptionally strong performance. Easing credit conditions brought banks
and other financial firms back into the capital markets as issuers of non-
guaranteed debt, a strong signal to the markets that the financial system may
soon not need the federal government's life support.
As the following chart illustrates, while high quality corporate benchmarks
outperformed Agencies and Treasuries for the quarter, over the past year
Federal Agencies still performed best.
The rise in intermediate- and longer-term rates evidences that market
participants saw hope for the economy on the horizon. The federal stimulus
package has helped to plant seeds for an economic recovery and provided
much needed support to the financial system. No systemically vital financial
institutions failed during the quarter, although Chrysler and General Motors
were forced into bankruptcy, as largely expected.
The release of stress tests clarified the capital needs of some banks. With a
semblance of normalcy in the capital markets, banks issued new common
equity and converted preferred shares to common in order to insulate their
balance sheets from potentially higher capital losses. Investor perception that
the financial system is healing and that bank balance sheets are strengthening
resulted in tightening corporate spreads.
PFM Asset Management LLC Section A - 3
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
Even with mounting job losses, consumers are growing less pessimistic on
current conditions and the outlook for the future. Employment is a lagging
indicator of economic vitality and the labor market is expected to be weak
well into any economic recovery. However, the market is finding hope in
recent consumer confidence reports. Retail sales have also improved
somewhat modestly, and consumer confidence tends to move in tandem with
retail sales, as the following chart illustrates.
OUTLOOK
The market expects a gradual economic recovery over the next year or two.
At some point, the Fed will have to unwind its extraordinary efforts to
liquefy the markets. The Fed will be challenged to do this early enough to
avoid stoking inflation and without causing undue harm that could quench a
recovery or cause financial market dislocation. The hope is that excess
capacity will dampen future inflation and offer a window of opportunity for
the Fed to unwind positions. Thus, short- and intermediate-term rates are
likely to be range bound for the next three to six months as these theories are
tested. However, as the theory of an economic recovery continues to gain
momentum, risks, such as interest rate risk, may force returns on
intermediate- and long-term fixed-income portfolios to be low or negative.
Duration management will become even more critical in this phase of the
economic/interest rate cycle.
Source: Bloomberg
U.S. ECONOMY STILL HAS A DISTANCE TO GO...
Though there were recent signs of stabilization, a recovery of 5% to 6%
annual growth in GDP, typical in the recovery of a business cycle, is unlikely
this time around. Meanwhile the economy continued to lose jobs with the
number of unemployed persons in the U.S. reaching 14.7 million in June.
Thirty percent of those unemployed have been unemployed for six months or
longer. Further compounding problems is the fact that those with incomes
are reluctant to spend it, spiking the savings rate to 6.9%, its highest level
since 1993.
The housing market will continue to dampen a rebound, as this market is
expected to take five or more years to revive. Furthermore, if long-term
interest rates rise in reaction to positive economic prospects, a rebound in the
housing market will be delayed by higher mortgage rates.
PFM Asset Management LLC Section A - 4
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
Executive Summary
PORTFOLIO STRATEGY
? The United States remains mired in its longest lasting recession since the Great Depression. Most economists believe that intermediate
term growth will be sluggish at best. This recession is not unique to the United States; most developing countries continue to experience
negative growth. For instance, the European Commission estimates that all but one European Union member state will experience
negative growth for 2009. Economists are predicting that World GDP will contract by 1.5% in 2009.
? The City's portfolio has performed extremely well, especially considering the current state of the market: the portfolio is well diversified
among U.S. Treasury, federal agency, and FDIC-insured corporate securities. The General City Account Portfolio's Yield to Maturity at
Cost out yielded the Yield to Maturity of its benchmark Merrill Lynch 6 Month U.S. Treasury Bill Index by 73 basis points (0.73%).
? The portfolio complies with the City's investment policy and Florida investment statutes. During these uncertain times, we continue to
focus on safety and liquidity in the portfolios.
? While recent economic news has been less negative, there is no clear evidence that the economy has begun its recovery. At its June
meeting, the Federal Open Market Committee reiterated their position that "economic conditions are likely to warrant exceptionally low
levels of the federal funds rate for an extended period." We are unlikely to see any consistent significant change in rates until there are
clear signs of economic recovery.
? We will maintain a well diversified portfolio. Over the past quarter, federal agencies lost much of their yield advantage relative to
Treasuries. While the additional yield offered by federal agencies over Treasuries remains low, we will likely maintain a higher allocation
to Treasury securities than in the recent past.
PFM Asset Management LLC Section B - I
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
The City's Investment Statistics
Account Name
Amortized Cost',1,' Amortized Cost' 23 Market Value' 1,3 Market Value' 23 Duration (Years)
June 30, 2009 March 31, 2009 June 30, 2009 March 31, 2009 June 30, 2009
General City Account Portfolio $19,712,249.80 $15,199,681.71 $19,801,113.21 $15,234,207.93 0.86
General City Account U.S. Treasury Direct N/A 4,283,264.53 N/A 4,283,264.53 N/A
Fidelity Institutional Money Market Fund Government Portfolio (Fund #257) 5,355,529.41 7,031,121.18 5,355,529.41 7,031,121.18 0.003
Money Market Fund - State Board of Administration 1,061,117.14 1,104,555.15 657,403.27 657,403.27 0.003
Water & Sewer Series 2000 U.S. Treasury Direct N/A 716,110.48 N/A 716,110.48 N/A
Water & Sewer 2000 - Money Market Fund - State Board of Administration 30,796.42 32,057.10 30,796.42 19,079.57 0.003
Water & Sewer Series 1992 Refunding Revenue Reserve - BONY 1,305,069.93 1,305,069.93 1,305,069.93 1,305,069.93 0.003
Total $27,464,762.70 $29,671,860.08 $27,149,912.24 $29,246,256.89
Yield to Maturity Yield to Maturity Yield to Maturity Yield to Maturity
on Cost" on Cost° at Market at Market Duration (Years)
Account Name June 30, 2009 March 31, 2009 June 30, 2009 March 31, 2009 March 31, 2009
General City Account Portfolio 1.02% 1.20% 0.62% 1.06% 1.26
General City Account U.S. Treasury Direct N/A 0.01% N/A 0.01% 0.01
Fidelity Institutional Money Market Fund Government Portfolio (Fund #257) 0.02% 0.34% 0.02% 0.34% 0.00
Money Market Fund - State Board of Administration 0.00% 0.00% 0.00% 0.00% 0.00
Water & Sewer Series 2000 U.S. Treasury Direct N/A 0.01% N/A 0.01% 0.01
Water & Sewer 2000 - Money Market Fund - State Board of Administration 0.00% 0.00% 0.00% 0.00% 0.00
Water & Sewer Series 1992 Refunding Revenue Reserve - BONY 0.00% 0.00% 0.00% 0.00% 0.00
Weighted Average Yield 0.74% 0.70% 0.46% 0.64%
Benchmarks June 30, 2009 March 31, 2009
6 Month U.S. Treasury Bill Index5 0.29% 0.31%
Notes:
1. On a trade-date basis, including accrued interest.
2. In order to comply with GASB accrual accounting reporting requirements, forward settling trades are included in the monthly balances.
3. Excludes any money market fund/cash balances held in custodian account.
4. Past performance is not indicative of future results.
5. Source Bloomberg.
PFM Asset Management LLC Section B - 2
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
General City Account Portfolio Composition and Credit Quality Characteristics
Security Type' June 30, 2009 % of Portfolio March 31, 2009 % of Portfolio
U.S. Treasuries $1,343,674.01 6.79% $1,340,052.59 8.80%
Federal Agencies 13,896,255.03 70.18% 9,363,052.17 61.46%
Commercial Paper 0.00 0.00% 0.00 0.00%
Certificates of Deposit 0.00 0.00% 0.00 0.00%
Bankers Acceptances 0.00 0.00% 0.00 0.00%
Repurchase Agreements 0.00 0.00% 0.00 0.00%
Municipal Obligations 0.00 0.00% 0.00 0.00%
Corporate Notes/Bonds 0.00 0.00% 0.00 0.00%
Corporate Notes/Bonds - FDIC Insured 4,561,184.17 23.03% 4,531,103.17 29.74%
Mortgage Backed 0.00 0.00% 0.00 0.00%
Money Market Fund/Cash 0.00 0.00% 0.00 0.00%
Totals $19,801,113.21 100.00% $15,234,207.93 100.00%
Portfolio Composition
as of 06/30/09
Federal
Agency
Obligations
U. S. f/ 70%
Treasuries
7%
I
Corporate I?
I
Notes/Bonds -
FDIC Insured
23%
Notes:
1. End of quarter trade-date market values of portfolio holdings, including accrued interest.
2. Credit rating of securities held in portfolio, exclusive of money market fund.
3. A rating of'TSY" indicates the security is an obligation of, or explicitly guaranteed by the U. S. Government.
Credit Quality Distribution2 3
as of 06/30/09
A-1+ (Short-
term)
31%
I ti
AAA- - ------ - •.
62%
TSY
7%
PFM Asset Management LLC Section B - 3
City of Winter Springs Investment Report - Quarter Ended June 30, 2009
General City Account Portfolio Maturi ty Distribution
Maturity Distribution' June 30, 2009 March 31, 2009
Overnight (Money Market Fund) $0.00 $0.00
Under 6 Months 7,711,672.99 3,203,250.13
6 - 12 Months 4,421,526.89 2,873,665.09
1 - 2 Years 7,667,913.33 9,157,292.71
2 - 3 Years 0.00 0.00
3 - 4 Years 0.00 0.00
4 - 5 Years 0.00 0.00
5 Years and Over 0.00 0.00
Totals $19,801,113.21 $15,234,207.93
70%
60%
0 50%
0
0 40%
n
0 30%
20%
0
0)
m
c 10%
0
0%
39%
F
0% 0%
Portfolio Maturity Distribution'
60%
F--1
39%
21% 22%
19%
Overnight Under 6 Months 6 - 12 Months 1 - 2 Years
?June 30, 2009
?March 31, 2009
0% 0% I
0% 0%
0% 0%
0% 0%
2 - 3 Years 3 - 4 Years 4 - 5 Years 5 Years and Over
Notes:
1. Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity.
PFM Asset Management LLC Section B - 4
City of Winter Springs, Florida' Asset Allocation as of June 30, 2009*
Security Type June 30, 2009 June 30, 2009 Notes Permitted by Policy
United States Treasury Securities 1,341,188.22 4.73% 100%
United States Government Agency Securities - 0.00% 75%
Federal Instrumentalities 13,848,536.82 48.85% 80%
Certificates of Deposit - 0.00% 25%
Repurchase Agreements - 0.00% 50%
Commercial Paper - 0.00% 30%
Corporate Notes - FDIC Insured 4,522,524.76 15.95% 50%
Mortgage-Backed Securities - 0.00% 0%
Bankers' Acceptances - 0.00% 30%
State and/or Local Government Debt (GO and Revenue) - 0.00% 20%
Money Market Mutual Funds 6,416,646.55 22.63% 100%
Intergovernmental Investment Pool - 0.00% 25%
Bank of America Cash for Operation 2,220,277.26 7.83% 100%
Asset Allocation
as of June 30, 2009
Federal Instrumentalities Corporate Notes - FDIC
48.85% Insured
15.95%
United States Treasury - Money Market Mutual
Securities Funds
4.73% 22.63%
Bank ofAmerica Cash
for Operation
7.83%
Individual Issuer Breakdown June 30, 2009 June 30, 2009 Notes Permitted by Policy
Government National Mortgage Association (GNMA) - 0.00% 50%
US Export-Import Bank(Ex-Im) - 0.00% 50%
Fanners Home Administration (FMHA) - 0.00% 50%
Federal Financing Bank - 0.00% 50%
Federal Housing Administration (FHA) - 0.00% 50%
General Services Administration - 0.00% 50%
New Communities Act Debentures - 0.00% 50%
US Public Housing Notes & Bonds - 0.00% 50%
US Dept. of Housing and Urban Development - 0.00% 50%
Federal Farm Credit Bank (FFCB) - 0.00% 25%
Federal Home Loan Bank (FHLB) 5,714,455.57 20.16% 25%
Federal National Mortgage Association (FNMA) 1,505,669.28 5.31% 25%
Federal Home Loan Mortgage Corporation (FHLMC) 6,628,411.97 23.38% 25%
Student Loan Marketing Association (SLMA) - 0.00% 25%
Notes:
1. Does not include bond proceeds.
Individual Issuer Breakdown June 30, 2009 J une 30, 2009 Notes Permitted by Policy
CD - BankA - 0.00% 15%
CD - BankB - 0.00% 15%
Fully collateralized Repo - A - 0.00% 25%
Fully collateralized Repo - B - 0.00% 25%
CP A - 0.00% 10%
CP B - 0.00% 10%
General Electric Corporate Notes - FDIC insured 1,508,264.88 5.32% 25%
JP Morgan Chase Corporate Notes - FDIC insured 1,508,830.69 5.32% 25%
Bank of America Corporate Notes - FDIC insured 1,505,429.19 5.31% 25%
Corporate Notes - FDIC insured D - 0.00% 25%
Corporate Notes - FDIC insured E - 0.00% 25%
BA Bank A - 0.00% 10%
BA Bank B - 0.00% 10%
BA Bank C - 0.00% 10%
Municipal Notes/Bonds - 0.00% 20%
Fidelity Institutional Money Market Fund Government Portfolio (Fund #657) 5,355,529.41 18.89% 25%
Money Market Fund - State Board of Administration 1,061,117.14 3.74% 25%
PFM Asset Management LLC Section C - 1