FGFOA Webinar Series: During Unusual Times. Presented By:

Transcription

1 August 22, 2012 FGFOA Webinar Series: Investing Florida Public Funds During Unusual Times Presented By: Scott Prickett Managing Director, Senior Vice President Glenn Scott - Senior Vice President, Portfolio Manager Julie Hughes Senior Vice President, Portfolio Manager

2 Outlook Europe s banking, currency and sovereign debt crisis will dominate global market movements and economics in Geopolitical stability is poor; event risks are elevated. Global growth rates are declining; U.S. drought is pushing commodity prices up creating supply-side inflation. U.S. inflation rates are forecast at 2.0%. Housing appears to be gaining strength and could supply a tailwind to the U.S. economy. Employment remains weak despite GDP growth; return of jobless recovery ; U.S. productivity growth rates are likely to be significant. Consumers remain burdened by heavy debt loads, but are slowly deleveraging. Bank failure rates are likely to remain elevated throughout the remainder of U.S. sovereign debt levels surpass 100% of GDP. FOMC on hold with Federal Funds targeted %, LIBOR under Eurozone pressure; relieved periodically by central bank interventions, extension of Fed s Operation Twist.

3 3 U.S. GDP Growth by Quarter This Century Quarterly Change in Real GDP (Percentage Change)

4 4 Public Sector Debt to GDP Ratios Global 2012 Source: Wikipedia, Public Domain

5 U.S. Federal Debt to GDP Ratios - 5 Historical

6 6 Problem Banking Institutions tions Source: problembanklist.com

7 7 Housing Signs of an improving housing market could provide a substantial tailwind for the U.S. economy. According to the latest S&P/Case-Shiller home-price index, prices rose 0.9% between April and May in the 20 largest metropolitan areas, 17 of the 20 areas posted improvements in year over year prices and all 20 posted monthly gains in May based on non-seasonally adjusted data. The National Association of Home Builders (NAHB) index of home builder sentiment climbed to 37 in August up from 35 in July. This index is now at its highest level since 2007 and was above consensus expectations. The housing markets that t fell earliest in the downturn are the ones that t are beginning i to see the most relative strength in recently reported data. Prices were up in Miami and Tampa Florida 0.7% and 1%, respectively, in May from April. The statewide median sales price for single-family existing homes in Florida last month was $151,000, up 8.2% from June This compares favorably to the national median sales price for existing single-family homes which was up 7.7% from the previous year. Continued improvement in housing is dependent upon numerous factors not the least of which is a stronger recovery in our labor markets. Many areas are still suffering from a lack of financing options, overly restricted credit standards and a shadow inventory of homes.

8 Case Shiller Home Prices 8 YoY % Change Source: Bloomberg Financial

9 Employment - Deconstructed 9

10 Florida Employment Statistics - 10 Historical Nonfarm Payroll in Thousands Unemployment Rate Source: Bureau of Labor Statistics

11 U.S. 2-Year Treasury Yields 11 Historical Perspective Source: Bloomberg Financial

12 Investment Management Process 12 Overview Review investment statutes and solidify your investment policy. Establish broker/dealer guidelines and perform due diligence. Establish custody/safekeeping arrangements. Create a cash flow forecast. Identify liquid funds and operating funds. Develop an investment strategy. Monitor the markets and investment results. Stay disciplined, but adjust when needed.

13 Operating funds can be allocated into 13 different tiers Core Funds Liquidity Tier Enhanced Cash Tier Short-Term Tier Each tier is distinct and can be benchmarked Liquidity Tier (0 60 Days, WAM) Enhanced Cash Tier (60 Days 1 Year) 5 Short-Term Tier (1 3 Years)

14 14 Liquidity Allocation (Tier) Provides the highest degree of principal protection. Designed to provide perfect liquidity (constant NAV). Maintain balances at a level to provide for daily liquidity needs. Maintain an appropriate p cushion (comfort level). Liquidity Tier (0-60 Days, WAM)

15 15 Enhanced Cash Allocation (Tier) An enhanced cash strategy is designed to improve on returns provided by typical Money Market Funds and LGIPs while still meeting the primary goals of safety of principal and liquidity. Historically an enhanced cash portfolio (Merrill Lynch 0-1 Year Treasury Note Index) has outperformed the 3-Month Treasury Bill over the past ten years. Total return and yield should be used when evaluating enhanced cash strategies. A longer duration results in slightly higher principal (price) volatility. Historically, incremental risk vs. the increase in returns is very low. Enhanced Cash Tier (60 Days 1 Year)

16 16 Short-Term Allocation (Tier) Designed for funds with holding periods of one to three years. Comes with a higher degree of principal volatility. Objective is to maximize returns. Yield and total t return should be used when evaluating the short-term t allocation tier. Historically a short-term portfolio allocation (Merrill Lynch 1-3 Year Treasury Note Index) has outperformed 3-Month Treasury Bill significantly over the past ten years. Short-Term Tier (1-3 Years)

17 GAP Analysis GAP Analysis is a mathematical way to evaluate short-term strategies on a BREAKEVEN basis. GAP Analysis compares two short-term investments VERSUS an equivalent longer term investment. 17

18 GAP Analysis 1 st Example 6-month vs 1-year investment % (Full Term = 308) 0.16%? (Head = 173 Days) (Tail = 135 Days) August 17, 2012 February 6, 2013 June 21, 2013

19 GAP (Breakeven) Analysis 19

20 GAP Analysis 2nd Example 1-year vs 2-year investment % (Full Term = 741) 0.20%? (Head = 308 Days) (Tail = 433 Days) August 17, 2012 June 21, 2013 August 28, 2014

21 GAP (Breakeven) Analysis 21

22 22 Volatility Analysis 2 Year High.31% Average.26% Low.20% Duration 1.87

23 Volatility Analysis 5 Year High.80% Average.65% Low.54% Duration 4.90

24 Florida Investment & Depository Statutes Typical Public Entity Portfolio

25 25 Spread Analysis A systematic comparison of alternative securities. Helps quantify investment decisions. Spread analysis is not one dimensional. Within market sectors Between market sectors 25

26 Current Yield Curve Spreads 26 Repo / CP / CDs Source: Bloomberg Financial

27 Current Yield Curve Spreads U.S. 27 Treasuries / Agencies Source: Bloomberg Financial

28 Current Yield Curve Spreads 28 U.S. Treasuries / AA Corporates Source: Bloomberg Financial

29 29 Summary Stay true to your risk tolerance and priorities of safety, liquidity, and yield/return. Be realistic regarding current and future rate levels els considering monetary policy, global economic trends, and fiscal policy. Resist the temptation to reach for yield at the expense of creditworthiness or unwarranted risk. Look under the covers - only buy what you understand and can explain. Choose a realistic benchmark and manage accordingly. Inefficiencies embedded in the yield curve and security selection strategies provide the opportunity to be competitive with assigned benchmarks. Use management tools such as spread analysis, gap analysis, yield curve analysis, and credit analysis to achieve goals. Stay disciplined, but adjust as necessary. A combination of strategies, matching different liquidity and risk tolerance tiers can provide significant increases in the performance of your short-term funds. The average maturity (duration) of your operating fund portfolio is arguably the single greatest determinant of investment performance