LGIP QUARTERLY MEETING & CONFERENCE CALL 7.26.2012 OFFICE OF THE ARIZONA STATE TREASURER
AGENDA LGIP Performance Endowment Performance Endowment Distribution Formula State Cash Flow Guest Presentation: Jim Palmer, CFA, Head of Investments for U.S. Bancorp Asset Management Q & A
INVESTMENT PHILOSOPHY SAFETY before LIQUIDITY before YIELD
EARNINGS FOR FY 2012 YTD $134,833,364
LGIP PERFORMANCE Q4 FY2012
POOL 5
POOL 7
POOL 500
POOL 700
Separately Managed Accounts (SMAs) Designed for those seeking a customized investing solution based on your risk tolerance, liquidity needs and duration target. Monthly Liquidity Requires $100 million minimum deposit Pre-Meeting with Portfolio Manager to set up Account and determine investing needs. Costs: Standard 6 basis points, plus yearly accounting charges of $20,000 out of earnings (equivalent to 2 basis points.) Contact Deputy Treasurer Mark Swenson
OPERATING UPDATES Starting Monday, July 30, 2012 new key phone numbers: Main number 602-542-7800 LGIP Line 602-542-7834 Mark Swenson 602-542-7877 Dale Stomberg 602-542-7833
ENDOWMENT PERFORMANCE Q4 FY2012 OFFICE OF THE ARIZONA STATE TREASURER
ENDOWMENT MARKET VALUE $4.00 $3.50 Endowment Market Value $3.52 Billion Billions $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 December 2006 February 2007 April 2007 June 2007 August 2007 October 2007 December 2007 February 2008 April 2008 June 2008 August 2008 October 2008 December 2008 February 2009 April 2009 June 2009 August 2009 October 2009 December 2009 February 2010 April 2010 June 2010 August 2010 October 2010 December 2010 February 2011 April 2011 June 2011 August 2011 October 2011 December 2011 February 2012 April 2012 June 2012
ENDOWMENT UNREALIZED GAINS $1,200.00 Millions $1,000.00 $911 million $800.00 $600.00 $400.00 $200.00 $0.00 -$200.00 June 2012 December 2006 March 2007 June 2007 September 2007 December 2007 March 2008 June 2008 September 2008 December 2008 March 2009 June 2009 September 2009 December 2009 March 2010 June 2010 September 2010 December 2010 March 2011 June 2011 September 2011 December 2011 March 2012
ENDOWMENT ASSET ALLOCATION 8.6% $1,549.4 million $1,600.04M $3.52 Billion Fixed Income $542.2 million $502.79M 14.7% 41.5% S&P 500 35.2% $1,122.1 million $1,052.42M S&P 400 S&P 600 As of 6/30/2012
PROPOSED ENDOWMENT DISTRIBUTION FORMULA OFFICE OF THE ARIZONA STATE TREASURER
SMOOTHER, CONSISTENT DISTRIBUTIONS 5-Year Average Market Value X 2.5% Annual Distribution Takes 2.5% of the average monthly market value from each of the previous five years
STATE CASH FLOW OFFICE OF THE ARIZONA STATE TREASURER
STATE CASH FLOW TOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE Up 58% YOY in F Y 2012 $3,000 $2,500 $2,000 Jul '90-Mar '91 Recession Mar'01-Nov '01 Recession Dec'07-June '09 Recession $2.3 billion in June $1,500 $1,000 Millions $500 $0 -$500 -$1,000
STATE CASH FLOW $3,000 $2,500 State Operating Balance FY 2007 - FY 2012 $2,000 $1,500 $1,000 $500 $0 -$500 -$1,000 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
STATE CASH FLOW $3,000,000 $2,500,000 YTD FY 2012 Cash Flow vs. FY 2011 $2,000,000 $1,500,000 $1,000,000 $500,000 $- FY 2011 FY 2012 Actual 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb1-Mar 1-Apr 1-May 1-Jun
AZ NON-FARM EMPLOYMENT 3000 2750 2500 Mar'01-Nov '01 Recession Dec '07-Jun 09 Recession 2250 2000 Jul '90-Mar '91 Recession AZ Job growth returning 1750 1500 Jul '81-Nov '82 Recession 1250 1000 750 Feb-82 Feb-83 Feb-84 Feb-85 Feb-86 Feb-87 Feb-88 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Source: Bloomberg 2012 L.P.
AZ UNEMPLOYMENT AT 8.2% 12% 11% 10% Jan '80-Jul '80 Recession Jul '81-Nov '82 Recession Jul '90-Mar '91 Recession Mar'01-Nov '01 Recession AZ Rate at 8.2% Dec'07-June 09 Recession 9% 8% National rate of 8.2% 7% 6% 5% 4% 3% 2% Feb-76 Feb-77 Feb-78 Feb-79 Feb-80 Feb-81 Feb-82 Feb-83 Feb-84 Feb-85 Feb-86 Feb-87 Feb-88 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Source: Bloomberg 2012 L.P.
AZ HOUSING PRICES 250 S & P/Case Schiller Housing Price Index for Phoenix 200 150 100 50 0 Source: Bloomberg 2012 L.P.
Guest Presentation: James Palmer, CFA: Head of Investments for U.S. Bancorp Asset Management OFFICE OF THE ARIZONA STATE TREASURER
Arizona State Treasurer s Office LGIP Quarterly Meeting and Q4 2012 Conference Call Presentation By: Jim Palmer, CFA Head of Investments 612.303.3434 NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public.
Market Conditions Fed/Central Bank Policy Current policy indication is to keep the federal funds rate exceptionally low at least through late 2014 Operation Twist supportive of short-term yields Risk is skewed toward implementing additional monetary stimulus. All would be negative for short-term yields Additional Asset Purchases, aka: Quantitative Easing 3 Extending language to keep Federal Funds Rate exceptionally low Reducing the Interest on Excess Reserves rate ECB has taken aggressive actions 3-year LTROs Reduced key refinancing rate to 0.75% Reduced interest rate on overnight deposits to 0.00% For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public. 27
Market Conditions Economic Growth Recent U.S. economic data has been disappointing Employment, manufacturing, retail sales Global growth is slowing Policymakers view inflation as relatively contained For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public.
Market Conditions Credit Market Challenges European sovereign and bank debt crisis continues and represents the largest tail risk to the financial markets Rating agency risk remains, but has diminished after Moody s completed its reviews of global financial institutions in the second quarter U.S. has significant policy making uncertainties Fiscal Cliff U.S. fiscal debt ceiling For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public.
Strategies Yield Curve Fed policy supports 2- to-3-year and under bond prices Risk is skewed toward steeper yield curve, favoring a bullet strategy LIBOR remains attractive in the mid-40 bps range Duration Management Fed policy argues for extending portfolio duration to maximize yield for shorter portfolios Long-run view suggests risks are skewed toward higher interest rates For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public. 30
Strategies Sectors Treasuries current yield curve relatively low Agencies Spreads have tightened Callable spreads have tightened but select securities can still offer value Corporates Industrial companies have built strong balance sheets and cash positions U.S. banks have built strong capital and liquidity positions Spreads have tightened in past six months Asset-Backed Securities (ABS) At current spreads, ABS offer more value as a portfolio diversifier than as a yield enhancement strategy Agency MBS Favor CMOs with tighter pre-pay speed bands over pass-throughs Recent bump in pre-pay speeds has limited opportunities Additional Fed policy actions could increase risk of faster pre-payments For Institutional Investor or Investment Professional Use Only This material is not for inspection by, distribution to, or quotation to the general public.
QUESTIONS? OFFICE OF THE ARIZONA STATE TREASURER