HomeMy WebLinkAbout2018-06-12; City Council; ; Approve: Annual Report of Investment Portfolio as of June 30, 2017Annual Report of Investment Portfolio for Year Ended June 30, 2017
Meeting Date: June 12, 2018
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fiscal year (FYl 7-18), it is expected that the average return for the portfolio will be
approximately 1.4 percent.
Fiscal Analysis
None
Next Steps
The Annual Report of Investment Portfolio is produced once a year by the City Treasurer.
Environmental Evaluation (CEQA)
Pursuant to Public Resources Code section 21065, this action does not constitute a "project"
within the meaning of CEQA in that it has no potential to cause either a direct physical change in
the environment, or a reasonably foreseeable indirect physical change in the environment, and
therefore does not require environmental review.
Public Notification
This report was noticed in accordance with the Ralph M. Brown Act and was available for
viewing at least 72 hours prior to the posting of the agenda.
Exhibits
l. Annual Report of Investment Portfolio for Year Ended June 30, 2017
June 12, 2018 Item #2 Page 2 of 17
By August of2016 the universe of negative yielding debt was approximately $13.4T globally.
The historically low interest rates created pressure on pension fund managers and insurance
company executives as they looked to match long term obligations to fixed income obligations.
A major market moving event occurred with the election of Donald Trump as US President. In
short order, the focus turned to the potential benefits of fiscal stimulus, a reduction in business
regulations and the possibility of tax cut legislation. These events pushed equity valuations
higher month by month in 2017 to record high levels eventually referred to as the "Trump
Bump".
From the November election date of President Trump to late January of 2018 the S&P 500 index
rose 34%. In the same month of November 2016, OPEC met in Vienna to discuss commitments
to production cuts to their output of oil. They reached agreement on member states target
production levels trying to stabilize oil prices at the $50 per barrel level. Several non-OPEC
producers also agreed to reduce their output in December and global oil prices strengthened
considerably.
US Bonds
During the past year returns on bonds increased significantly, especially in the short -term
maturities. The strengthening US economy coupled with rate increases by the Federal Reserve
have proved to be a good catalyst for growth. Adding to this environment was growth in the US
economy of 2.3%, the fastest year over year growth in over 2 years.
Levels of unemployment also hit new lows reaching their lowest levels observed in over 16
years. This has had a positive effect on improving consumer confidence which should lead to
higher retail sales, a significant component of overall US GDP. Eventually, as personal incomes
rise, we can anticipate further growth in economic results. Since December of 2015 interest rates
have increased 1.50%. The Federal Reserve is monitoring employment levels and inflation as it
considers additional rate changes over the coming months.
FY 17-18 PREVIEW
The environment going forward continues to be challenging as economies around the world look
for ways to stimulate growth. The backdrop of terrorist activities places constraints on economic
growth. We anticipate a continued cautious approach to increasing US interest rates as the Fed
monitors data points for any sign of weakness that may warrant a pause.
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June 12, 2018 Item #2 Page 12 of 17
At the end of FY 16-17, LAIF investments had a yield of O. 93 percent, and all other investments
had a yield of 1.47 percent. Revenues on investments are projected to remain flat or increase
slightly due to the continuing low interest rate environment.
On June 30, 2017 the yield of the total portfolio averaged 1.25 percent. Total assets in the
investment portfolio stood at $724.4 million as measured on a cost basis at the close of FY 16-17.
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June 12, 2018 Item #2 Page 13 of 17
APPENDICES TO ANNUAL REPORT OF INVESTMENT PORTFOLIO
APPENDIX A: RISK MANAGEMENT AND DISCLOSURE
All investments are exposed to risk of some type. The objective of risk management is to identify
the risks involved and establish acceptable levels of risks that are consistent with the city's
investment objectives. Risk management includes managing, measuring, monitoring, and
reporting the various risks to which portfolio investments are exposed.
Portfolio investments are exposed to the following types of risks:
A. Credit risk
a. Custodial credit risk
a) Investments
b) Deposits
b. Default credit risk
c. Concentration credit risk
B. Interest rate risk
C. Event Risk
As of June 30, 2017, the portfolio had the following investments and cash in its internal investment
pool.
Investment Maturities
U.S. agencies July 2017 -May 2022
Corporate Notes Sept 201 7 -May 2022
Certif. of Deposit Nov 2017 -June 2022
LAIF
Sweep accounts
Cash accounts
Total
*Market Value less Amortized cost.
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Market Value
$470,523,000
134,977,000
15,613 ,000
94,406,000
4,028,000
633 000
$720,018,000
Market Value
Gain (Loss)*
$ (1,831,000)
(504,000)
38,000
(100,000)
$ (2,397,000)
June 12, 2018 Item #2 Page 14 of 17
Disclosures
Custodial Credit Risk (Investments). The city uses a third party custody and safekeeping
service for its investment securities. The Mitsubishi UFJ Financial Group Union Bank, N.A.
(MUFGUB) is under contract to provide these custodial services. Custodial credit risk is the risk
that the city will not be able to recover the value of its investments in the event of a UBC failure.
All city investments held in custody and safekeeping by MUFGUB are held in the name of the city
and are segregated from securities owned by the bank. This is the lowest level of custodial credit
risk exposure.
Custodial Credit Risk (Deposits). The city maintains cash accounts at Wells Fargo Bank
(WFB) and MUFGUB. At the conclusion of each business day, balances in these accounts are
"swept" into overnight investments. These overnight investments are pooled and collateralized
with either U.S. government securities or U.S. agency securities. The California Code authorizes
this type of investment. A small amount of cash is not swept from the WFB checking accounts to
cover checks that may be presented for payment. Amounts up to $250,000 are FDIC insured.
Default Credit Risk. Default credit risk is the risk that the issuer of the security does not pay
either the interest or the principal when due. The debts of most U.S. agencies are not backed by
the full faith and credit of the federal government; however, because the agencies are U.S.
Government-sponsored, they carry AA credit ratings. The default credit risk of these investments
is minimal.
Unless otherwise exempted, California state code limits investments to the top three credit ratings
(AAA, AA, and A). It is the city's policy, however, to limit investments to the top two credit
ratings (AAA and AA). As of June 30, 2017, two investments in corporate notes had a credit
rating below the AA limit. These investments were made when the credit ratings were either AAA
or AA. California state code and the city's Investment Policy allow the City Treasurer to determine
the course of action to correct exceptions to the policy. It is the intent of the City Treasurer to hold
these investments in the portfolio until maturity unless events indicate a sale should be made. The
default credit risk for corporate notes with a credit rating of single A is higher than U.S. Treasuries,
federal agencies or LAIF, but is considered by the City Treasurer to be within acceptable limits
for purposes of holding to maturity.
The Local Agency Investment Fund (LAIF) is an investment pool managed by the California State
Treasurer. Its investments are short-term and follow the investment requirements of the state. As
of June 30, 2017, the average maturity of the LAIF investments was 194 days. The State Treasurer
is not required to contract for a credit rating to be assessed for LAIF. California State Code Section
16429.3 excludes LAIF deposits from being transferred, loaned, impounded or seized by any state
agency or official.
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June 12, 2018 Item #2 Page 15 of 17
Concentration Credit Risk. Concentration credit risk is the heightened risk of potential loss
when investments are concentrated in one issuer. The California state code does not identify a
specific percentage that indicates when concentration risk is present for any one issuer. The state
code does, however, require that total investments in medium-term corporate notes of all issuers
not exceed 30 percent of the portfolio. As of June 30, 2017, approximately 18.9 percent of the
city's total portfolio investments were in medium-term corporate notes.
For concentration of investments in any one issuer, the city's Investment Policy requires that no
more than 5 percent of investments in corporate notes be in any one issuer. There is no similar
requirement in either the state code or the city's Investment Policy for U.S. agencies. As of June
30, 2017, no investments in any one corporate issuer exceeded 5 percent of total portfolio
investments.
Interest Rate Risk. Interest rate risk is the risk that investments will lose market value because
of increases in market interest rates. A rise in market interest rates will cause the market value of
investments made earlier at lower interest rates to lose value. The reverse will cause a gain in
market value. As of June 30, 2017, the portfolio had a 0.66 percent loss in market value based on
cost.
The city's Investment Policy has adopted two means oflimiting its exposure to market value losses
caused by rising market interest rates: (1) Limiting total portfolio investments to a maximum
modified duration of 2.2, and (2) requiring maturing investments within one year be equal to an
amount that is not less than 2/3 of the current operating budget $250,146,000. As of June 30, 2017,
the modified duration of the portfolio was 1.942, within the required maximum of2.2. Investments
maturing within one year were $229,659,000, exceeding the required minimum of $166,762,000.
The city's exposure to interest rate risk is within acceptable limits.
Event Risk. Event risks include the chance that something unexpected will impede the ability
of an issuer of a security to meet its obligations. These types of risks are usually short in duration,
but can impair the city's ability to communicate with or use banking services. Such an event could
cause a delay in collecting securities which have matured. Security risks are also within this
category.
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June 12, 2018 Item #2 Page 16 of 17
APPENDIX B: PORTFOLIO ACTIVITIES FOR FISCAL YEAR ENDED JUNE 30, 2017
The city's portfolio balance increased 0.68 percent from $719.5 million to $724.4 million based
on cost in fiscal year 2016-17. The increase of $4. 9 million does little to show the volume of cash
that flows in and out of the portfolio in the course of one fiscal year. The following table illustrates
that the City Treasurer managed over three billion dollars of cash inflows and cash outflows which
prompted investment decisions during fiscal year 2016-17.
Cash Flows:
Bond Maturities
Bond Calls
LAIF Withdrawals
Sweep Withdrawals
Interest Income
Bond Purchases
LAIF Investments
Sweep Investments
Total
$ 115,828,000
75,225,000
239,982,000
1,046,024,000
9,286,000
242,996,000
236,272,000
1,051,349,000
$3,016,962,000
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June 12, 2018 Item #2 Page 17 of 17