STATE TREASURERS OFFICE LGIP Stakeholders Meeting 9/26/2018 - - PowerPoint PPT Presentation

STATE TREASURERS OFFICE LGIP Stakeholders Meeting 9/26/2018

Investment Consultants Deanne Woodring, CFA President and Senior Portfolio Advisor Dave Westcott, CFA Chief Investment Officer and Senior Portfolio Advisor Government Portfolio Advisors 503-248-9973 Deanne@gpafixedincome.com www.gpafixedincome.com

1980 - 1990 2 year Yields

High 17% Low 6% Average 10%

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1990-2000 2 year Yields

High 9% Low 3.5% Average 5.75%

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3

4

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1980 – 2018 2 Year Yields

High 17% Low .15% Average 5%

$10,000,000 1 year Earnings

17% = $ 1,700,000 5% = $ 500,000 .15% = $ 15,000

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Economic and Rate Observations Impacting the Markets

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Quarterly Rate Change

9/30 9/30/1 /17 12/3 12/31/1 /17 3/31 3/31/1 /18 6/30 6/30/1 /18 NM L LGI GIP 1.01 1.01 1.20 1.20 1.50 1.50 1.81 1.81 3-month bill 1.05 1.38 1.61 1.92 2- year note 1.49 1.88 2.27 2.53 5 -year note 1.94 2.20 2.56 2.74 10- year note 2.33 2.41 2.74 2.86

Q3 Q3-18 18 Q4 Q4-18 18 Q1 Q1-19 19 Q2 Q2-19 19

Real GDP 2.90 2.90 2.90 2.60 CPI (YOY%) 2.80 2.50 2.30 2.30 Unemployment 3.80 3.70 3.70 3.70

Economic Projections

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FOMC Rate Change to Fed Funds

1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 8/1/2017 8/15/2017 8/29/2017 9/12/2017 9/26/2017 10/10/2017 10/24/2017 11/7/2017 11/21/2017 12/5/2017 12/19/2017 1/2/2018 1/16/2018 1/30/2018 2/13/2018 2/27/2018 3/13/2018 3/27/2018 4/10/2018 4/24/2018 5/8/2018 5/22/2018 6/5/2018 6/19/2018 7/3/2018 7/17/2018 7/31/2018 8/14/2018 8/28/2018

Two Year Note Fed Funds Upper Bound

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Probability of More Rate Hikes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Probability of Hike at Sept 26 Meeting to 2.25% Probability of Hike at Dec 19 Meeting to 2.50% 10

Unemployment to 2 Year Notes

2 4 6 8 10 12

07/08 11/08 03/09 07/09 11/09 03/10 07/10 11/10 03/11 07/11 11/11 03/12 07/12 11/12 03/13 07/13 11/13 03/14 07/14 11/14 03/15 07/15 11/15 03/16 07/16 11/16 03/17 07/17 11/17 03/18 07/18

US Unemployment Two-Year Treasury

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GDP Relationship to 2 Year Notes

(1.000)

• 1.000

2.000 3.000 4.000 5.000 6.000

03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 09/16 12/16 03/17 06/17 09/17 12/17 03/18 06/18

US GDP Quarter-over-Quarter % Change Two-Year Treasury

0.000

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Inverted Yield Curves – Sign of Recession Spread Relationship of 3 mth Bill to 10 Year Note

(1.000)

• 1.000

2.000 3.000 4.000 5.000 09/88 09/89 09/90 09/91 09/92 09/93 09/94 09/95 09/96 09/97 09/98 09/99 09/00 09/01 09/02 09/03 09/04 09/05 09/06 09/07 09/08 09/09 09/10 09/11 09/12 09/13 09/14 09/15 09/16 09/17 0.000

3 month Bill – 2% 10 Year Note – 2.95% Current Spread .95%

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How are Public Funds Investing Around the Country?

Updating Policies, Procedures and Practices

Identifying resources Identifying Capabilities Implementing Best Practice Standards

Identifying Liquidity Balances LGIP an and B Ban ank B Bal alances Identifying Core Investment Components Investing based on NMSA 6.10.10 Maturities typically to 5 years Utilizing market benchmarks to control risk

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PUBLIC FUND INVESTING TRENDS FOR 2019 – ACT Investing

Establish rules to manage your investments while providing support for the investment decision- making process.

ACCOUNTABILITY

Understand the investment purpose and strategy, which will lead to confident investment decisions.

CONFIDENCE

Clearly document all elements of an investment program that adheres to industry best practice standards.

TRANSPARENCY

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Growth of $1,000,000 Dollars

$1MM in 1983 $3.6MM

2 4 6 8 10 12 14 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000 5/83 5/84 5/85 5/86 5/87 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97 5/98 5/99 5/00 5/01 5/02 5/03 5/04 5/05 5/06 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 5/18

Three-Month Bill Investment(Left Axis) Two-Year Note Investment(Left Axis) Two-Year Note Yield(Right Axis)

$4.6MM

Source Bloomberg 16

Public Funds are Identifying Balances to be Dedicated to Liquidity (LGIP) and Investing Core

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10 Year Returns - Long Term Value of Longer Maturities 3 Month Bill 0.56 0-3 Treasury 1.01 0-5 Treasury 1.50

(1.00)

• 1.00

2.00 3.00 4.00 5.00 6.00 7.00 8.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Total Returns for Benchmarks

0-3 Treasury Benchmark 0-5 Treasury Benchmark

Review of Historical Performances Based on Maturity

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LGIP Characteristics and Results 6/30/18

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LGIP Asset Allocation as of 6/30/18

15% 10.83% 69%

Total LGIP Allocation

Repo Bank Deposit s Treasury Agency Corp/ CP

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Performance of LGIP in Yield

Earnin ings Yie ield ld 6/ 6/30/ 30/2018 2018 6/ 6/30/ 30/17 17 - 6/ 6/30/ 30/18 18 LG LGIP P FU FUND Ma Mark rket Value JP Mo Morg rgan Days Quart rter r End Yield Annualized R Rate LGIP DailyGross Yield 738,987,800 $ 50 1.866% 1.32% S&P LGIP Govt Pools Gross Yield 33 1.810% 1.31% LGIP Daily Net Yield 1.816% 1.27% S&P LGIP Govt Pools Net Yield 1.760% 1.15%

LG LGIP Fu P Fund Market V Value+ Repo Ba Bank Tre reasury ry Agency cy Co Corp/CP CP 6/30/2018 738,987,800 $ 15.59% 4.69% 10.83% 68.89% 0.00% 6/30/2017 885,076,477 $ 20.37% 1.52% 12.55% 65.56% 0.00% Change over Period (146,088,677) $

• 4.78%

3.17%

• 1.73%

3.33% 0.00% CHANGE I IN P PORTFOLIO F FROM 6 6/30/17 t to 6/ 6/30/18

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Comparison to Other State LGIP Prime versus AAAm style 6-30-18

Source: Websites State tate Rate ate Dur Duration Asse sset A t Allocat ation Oregon 2.25% Six months 50% Corporate Utah 2.50% Six months 87% Corporates/10% CP/Variable Rate Final 2021 Florida Prime 2.02% Six months est. 20% Corporates State Rate Duration Asset Allocation NM LGIP 1.81% 60 days 100 Govt/Bank Deposits and Repo - fully Collateralized ) Colorado SAFE 1.80% 60 days 100% Govt/Bank Deposits and Repo - fully Collateralized Washington LGIP 1.89% 60 days 100% Govt/Repo/Bank Deposits fully Collateralized AAAm Like – 60 day Average Maturity – All Governments and Govt Repo Prime and longer maturity – 6 months Average Maturity – Include Corporates and CP

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NMSTO – LGIP POLICY OBJECTIVES

Managing quality of the investment in US treasury, Agency, Repurchase Agreements and Bank Deposits

Safet ety

Managing with in the AAAm constraints and selectively placing maturities

Retur urn

Maintaining sufficient liquidity to meet participants demands

Liquidi dity ty

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NMSTO – MANAGING RISK

Interest Rate Risk

Risk Level Low

Credit Risk

Risk Level Low

Reinvestment Rate Risk

Risk Level Low

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Key Points of Focus in the STIC Monthly Reports

• Present current asset allocations in LGIP
• Present changes in asset allocation over the quarter
• Compare the asset allocations to the S&P GIP All Govt Index

Asset Allocation

• Review transactions for the quarter
• Report on the performance of the fund relative to the benchmark
• Review the S&P report and provide an NAV sensitivity analysis

Performance Measurement and Risk Management

• Participate in the weekly calls
• Provide strategic input to the portfolio management team

Investment Strategy Review

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SUMMARY AND TAKE-AWAYS

STO’ O’s a approach t to managing g the e LGI GIP wi with Accountability: y:  S&P Rating of AAAm and oversight on a weekly basis  Investment Policy guidelines  Benchmark of the S&P Government Pools STO’ O’s a approach t to managing g the e LGI GIP wi with Confiden ence: e:  Asset allocation oversight and invests with intention  Cash flow analysis and review  Broker Dealer relationships  Policy compliance STO’ O’s a approach t to managing g the e LGI GIP wi with Transparen ency: y:  STIC reports –http://www.nmsto.gov/stic-binders/LGIP Section  Quarterly oversight report by GPA  Information available upon request

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