Challenges and Solutions for Today s Investment Markets

Transcription

1 Challenges and Solutions for Today s Investment Markets Presented by: Nelson Bush Managing Director PFM Asset Management LLC 4350 North Fairfax Drive, Suite 580 Arlington, VA (703) bushn@pfm.com

2 Summary of Economic Conditions Economic activity in the U.S. appears to be leveling out. Signs of improvement in the economy include: GDP is growing Manufacturing sector is expanding Home sales are stronger; prices stabilizing Economy is slowly adding jobs Stock markets have led the way, sort of Significant challenges remain, meaning recovery will be relatively slow compared to past business cycles. These headwinds include: High unemployment Weak consumer spending Rising mortgage delinquencies Reduced availability of credit PFM Asset Management LLC 1

3 Gross Domestic Product 8% Fourth Quarter 2004 First Quarter 2011 (projected) 6% 4% 2% 0% -2% -4% -6% -8% 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 Source: Bloomberg PFM Asset Management LLC 2

4 Recovery Hindered by Unemployment Unemployment Rate vs. Average Weekly Hours Worked April 2002 April % 38 10% 36 8% 6% 34 4% 32 U.S. Unemployment Rate Average Weekly Hours Worked 2% 30 0% Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Source: Bloomberg PFM Asset Management LLC 3

5 Fed Funds Are Expected To Stay Low 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Federal Funds Target Rate High Forecast Median Forecast Low Forecast High Uncertainty 0.0% May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Source: Bloomberg PFM Asset Management LLC 4

6 As Are Treasury Yields 2-Year U.S. Treasury Note Yield 7.0% 6.0% High Uncertainty 5.0% High Forecast 4.0% 3.0% Median Forecast 2.0% 1.0% Low Forecast 0.0% May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Source: Bloomberg PFM Asset Management LLC 5

7 Strategies for Enhancing Returns PFM Asset Management LLC 6

8 Strategies Should Be Prudent & Comprehensive Utilize high-quality money fund for liquidity and flexibility Short-term Funds Safely maximize earnings for short-term cash needs Consider likelihood of future interest rate risk Take advantage of steepness in yield curve Core Funds Employ active management strategies Manage credit exposure carefully PFM Asset Management LLC 7

9 Short-Term Funds: Money Market Fund Yields Lag the Market 6.00% 5.00% Average Monthly Yields May 2002 May Month Treasury Bill S&P LGIP Index - Net 4.00% 3.00% 2.00% 1.00% 0.00% May 02 May 03 May 04 May 05 May 06 May 07 May 08 May 09 May 10 Source: Bloomberg PFM Asset Management LLC 8

10 Yield Core Funds: Yield Curve Is Exceptionally Steep 5% U.S. Treasury Yield Curve June 1, 2009 versus June 1, 2010 June 1, 2010 Pick up Over 3 Month 4% 3 month 0.15% - 3% 6 month 0.21% 1 year 0.31% +0.07% +0.17% 2% 2 year 0.77% 3 year 1.21% +0.62% +1.06% 1% 5 year 2.06% 10 year 3.26% +1.91% +3.11% 0% 361 my 2 y 3 y 5 y 10 y 30 y 30 year 4.18% +4.03% Source: Bloomberg Maturity PFM Asset Management LLC 9

11 Depository Opportunities Above-market ECR (Earnings Credit Rate) TAGP (Transaction Account Guarantee Program) Unlimited FDIC insurance on certain bank accounts Many banks have dropped out due to changing participation requirements: Non-Interest Bearing Transactions accounts (rate of less than 0.50% through June 30, 2010) Non-Interest Bearing Transactions accounts (rate of less than 0.25% through December 31, 2010) Aggressive CD Rates Collateralization/insurance important Understand the basis for rates PFM Asset Management LLC 10

12 Broker / Dealers as a Resource Ready source of market information Many specialize in a market sector Buys for and sells from house inventory Extremely beneficial to maintain multiple broker/dealer relationships Sample Trade on May 15, 2008 Buy: FHLMC, coupon 4.75%, November 3, 2009, par $10,000,000 Broker Offered Yield Offered Price Principal Difference Over Low Price Broker A 2.68% $ 10,295,117 $ 17,277 Broker B 2.72% $ 10,289,298 $ 11,459 Broker C 2.76% $ 10,283,485 $ 5,645 Broker D 2.80% $ 10,277,840 $ 0 PFM Asset Management LLC 11

13 Investment Advisor Discretionary and non-discretionary services No house inventory must competitively shop for every security Ready source of market information Assist clients with the development of cash flow forecasts, investment strategies and investment policy Fiduciary responsibility to clients PFM Asset Management LLC 12

14 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 Cash Flow Forecast 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 Analysis of Core Portfolio Short-Term Portfolio Highly liquid Stable returns Low market risk Flexible Core Portfolio Longer-term investments Higher returns over time Historical Short-term Portfolio Historical Core Projected Short-term Portfolio Projected Core PFM Asset Management LLC 13

15 Benchmarking Longer investment strategies can achieve higher returns but expose the portfolio to more volatility Risk/Return of Various Benchmarks 10 Years Ended 3/31/2010 Cumulative Quarters With Overall Value of Negative Merrill Lynch Index Duration Return $20,000,000 Returns Money Market Mutual Fund 0.00 Years 3.08% $27,092,325 0 out of 20 3-Month Treasury Bill 0.23 Years 2.84% $26,477,942 0 out of 40 6-Month Treasury Bill 0.48 Years 3.25% $27,543,328 0 out of 40 1 Year Treasury Index 0.99 Years 3.69% $28,752,958 3 out of Year Treasury Index 1.92 Years 4.42% $30,832,276 4 out of Year Treasury Index 2.65 Years 4.93% $32,382, out of Year Treasury Index 3.94 Years 5.39% $33,813, out of Year Treasury Index 3.88 Years 5.96% $35,696, out of 40 Source: Bloomberg Merrill Lynch Indices PFM Asset Management LLC 14

16 Create Customized, Comprehensive Investment Program for AAPA Branded Investment Program High quality securities Open to operating funds and bond proceeds Sponsorship fee back to association Money Market Fund Managed Portfolios CD Purchase Program Purchasing Card Liquidity Individual investments FDIC-insured CDs Streamlined purchases Checking account sweep Cash management services Online transactions Structured to investment policy and liquidity needs Earnings/maturities to pool account Opportunity for enhanced yield Fixed terms from 60 days to one year Rebates on spending Enhanced reporting PFM Asset Management LLC 15

17 Important Disclosures and Disclaimers 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 a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. PFM Asset Management LLC 16