Putting it all Together: An Investment Simulation Game

Transcription

1 Putting it all Tgether: An Investment Simulatin Game BRIAN HEXTELL Institutinal Prtfli Manager Prudent Man Advisrs, Inc. COURTNEY SOESBE Senir Relatinship Manager PMA Financial Netwrk, Inc.

2 Intrductin t ur Simulatin Game

3 Successful Investment Plan Aligns Apprpriate Strategy fr Purpse Immediate Reserves: <12 mnths T bills/agency Discunt Ntes/CD s Cmmercial Paper LGIPs Semi Permanent Reserves: 1 5 Years Treasury Ntes/Agency Ntes Taxable Municipal Bnds Agency Mrtgage Securities Permanent Reserves: 5+ Years Mrtgage Pass Thrugh Bnds Taxable Municipal Bnds Treasury Ntes / Agency Ntes Pensin / OPEB : Lng Hrizn Crprate Bnds Zer Cupn Treasury/Agency Bnds Equities / Stcks

4 Investment Cnsideratins Safety f Principal Credit Risk Interest Rate Risk (Price Vlatility) Liquidity Needs Yield, Incme, and Return Objectives

5 Assumptins fr Tday Fcused n Lng Term Reserves High Quality Emphasis; AA Overall Credit Quality Prtfli Duratin Matching Yur Gals & Objectives Eligible Investments: Mney Market Funds & Lcal Gvernment Investment Pls U.S. Treasury Ntes U.S. Agency Ntes and Agency Securitized Municipal Securities (Rated AA/A)

6 Implementing Our Game We will be investing in indices instead f individual securities. Definitin Index: Attempts t replicate the perfrmance f a given investment type. It can als be called a benchmark.

7 Indices imneynet A cmpsite f dmestic taxable mney market mutual funds BfA Merrill Lynch 1 3 Year US Treasury & Agency Index BfA Merrill Lynch 1 5 Year AAA AA Municipal Securities Index BfA Merrill Lynch 3 5 Year US Mrtgage Backed Securities Index BfA Merrill Lynch 1 10 Year US Treasury & Agency Index

8 Key Terms Current Yield: Annual incme (cupns and interest) divided by the current market price f the security. This measure f yield uses the market price f a bnd instead f its face value r cst. When a bnd sells at par, the current yield will equal the stated interest rate (cupn) f the bnd. When the bnd sells fr a premium, the current yield will lwer than the stated interest rate n the bnd. The current yield will be higher fr a discunt bnd.

9 Key Terms Duratin: The apprximate percentage change in price fr a 100 basis pint change in rates. Clsely related t time t maturity Generally, lnger maturity bnds have a greater sensitivity t changes in interest rates. Apprximate Percent Price change = duratin x change in rates x 100 EXAMPLE Using a duratin f 3.00, let's see the apprximate change fr a small mvement in rates such as a 50 basis pints increase. Apprx. Percentage Price Change = 3.00 x ( ) x 100 = 1.50%

10 Key Terms Ttal Return: The actual rate f return f an investment r a pl f investments ver a given time perid. Ttal return includes interest and capital gains earned ver a given perid f time. Excess Return: Additinal return f an investment abve a Treasury security f similar duratin. Standard Deviatin: A measure that is used t quantify the amunt f variatin r dispersin f a set f data values. A lw standard deviatin indicates that the data pints tend t be clse t the mean. A larger standard deviatin is an indicatr f greater vlatility.

11 Key Terms Sharpe Rati: A measure fr calculating risk adjusted return. The Sharpe rati is the average return earned in excess f the risk free rate per unit f vlatility r ttal risk. Generally, the greater the value f the Sharpe rati, the mre attractive the riskadjusted return. This rati has becme the industry standard fr such calculatins. Sharpe rati = (Mean pr li return Risk free rate)/standard deviatin f prtfli return

12 Simulatin 1 Rising Rate Envirnment

13 Surces: Blmberg 12/31/04 Yield Curve

14 Market Infrmatin DECEMBER 31, 2004 Yield Duratin Mney Market Treas Mrt Muni Treas Surces: Blmberg, imneynet

15 What d we d? Break int grups f 5 7 As a grup, discuss yur strategy Cnsider data regarding each Index Yield Duratin Cnsider market envirnment Assign an allcatin t each index (yu can assign 0%) What are yur gals/bjectives? What is yur risk tlerance? Share yur grup s strategy and asset allcatin with the rm

16 Summary Results Cumulative Avg. STRATEGY Mney Ttal Excess Standard Sharpe Market Treas Mrt Muni Treas Return Return Deviatin Rati Diversified 10% 25% 25% 25% 15% 12.4% 0.03% I think I knw 50% 50% 0% 0% 0% 12.5% 0.03% Extreme betting 100% 0% 0% 0% 0% 12.3% 0.01% Mney Market 70% 15% 0% 15% 0% 11.8% 0.01% Surces: Blmberg, imneynet, Prudent Man Advisrs, Inc. Mnthly returns used t calculate Excess Returns and Standard Deviatin

17 Simulatin 2 Falling Rate Envirnment

18 Surces: Blmberg 12/31/07 Yield Curve

19 Market Infrmatin DECEMBER 31, 2007 Yield Duratin Mney Market Treas Muni Mrt Treas Surces: Blmberg, imneynet

20 Summary Results Cumulative Avg. STRATEGY Mney Ttal Excess Standard Sharpe Market Treas Muni Mrt Treas Return Return Deviatin Rati Diversified 10% 25% 25% 25% 15% 12.5% 0.27% I think I knw 0% 0% 30% 30% 40% 15.0% 0.33% Extreme betting 0% 0% 0% 0% 100% 15.4% 0.33% Mney Market 70% 15% 15% 0% 0% 5.7% 0.08% Surces: Blmberg, imneynet, Prudent Man Advisrs, Inc. Mnthly returns used t calculate Excess Returns and Standard Deviatin

21 Simulatin Game Results and Summary

22 Changes in Interest Rates

23 Summary Rates may nt mve as expected Strng market and Fed tightening in 2005 reversed by the end f 2007 Financial Crisis: Falling Treasury Rates Rising Credit Spreads Diversificatin acrss allwable sectrs reduces risk Financial Crisis results n sectr perfrmance: Treasuries utperfrmed (flight t safety) Credit prducts such as crprates and munis underperfrmed

24 6-year Results STRATEGY Mney Ttal Avg. Excess Standard Sharpe Market Treas Muni Mrt Treas Return Return Deviatin Rati Diversified 10% 25% 25% 25% 15% 25.6% Stay Shrt 40% 30% 30% 0% 0% 19.7% G lng 10% 0% 20% 20% 50% 27.7% Surces: Blmberg, imneynet, Prudent Man Advisrs, Inc. Annual returns used t calculate Excess Returns and Standard Deviatin

25 Investment Lessns Match yur investment plan t Gals and Objectives Measure perfrmance based n: Ttal Return (incme and price return) Risk Adjusted Return (Sharpe rati) Diversificatin reduces risk ver time Avid market timing

26 Appendix

27 6-year Mnthly Data Summary Mney Market Treas Muni Mrt Treas Cumulative Return 15% 25% 24% 36% 32% Annual Return 2.3% 3.9% 3.7% 5.3% 4.8% Standard Deviatin Number f Mnths with Lsses Surces: Blmberg, imneynet, Prudent Man Advisrs, Inc. Mnthly returns used t calculate Cumulative Return and Standard Deviatin

28 Disclaimer Prudent Man Advisrs, Inc. ( Prudent Man ) is an investment adviser registered with the U.S. Securities and Exchange Cmmissin. The infrmatin presented herein is fr general infrmatin purpses nly and is nt a specific/buy sell recmmendatin. The analysis r infrmatin presented in this presentatin is based upn hypthetical prjectins and/r past perfrmance that may have certain limitatins and is slely intended t suggest/discuss ptentially applicable financing applicatins r investment strategies with yu. Any terms discussed herein are preliminary until cnfirmed in a definitive written agreement. Investment in securities invlves risks, including the pssible lss f the amunt invested. In additin, past perfrmance is n indicatin f future perfrmance and the price r value f investments may fluctuate. Asset allcatin des nt assure r guarantee better perfrmance and cannt eliminate the risk f investment lsses. Yu shuld cnsider certain ecnmic risks (and ther legal, tax, and accunting cnsequences) prir t entering int any type f transactin with Prudent Man Advisrs, Inc. Prudent Man and its emplyees d nt ffer tax r legal advice. Yu shuld cnsult with yur tax and/r legal advisrs befre making any tax r legal related investment decisins. Securities, public finance and institutinal brkerage services are ffered thrugh PMA Securities, Inc. PMA Securities, Inc. is a brker-dealer and municipal advisr registered with the SEC and MSRB, and is a member f FINRA and SIPC. Prudent Man Advisrs, Inc., an SEC registered investment adviser, prvides investment advisry services t separately managed accunts and lcal gvernment investment pls. All ther prducts and services are prvided by PMA Financial Netwrk, Inc. PMA Financial Netwrk, Inc., PMA Securities, Inc. and Prudent Man Advisrs (cllectively "PMA") are under cmmn wnership. Securities and public finance services ffered thrugh PMA Securities, Inc. are available in CA, CO, FL, GA, IL, IN, IA, KS, MI, MN, MO, NE, OH, OK, PA, SD, TX and WI. This dcument is nt an ffer f services available in any state ther than thse listed abve, has been prepared fr infrmatinal and educatinal purpses and des nt cnstitute a slicitatin t purchase r sell securities, which may be dne nly after client suitability is reviewed and determined Prudent Man Advisrs, Inc. All rights reserved. Fr institutinal use nly.