Quarter End Report September 2011

Transcription

1 WASHINGTON COUNTY Quarter End Report September 2011 We urge you to compare the information contained in this periodic statement with the account statement(s) you receive directly fromcustodian that holds your account(s). Please notify us immediately if you identify any discrepancies or have any questions.

2 DAVIDSON FIXED INCOME MANAGEMENT, INC. QUARTER ENDING SEPTEMBER 30, 2011 MARKET OVERVIEW During August, the Federal Reserve released its June meeting results in which it communicated its objective of maintaining Fed Funds at their current range of zero to 25 basis points until the middle of Short treasury rates are expected to stay close to zero during this time. During periods of extremely low interest rates it is important for all fiduciaries in the investment management process to communicate and manage the expectations of earnings. It is our recommendation to focus on strategic investment plans that minimize excess liquidity balances and optimize fully invested portfolios to help achieve maximum earnings. Earnings rates of less than 1% should be expected for the coming year on portfolios that have maintained average maturities of close to 1 ½ years. Underlying themes in the marketplace: 1) Standard & Poor s (S&P) downgraded US treasury and GSE debt: S&P lowered their rating of Treasury debt from AAA to AA+. Both Fitch and Moody s kept their ratings at AAA with a negative watch. The market response was non-reactive as this was talked about for the previous two months and the treasury and agency yields actually dropped on the news. 2) Global Crisis continues: The U.S. fundamentals are slowly improving, however, all the focus is about foreign debt. The correlation of risk assets across the globe is higher than it has ever been and it is broad reaching. No one knows how long it is going to take to stabilize the global bank crisis, or how deep the damage will impact the financial institutions. Therefore, we continue to see a major flight to the US Treasury and Agency markets. 3) Longer period of low rates: Given the global economic crisis and the Fed s statements to hold rates down through 2013, a shift in investor sentiment to buy longer duration has occurred, pushing longer term rates down. 4) Operation Twist: The Fed pulled one more trick out of the bag and implemented Operation Twist. This action involves selling holdings in the front end of the curve and buying year treasury and mortgage backed securities. This action was effective in bringing longer term rates down to the lowest levels in history. Fed Policy: Indeed, the Fed responded to the erosion in confidence that accelerated in August with a pledge to hold extremely low rates down near zero through mid While that appeared to help put a floor under flagging stocks, it did little to revive either housing or employment two sectors in particular that continued to frustrate the Fed, along with waning global growth and confidence. Building evidence of internal division at the U.S. central bank found its outward public manifestation, however, with the dissent of three voting FOMC members. Kocherlakota, Plosser and Fisher disagreed with the policy of telegraphing rates 2-years into the future as dangerous. But Fed Chairman Bernanke and the dovish majority were not finished there.

3 By quarter-end Bernanke had all the ammunition he needed to resurrect an old policy trick after pointing to the bleachers and announcing in his Jackson Hole speech an expanded 2-day policy meeting in late September to allow a fuller discussion to consider the Fed s options. The zero reading on August payrolls and fresh whiff of a financial crisis provided cover for the announcement of Operation Twist on September 21. Source: Action Economics report: Third party provider to DFIM. Economic Indicators and Composite Economist Outlook: Bloomberg composite economic projections have moved unemployment prospects back above 9% for 2011 and raised inflation growth above 3% as shown below. Indicator est 2012 est Real GDP CPI (YOY) Unemployment Source: Bloomberg Fed Forecasts Composite Economist s Rate Projections: The economic forecasts for rates have been dramatically adjusted each quarter. Last quarter they were projecting for fed funds to be at.50% by Q now it is out into Last quarter they projected the 10 year note to be over 4% in Q2-12 and now they have it at So if you feel confused, there is a reason, even those paid to give us the projections are missing the mark by substantial margins. We are likely in for a slow shift upward in rates between now and Maturity Ending Ending Ending 2010 Ending Q Q Q Q est Q est Q est Fed Bank Rate Month Year Year Source: Bloomberg STRATEGY FOR THE FOURTH QUARTER 2011 AND BEYOND: In this low rate environment we will continue to maintain portfolio durations close to their respective benchmarks. Tactical allocations will be focused on identifying securities and yield curve sectors that are expected to perform the best during this period. While rates are close to zero we will continue to be on alert for any economic strength which could possibly undermine the Fed s desire to maintain rates at zero until Interest rate returns and risk remain in the longer dated sectors with two year and shorter issues yielding close to zero. Managing the tradeoff of substantially higher yields in securities longer than two years and the higher interest rate risk in these issues will be crucial in optimizing earnings over the next

4 several quarters. Disciplined duration management and a focus on a defined investment process will be critical during this period of extremely low interest rates. CHANGES IN THE TREASURY MARKET OVER THE PAST YEAR: 9/30/10 12/31/10 3/31/11 6/30/11 9/30/11 Change Last Qtr Y-O-Y Change 3-month bill month bill year note year note year note

5 WASHINGTON COUNTY DISTRIBUTION BY ASSET CLASS DISTRIBUTION BY MATURITY 6.7% 3.4%0.0%3.3% 18.4% $200,000, % $180,000,000 $171,610, TREASURY NOTES 55,268, AGENCY BULLET 205,568, AGENCY CALLABLE 20,046, CORPORATE 10,235, CASH & EQUIVALENTS 1, OR STATE POOL 10,000, $160,000,000 $140,000,000 $120,000,000 $100,000,000 $88,813, DISTRIBUTION BY ISSUER $80,000,000 Industry Groups Market Value Pct. FHLB 89,305, US TREASURY 55,268, FHLMC 50,542, FFCB 44,987, FNMA 40,779, CORPORATE 10,235, STATE INVESTMENT POOL 10,000, CASH & EQUIVALENTS 1, Total 301,120, $60,000,000 $40,000,000 $20,000,000 $0 $40,695, Under 1 Yr 1 Yr - 3 Yrs 3 Yrs - 5 Yrs

6 Securities Summary Report WASHINGTON COUNTY September 30, 2011 Unrealized Weighted % Weighted Weighted Average Weighted Average Par Value Purchase Cost Amortized Cost Market Value Gain/Loss Days to Maturity Portfolio Average Yield Duration to Maturity Duration to Call FHLB 88,000,000 88,823, ,347, ,159, , FNMA 40,000,000 40,600, ,587, ,598, , , FHLMC 50,000,000 50,406, ,395, ,424, , FFCB 45,000,000 45,024, ,015, ,945, , CORPORATE 10,000,000 10,210, ,206, ,172, , US TREASURY 55,000,000 54,936, ,919, ,138, , STATE INVESTMENT POOL 10,000,000 10,000, ,000, ,000, TOTAL 298,000, ,001, ,471, ,438, ,

7 1 WASHINGTON COUNTY PORTFOLIO HOLDINGS September 30, 2011 Security Call Pur Amort Book Market Market Market Accrued Total Unrealized Pct. Dur Dur Symbol Quantity Security Date Date Price Yield Price Yield Value Interest Value Gain/Loss Assets Mat Call AGENCY BULLET 3133XXPV3 15,000,000 FEDERAL HOME LN BKS ,080, , ,142, , % Due KEV8 10,000,000 FEDERAL FARM CR BKS CONS ,001, , ,009, , % Due XUK93 20,000,000 FEDERAL HOME LN BKS ,324, , ,341, , % Due XUK93 13,000,000 FEDERAL HOME LN BKS ,210, , ,222, , % Due EACP2 20,000,000 FEDERAL HOME LN MTG CORP ,014, , ,039, , % Due XX7F8 20,000,000 FEDERAL HOME LN BKS ,370, , ,379, , % Due EACJ6 10,000,000 FEDERAL HOME LN MTG CORP ,192, , ,266, , % Due A5W8 20,000,000 FEDERAL NATL MTG ASSN ,088, , ,131, , % Due UC8 15,000,000 FEDERAL HOME LN BKS ,130, , ,164, , % Due UC8 5,000,000 FEDERAL HOME LN BKS ,043, , ,054, , % Due EACV9 20,000,000 FEDERAL HOME LN MTG CORP ,218, , ,236, , % Due KYR5 15,000,000 FEDERAL FARM CR BKS CONS ,929, , ,932, , % Due A4M1 20,000,000 FEDERAL NATL MTG ASSN ,509, , ,648, , % Due ,000, ,113, , ,568, , AGENCY CALLABLE 31331KUG3 20,000,000 FEDERAL FARM CR BKS CONS ,014, , ,046, , % Due CASH & EQUIVALENTS cash Cash Account , , CORPORATE 36962G4H4 10,000,000 GENERAL ELECTRIC CAP CORP ,172, , ,235, , % Due OR STATE POOL ORPOOL 10,000,000 OREGON STATE POOL ,000, ,000, % Due Special note: At this time AXYS does not correctly calculate book or market yields for variable rate, floating rate, or mortgage backed securities.

8 2 WASHINGTON COUNTY PORTFOLIO HOLDINGS September 30, 2011 Security Call Pur Amort Book Market Market Market Accrued Total Unrealized Pct. Dur Dur Symbol Quantity Security Date Date Price Yield Price Yield Value Interest Value Gain/Loss Assets Mat Call TREASURY NOTES LT5 20,000,000 UNITED STATES TREAS NTS ,014, , ,097, , % Due PD6 20,000,000 UNITED STATES TREAS NTS ,041, , ,072, , % Due PR5 15,000,000 UNITED STATES TREAS NTS ,082, , ,097, , % Due ,000, ,138, , ,268, , TOTAL 298,000, ,439, , ,120, , Special note: At this time AXYS does not correctly calculate book or market yields for variable rate, floating rate, or mortgage backed securities.

9 DETAIL AMORTIZATION COST RETURN WASHINGTON COUNTY From to Interest Accretion Realized CURRENT HOLDINGS Earned (Amortization) Gain/Loss Total Income TREASURY NOTES 92, , , AGENCY BULLET 491, , , AGENCY CALLABLE 105, , , , CORPORATE 6, , , CASH & EQUIVALENTS TLGP DEBT OBLIGATION 91, , , OR STATE POOL 2, , TOTAL 788, , , ,571.64

10 DETAIL ON MARKET VALUE RETURN WASHINGTON COUNTY From to Interest Change in Current Holdings Earned Market Value Total Income TREASURY NOTES 92, , , AGENCY BULLET 491, , , AGENCY CALLABLE 105, , , CORPORATE 6, , , CASH & EQUIVALENTS TLGP DEBT OBLIGATION 91, , , OR STATE POOL 2, , TOTAL 788, , ,482.15

11 WASHINGTON COUNTY PORTFOLIO RETURNS GROSS OF FEES Target Benchmark: Treas 0-3 Year From to Inception Date: Market Value and Return Duration Comparison Period Ending Beginning Value Contribution/ Withdrawal Principal Change Interest Earnings Ending Value Total Return Portfolio Duration Treas 0-3 Year Duration Difference DFIM /30/ ,534, /30/ ,534, ,120, , , ,120, , Total 29,120, , , , Monthly Return Cumulative Return Date Price Return Interest Return Portfolio Return Treas 0-3 Year Return YTD Portfolio YTD Treas 0-3 Year Difference YTD DFIM 0-3 Since Inception Portfolio Since Inception Treas 0-3 Year Since Inception DFIM /30/ % 0.282% 0.180% 0.351% 0.180% 0.351% % 0.311% 7.339% 7.324% 9.540% Annualized 0.714% 1.400% % 1.239% 2.147% 2.143% 2.770%

12 WASHINGTON COUNTY PORTFOLIO RETURNS NET OF FEES Target Benchmark: Treas 0-3 Year From to Inception Date: Market Value and Return Duration Comparison Period Ending Beginning Value Contribution/ Withdrawal Principal Change Interest Earnings Ending Value Total Return Portfolio Duration Treas 0-3 Year Duration Difference DFIM /30/ ,534, /30/ ,534, ,120, , , ,120, , Total 29,120, , , , Monthly Return Cumulative Return Date Price Return Interest Return Portfolio Return Treas 0-3 Year Return YTD Portfolio YTD Treas 0-3 Year Difference YTD DFIM 0-3 Since Inception Portfolio Since Inception Treas 0-3 Year Since Inception DFIM /30/ % 0.282% 0.171% 0.351% 0.171% 0.351% % 0.311% 7.205% 7.324% 9.540% Annualized 0.682% 1.400% % 1.239% 2.109% 2.143% 2.770%

13 WASHINGTON COUNTY TRANSACTION SUMMARY From To Trade Settle Call Date Date Cusip Quantity Security Date Amount Broker Buy long ORPOOL 16,000,000 OREGON STATE POOL 16,000, % Due KUG3 20,000,000 FEDERAL FARM CR BKS CONS ,016, Bank of A 1.180% Due EACV9 20,000,000 FEDERAL HOME LN MTG CORP 20,283, Morgan St 1.000% Due A4M1 20,000,000 FEDERAL NATL MTG ASSN 20,565, Deutch Ba 1.625% Due KYR5 15,000,000 FEDERAL FARM CR BKS CONS 15,003, Credit Su 0.500% Due G4H4 10,000,000 GENERAL ELECTRIC CAP CORP 10,210, Deutch Ba 2.800% Due ORPOOL 10,000,000 OREGON STATE POOL 10,000, % Due ,078, Deposit manfee Management Fee 7, manfee Management Fee 7, manfee Management Fee 7, , Interest CASH CASH % Due XTXH4 FEDERAL HOME LN BKS 130, % Due PR5 UNITED STATES TREAS NTS 46, % Due ORPOOL OREGON STATE POOL % Due CASH CASH % Due FM3R3 FEDERAL NATL MTG ASSN 131, % Due

14 WASHINGTON COUNTY TRANSACTION SUMMARY From To Trade Settle Call Date Date Cusip Quantity Security Date Amount Broker CASH CASH % Due ORPOOL OREGON STATE POOL % Due XUK93 FEDERAL HOME LN BKS 330, % Due XX7F8 FEDERAL HOME LN BKS 162, % Due UAF7 MORGAN STANLEY FDIC GTD 200, % Due Q9 FEDERAL HOME LN BKS 46, % Due ORPOOL OREGON STATE POOL 1, % Due ,049, Deliver in long cash Cash Account 9,999, cash Cash Account 4,747, cash Cash Account 40,972, cash Cash Account 1, cash Cash Account 15,075, ,797, Deliver out long cash Cash Account 9,999, cash Cash Account cash Cash Account 16,130, cash Cash Account 10,469, cash Cash Account 15,074, ,674, Purchased Accrued Interest KUG3 FEDERAL FARM CR BKS CONS , % Due

15 WASHINGTON COUNTY TRANSACTION SUMMARY From To Trade Settle Call Date Date Cusip Quantity Security Date Amount Broker EACV9 FEDERAL HOME LN MTG CORP 5, % Due A4M1 FEDERAL NATL MTG ASSN 118, % Due KYR5 FEDERAL FARM CR BKS CONS 1, % Due G4H4 GENERAL ELECTRIC CAP CORP 57, % Due , Sell long XTXH4 11,000,000 FEDERAL HOME LN BKS 11,000, MATURITY 1.625% Due XTXH4 5,000,000 FEDERAL HOME LN BKS 5,000, MATURITY 1.625% Due ORPOOL 5,000,000 OREGON STATE POOL 5,000, % Due FM3R3 15,000,000 FEDERAL NATL MTG ASSN 15,000, CALLED 1.750% Due ORPOOL 11,000,000 OREGON STATE POOL 11,000, % Due UAF7 10,000,000 MORGAN STANLEY FDIC GTD 10,000, MATURITY 2.000% Due UAF7 10,000,000 MORGAN STANLEY FDIC GTD 10,000, MATURITY 2.000% Due Q9 15,000,000 FEDERAL HOME LN BKS 15,000, CALLED 1.250% Due ,000,

16 WASHINGTON COUNTY CASH PORTFOLIO HOLDINGS September 30, 2011 Security Call Pur Amort Book Market Market Market Accrued Total Unrealized Pct. Dur Dur Symbol Quantity Security Date Date Price Yield Price Yield Value Interest Value Gain/Loss Assets Mat Call CERTIFICATE OF DEPOSITS CD ,000,000 UMPQUA BANK CD ,000, , ,003, % Due TREASURY NOTES LT5 25,000,000 UNITED STATES TREAS NTS ,018, , ,122, , % Due TOTAL 30,000, ,018, , ,125, , Special note: At this time AXYS does not correctly calculate book or market yields for variable rate, floating rate, or mortgage backed securities.

17 Washington County Strategic Review September 30, 2011 Policy Compliance Report (Market Values) Overall Portfolio Structure Investment Strategy Range Neutral Actual Low High Market Value Allocation Allocation Position Liquid Component $75,000, $220,000, $110,648, % 27.6% 7.6% Investment Component (Core) $200,000, $225,000, $290,247, % 72.4% -7.60% Total $400,896, Policy Requirement Actual Portfolio Within Limits Weighted Average Maturity (In Years) < Yes Under 1 Month > 10% 20.06% Yes Under 1 Year > 25% 47.16% Yes Under 5 Years 100% % Yes Policy Maximum Allocation Asset Allocation Strategy Current Portfolio Allocation Market Value Amount Available to Invest Within Limits US Treasuries 100% 19.99% $80,156, $320,739, Yes Federal Agency 100% 56.16% $225,128, $175,767, Yes FHLB 50% 22.24% $89,159, $111,288, Yes FNMA 30% 10.13% $40,598, $79,670, Yes FHLMC 30% 12.58% $50,424, $69,844, Yes FFCB 50% 11.21% $44,945, $155,502, Yes Other GSEs 10% 0.00% $0.00 $40,089, Yes TLGP Debt Obligations 30% 0.00% $0.00 $120,268, Yes Corporate Bonds (AA-/Aa3 or better) 20% 2.54% $10,172, $70,007, Yes Commercial Paper (A-1/P-1) 10% 0.00% $0.00 $40,089, Yes Bank Deposits and Certificates of Deposit 10% 2.23% $8,929, $31,160, Yes State Pool ORS Maximum or 100% 19.08% $76,500, $11,278, Yes Municipal Obligations (OR, CA, ID, WA) 10% 0.00% $0.00 $40,089, Yes Total % $400,887, ORS Maximum (=normal maximum x2) $87,779, *Investment Policy Note: Section states; "Due to fluctuations in the aggregate surplus funds balance, maximum percentages for a particular issuer or investment type may be exceeded at a point in time subsequent to the purchase of a particular issuer or investment type may be exceeded at a point in time subsequent to the purchase of a particular security. Securities need not be liquidated to realign the portfolio; however, consideration should be given to this matter when future reinvestments occur." Policy Review Date: October 2010 Davidson Fixed Income Management

18 Changes in Investment/Liquidity Allocation 100% 80% 60% 40% Invested Component Liquid Component 20% 0% Neutral Target June 30, 2010 September 30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 Davidson Fixed Income Management

19 Current Sector Allocation 0% Changes in Sector Allocation 33% 17% 15% 20% 15% US Treasury FNMA FHLMC FHLB FFCB TLGP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Neutral Target June 30, 2010 September 30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 Cash/Pool Corporates TLGP FFCB FHLB FHLMC FNMA US Treasury Davidson Fixed Income Management

20 Callable Allocation vs. Neutral Target Changes in Callable Allocation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Callables Non-Callables 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Neutral Target June 30, 2010 September 30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 Neutral Target Current Weighting Callables Non-Callables Davidson Fixed Income Management

21 Changes in Maturity Distribution Effective Duration 100% 80% 60% 40% 20% 0% ML Treas 0 3 Benchmark June 30, 2010 September 30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 Under 1 Year 1 3 Years 3 5 Years Effective Duration Davidson Fixed Income Management

22 Washington County Strategic Review September 30, 2011 Core Fund Yield Curve Strategy (Market Values) Commentary DFIM will keep the duration close to the benchmark duration Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Portfolio Effective Duration Year Note Yield Year Note Average Yield Current Benchmark Duration (T 0-3) Low Range Value (75% of Benchmark) High Range Value (125% of Benchmark) Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Portfolio Effective Duration 2 Year Note Yield 2 Year Note Average Yield Current Benchmark Duration Low Range Value (75% of Benchmark) High Range Value (125% of Benchmark) Davidson Fixed Income Management

23 NOTIFICATION OF FEES Washington County Quarterly Management Fee for the period beginning July 1st, 2011 ending September 30th, 2011 Fee is calculated and billed quarterly as stated and agreed to in the contract. Account Name Period End Market Value (with accrued) Fee Washington County Core Fund Washington County Cash Fund $ $ 301,120, ,125, $ 22, This is not a bill Total Charged to Account: $ 22, This information reflects quarterly fee calculations, which is being provided per regulatory directive. It is the SEC's position that the account's custodian will not determine if the fee is calculated properly. It is the client's responsibility to verify the accuracy of the fee calculations. Thank you for your business.