City and County of Denver

Transcription

1 Sr. s I. Economic Commentary Capital markets rallied after the U.S. presidential election in November. The move in capital markets was driven by heightened expectations for fiscal stimulus in light of president elect Trump s victory. Positive economic data on unemployment and wage growth, along with the shift in Federal Reserve policy helped propel equity prices higher, fixed income prices lower, and U.S. treasury yields significantly higher. Global factors including steeper yield curves in Japan and Germany, and an expectation for ongoing stimulus from the European Central Bank also continue to influence U.S. Treasury yields. The Federal Open Market Committee (FMOC) voted to increase the federal funds rate by 25 basis points at the mid-december meeting. The Fed noted that economic activity expanded at a moderate pace and labor market trends improved but inflation remained below target. The message continued to imply that future rate increases would be gradual and depend on variable economic conditions. Payrolls grew at a monthly average of 165,000 for the quarter, edging the unemployment rate down to 4.7%. Wage increases ticked higher, encouraging workers to re-enter the workforce while sending the participation rate modestly higher. Manufacturing data also rebounded, indicating slow expansion, with the ISM Index value rising to 54.7 by the end of the quarter. An ISM Index value above 50 is viewed as expansionary, signaling potential growth during the 2017 calendar year. The housing sector continued to grow as permits and existing home sales continued inline with consensus. Tight inventory, low mortgage rates, and population growth will likely keep pressure on elevated pricing. New asset class exposure continued to facilitate a modest increase in incremental earnings for the portfolios. Allocation to credit securities, collateralized mortgage obligations, and asset-backed securities was expanded during the fourth quarter, with further asset class purchases expected during the 2017 calendar year. The City s investment portfolio outperformed the stated benchmark indices as the 10-year U.S. Treasury yield increased to 2.44% from 1.59% the prior quarter. s Market Value Managed s $2,973,662,273 Special Purpose s $54,078,719 Escrows* $0 Finance Administrated $3,027,740,992 *See page 9 for additional details. 1

2 Sr. s II. Consolidated $2,495,872,339 Total Return (Not Annualized) 1-Month 3-Month YTD Total Return 0.02% -0.89% 1.43% Blended Benchmark (TR) 0.03% -0.99% 1.27% Excess Return -0.01% 0.10% 0.16% Current Return (Not Annualized) 1-Month 3-Month YTD Total Return 1.94% 1.69% 1.57% Blended Benchmark (CR) 1.49% 1.19% 1.07% Excess Return 0.45% 0.50% 0.50% Year-to-Date earnings on a current return basis for the Consolidated were $40,436,460. The 1-5 Year Strategy Blended Benchmark consists of 67.50% BofA Merrill Lynch 1-5 Year US Treasury & Agency Index, % BofA Merrill Lynch 1-5 Year AAA-A US Corporate Index, 7.50% BofA Merrill Lynch AAA US Asset Backed Securities, 5.00% BofA Merrill Lynch 0-3 Year US Agency CMOs and 2.50% BofA Merrill Lynch 3-5 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-5 Year US Treasury & Agency Index. The 1-10 Year Strategy Blended Benchmark consists of 65.00% BofA Merrill Lynch 1-10 Year US Treasury & Agency Index, % BofA Merrill Lynch 1-5 Year AAA-A US Corporate Index, 5.00% BofA Merrill Lynch AAA US Asset Backed Securities, 7.50% BofA Merrill Lynch 0-10 Year US Agency CMOs and 7.50% BofA Merrill Lynch 0-10 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-10 Year US Treasury & Agency Index. Factors Affecting & Management Strategies Chandler s proprietary Horizon Model that the City utilizes as a tool to meet or outperform the benchmarks over time (the Merrill Lynch Treasury/Agency 1-5 year index and the Merrill Lynch Treasury/Agency 1-10 year index) are revised on a regular basis, reflecting the volatility of both bond market interest rates and interest rate curve movements. The City evaluates the portfolios each time a new Horizon Model is received. The key variables subject to potential revision as a result of Horizon Model changes include duration, composition and structure. The portfolios have been allocated with a shorter benchmark duration within the 1-5 and 1-10 year strategies. The City and Chandler Asset Management believe the risk to principal far outweighs the potential income gain from extending the duration of the strategies in the event interest rates do rise further. Safety of principal is paramount in investing the City s funds. Corporate Bonds, Collateralized Mortgage Obligations, Mortgage-Backed Securities, and Asset-Backed Securities are new asset classes approved by voters for implementation in 2014 by an amendment to the City Charter. Purchases of the new asset classes continued to increase as a percentage of total composition during the fourth quarter of The CCD investment team has transitioned to the official Consolidated benchmarking indices, commencing January 1, The transition represents a shift from a single BofA Merrill Lynch Treasury/Agency index, to multiple BofA Merrill Lynch indices, creating a static weighted blended benchmark. A total of two new benchmarks have been created, to more closely reflect the portfolio duration and asset allocation constraints. 2

3 Consolidated Composition Characteristics Average Duration 2.43 Average Average Duration Coupon 1.97% 2.43 yrs Average Yield to Maturity 1.56% Average Average Coupon Rating (S&P) 1.97% AA+ Average Life 2.61 Characteristics Average Yield to Maturity 1.56% A, 4.2% AA, 63.1% Credit Quality AAA, 32.7% Average Rating (S&P) Average Life AA yrs AAA AA A Sr. CMO, 4.2% Muni, 4.2% ABS, 7.2% Supranational, 8.3% U.S. Corporates, 17.5% Asset Allocation LGIP, 5.7% MBS, 2.3% Commercial Paper, 0.4% U.S. Agency, 30.4% U.S. Treasury, 19.8% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Maturity Distribution 32.5% 22.8% 24.0% 8.1% 4.0% 6.6% 2.0% s The Consolidated s net assets decreased by approximately $209 million during the fourth quarter of On December 30th, 2016, net assets were $2.50 billion, compared to $2.70 billion on September 30 th, 2016, as expenditures exceeded inflows. The decrease in net assets was primarily due to cyclical debt service payments, consistent with historical fourth quarter activity. A large portion of debt service payments by the City occur during the fourth quarter of the year. The weighted average maturity (WAM), an aggregate portfolio measure of total years remaining until the maturity of all underlying holdings, ended modestly lower during the fourth quarter. The WAM consistently decreased consistently through the quarter, as the volume of tax inflows decreased. While modestly short of the benchmark duration, rebalancing and securities purchase activity during the fourth quarter extended duration more closely with the model and benchmark. 3

4 Management Environment 2.5 Bloomberg United States Financial Conditions Index Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 U.S. Tresury Yield Curve As of 12/30/2016 As of 6/30/2016 As of 12/31/ Sr. Yield M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y Years s The Federal Reserve retained the Fed Funds rate of 0.50% % during the fourth quarter of Consensus forecasting was flat at to 0.75% for the end of the first quarter of The one month LIBOR rate was 0.77% as of December 31st, 2016, an increase of 31% since September 30th, As of December 30 th, 2016, the yield of the two year Treasury index was 1.19%, and the five year Treasury index was yielding 1.93%. As of September 30 th, 2016, the two year Treasury index was yielding 0.72%, and the five year Treasury index was yielding 0.76%. The median of economists most recent forecasts is for a 1.20% two year Treasury yield at the end of the first quarter of 2017 and a 1.37% yield at the end of the second quarter of The shape of the yield curve has significantly steepened, as compared to the previous quarter. The spread between the two year Treasury index and the ten year Treasury index was 126 basis points on December 30th, 2016, compared to 84 basis points September,

5 Consolidated Top Holdings Top 5 Credit Holdings Issuer Market Value % of Industry JP Morgan 74,273, % Financials Toyota Motor Company 64,736, % Automobiles John Deere Capital Corp 53,902, % Industrials American Honda Finance 49,677, % Automobiles Microsoft 45,849, % Technology Total 288,439, % *Credit holdings include commercial paper, asset-backed securities, and corporate bonds. Sr. *Data represents holdings on the aggregate level. Top Agencies in Issuer Book Value % of FNMA 220,179, % FHLB 216,774, % FHLMC 189,448, % TVA 85,042, % FFCB 62,470, % FAMCA 22,359, % 796,273, % *Data represents holdings on the aggregate level. s 5

6 III. Airport Reserve $438,539,060 Total Return (Not Annualized) 1-Month 3-Month YTD Total Return -0.02% -1.62% 1.61% Blended Benchmark (TR) 0.00% -1.77% 1.45% Excess Return -0.02% 0.15% 0.16% Current Return (Not Annualized) 1-Month 3-Month YTD Total Return 3.36% 2.63% 2.36% Blended Benchmark (CR) 1.81% 1.42% 1.35% Excess Return 1.55% 1.21% 1.01% Sr. Year-to-Date earnings on a current return basis for the Reserve were $10,053,834. The 1-5 Year Strategy Blended Benchmark consists of 67.50% BofA Merrill Lynch 1-5 Year US Treasury & Agency Index, % BofA Merrill Lynch 1-5 Year AAA-A US Corporate Index, 7.50% BofA Merrill Lynch AAA US Asset Backed Securities, 5.00% BofA Merrill Lynch 0-3 Year US Agency CMOs and 2.50% BofA Merrill Lynch 3-5 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-5 Year US Treasury & Agency Index. The 1-10 Year Strategy Blended Benchmark consists of 65.00% BofA Merrill Lynch 1-10 Year US Treasury & Agency Index, % BofA Merrill Lynch 1-5 Year AAA-A US Corporate Index, 5.00% BofA Merrill Lynch AAA US Asset Backed Securities, 7.50% BofA Merrill Lynch 0-10 Year US Agency CMOs and 7.50% BofA Merrill Lynch 0-10 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-10 Year US Treasury & Agency Index. The Airport Bond Reserve portfolio has a maximum maturity constraint of 10 years. On an ongoing basis, liquidity is generated from income received from the portfolio holdings, as well as from periodic bond calls of Agency securities. All income received during the year is swept out of this portfolio into the Airport Operating funds contained in the Consolidated (subject to ongoing adjustments to the required portfolio balance stated in the bond indenture). The CCD investment team has transitioned to the official Airport Reserve benchmarking indices, commencing January 1, The transition represents a shift from a single BofA Merrill Lynch Treasury/Agency index, to multiple BofA Merrill Lynch indices, creating a static weighted blended benchmark. A total of two new benchmarks have been created, to more closely reflect the portfolio duration and asset allocation constraints. s 6

7 Airport Reserve Composition Sr. s 7

8 IV. Workers Compensation Composition $39,250,874 Sr. WC liabilities have a much longer term expected average duration than most other funds managed by the City. For this reason, management has determined that it is prudent to extend the duration of the invested assets associated with these obligations. A combination of cash and securities were transferred from the Consolidated to the newly established WC portfolio in August An allocation to cash equivalents appropriate to fund the liquidity needs of the unit was set aside (and is monitored and adjusted monthly), and the balance of the funds were invested in treasury, corporate, agency, municipal, and structured fixed income securities. The annualized current return for the fourth quarter of 2016 was 3.04%. Year-to-Date earnings on a current return basis for the Worker s Compensation were $1,157,507. s 8

9 Sr. V. Special Purpose s $54,078,719 In addition to the actively managed investments, the has established three additional portfolios. The FAA (Federal Aviation Administration) Escrow Defeasance portfolio was established to economically defease outstanding airport bonds. The Bill Daniels Cableland Trust portfolio was established to fund the annual maintenance expenses for Cableland, a facility donated to the City. These portfolios have been authorized by the Policy to contain longer term securities and higher per issuer constraints within the Consolidated and Reserve portfolios. The majority of the investments in these portfolios were purchased in market environments that featured much higher interest rates than those currently available. The investment income and principal of the three portfolios are pledged for specific purposes. Market Value 4th Qtr Current Return 2016 YTD Earnings FAA Escrow Account $50,421, % $2,593,514 Bill Daniels Cableland Trust $3,657, % $260,972 Escrows also manages certain investments held in escrow accounts at external financial institutions on behalf of Denver International Airport (primarily representing equipment leases). As of December 31 st, 2016, there was an outstanding balance of $0. The U.S. Treasury STRIPS contained in escrow matured on November 15 th, The proceeds from this maturity were used for debt service payment on refunded DIA Series 2006A Bonds. Policy The City operates under a written Policy, a copy of which can be obtained on the City s website ( or by contacting the at s 9

10 STATEMENT OF REVIEW OF PORTFOLIO PERFORMANCE Chandler Asset Management, a Registered Advisor with the Securities and Exchange Commission and noticed filed in the State of Colorado, as Independent Consultant to the City and County of Denver, periodically reviews the City s portfolio and represents the following: 1. The investments, as of December 31, 2016, are authorized by the Denver City Charter and are in compliance with the City s Policy; 2. Upon review of the City s Report, and relying on the independent market pricing provided by Interactive Data Corporation, the City s securities appear to be priced accurately. Chandler Asset Management has performed no independent verification of the securities pricing provided herein; and 3. performance as reported in the City s attached portfolio Report, for the period ending December 31, 2016, appears to be accurately reflected. Signed this 1 st day of February 2017 Nicole Dragoo COO, Chief Compliance Officer 6225 Lusk Boulevard San Diego, CA Phone chandlerasset.com