City and County of Denver

Transcription

1 Report 03/31/2017 s: Sr. I. Economic Commentary Capital markets in the first quarter of 2017 were modestly flat when compared to the significant rally in the fourth quarter of Market expectations for fiscal stimulus from Congress began to lose steam as participants realized the stimulus may be delayed or less robust than anticipated. As a result, U.S. treasury yields flattened over the past three months. The Federal Open Market Committee (FOMC) voted to increase the federal funds rate by 25 basis points at the mid-march meeting. The Fed noted that economic activity expanded at a moderate pace and the labor market remains solid. Inflationary measures are moving closer to the Federal Reserve s target of 2.0%. The Fed s message continued to imply that monetary policy will remain accommodative and future rate increases would be gradual and depend on variable economic conditions. Payrolls were significantly lower than expected in March, up 98,000 versus the consensus forecast of 175,000. January and February payrolls were revised down by 38,000. On a trailing 3-month payrolls increased by an average of 178,000 per month. The unemployment rate fell to 4.5% in March. On a year over year basis wages were up 2.7%. Labor market data suggests the economy is at or near full employment. Manufacturing data indicated continued expansion, with the ISM Index value rising to 57.2 by quarter end. An ISM Index value above 50 is viewed as expansionary, signaling steady growth for the remaining 2017 calendar year. The housing sector continued to grow as single family starts were up 6.2% year over year. Home prices were up 5.7% in January mainly due to tight inventory. New asset class exposure continued to facilitate a modest increase in incremental earnings for the portfolios. Allocation to credit securities, supranational securities, and assetbacked securities was expanded during the first quarter, with further asset class purchases expected during the remaining 2017 calendar year. The City s investment portfolio outperformed the stated benchmark indices as the 10-year U.S. Treasury yield decreased to 2.39% from 2.44% the prior quarter. s s Market Value Managed s $3,108,259,034 Special Purpose s $54,416,279 Escrows* $0 Finance Administrated $3,162,675,313 *See page 9 for additional details. 1

2 Report 03/31/2017 s: Sr. s II. Consolidated $2,647,874,688 Total Return 1-Month 3-Month YTD Total Return 0.08% 0.48% 0.48% Blended Benchmark (TR) 0.06% 0.44% 0.44% Excess Return 0.02% 0.04% 0.04% Current Return 1-Month 3-Month YTD Current Return 1.71% 1.64% 1.64% Blended Benchmark (CR) 1.44% 1.48% 1.48% Excess Return 0.27% 0.16% 0.16% Year-to-Date earnings on a current return basis for the Consolidated were $10,466,993. 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 first 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 Report 03/31/2017 Consolidated Composition s: Sr. The Consolidated s net assets increased by approximately $153 million during the first quarter of On March 31 st, 2017, net assets were $2.64 billion, compared to $2.50 billion on December 31 st, 2016, as inflows exceed expenditures. The increase in net assets was primarily due to cyclical cash inflows, consistent with historical first quarter activity. A large portion of tax revenue for the City occurs during the first half 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 first quarter. The WAM consistently decreased throughout the quarter, as the portfolio exposure to commercial paper increased for asset liability matching throughout While modestly short benchmark duration, rebalancing and securities purchase activity during the first quarter extended duration more closely with the model and benchmark. s 3

4 Report 03/31/2017 Management Environment 2.5 Bloomberg United States Financial Conditions Index s: Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 U.S. Tresury Yield Curve As of 3/31/2017 As of 9/30/2016 As of 3/31/ Sr. Yield M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y Years s The Federal Reserve raised the Fed Funds rate by 25 basis points to a range of 0.75%-1.00% during the first quarter of The Fed is projecting a 1.4% fed funds rate by the end of this year, which implies two more 25 basis point hikes. The one month LIBOR rate was 0.98% as of March 31st, 2017, an increase of 21 basis points from December 30 th, As of March 31 st 2017, the yield of the two-year Treasury index was 1.25%, and the fiveyear Treasury index was yielding 1.92%. As of December 30 th, 2016, the two-year Treasury index was yielding 1.19%, and the five-year Treasury index was yielding 1.93%. The median of economists most recent forecasts is for a 1.52% two-year Treasury yield at the end of the second quarter of 2017 and a 1.66% yield at the end of the third quarter of The shape of the yield curve has flattened, as compared to the significant steepening in the previous quarter. The spread between the two-year Treasury index and the ten-year Treasury index was 117 basis points on December 30th, 2016, compared to 126 basis points December, 30 th

5 Report 03/31/2017 Consolidated Top Holdings s: Top 5 Credit Holdings Issuer Market Value % of Industry Coca-Cola Company 91,569, % Consumer Nordea Bank 74,548, % Financial Bank of Tokyo Mitsubishi NY 74,414, % Financial Toyota Motor Company 61,175, % Automobiles JP Morgan Chase 54,339, % Financial Total 356,048, % *Credit holdings include commercial paper, asset-backed securities, and corporate bonds. Sr. *Data represents holdings on the aggregate level. Top 5 Agency Holdings Issuer Book Value % of FNMA 248,584, % FHLB 202,117, % FHLMC 161,097, % TVA 84,005, % FFCB 70,674, % 766,478, % *Data represents holdings on the aggregate level. s 5

6 Report 03/31/2017 s: Sr. III. Airport Reserve $422,045,046 Total Return 1-Month 3-Month YTD Total Return 0.04% 0.55% 0.55% Blended Benchmark (TR) 0.06% 0.56% 0.56% Excess Return -0.02% -0.01% -0.01% Current Return 1-Month 3-Month YTD Current Return 2.59% 2.26% 2.26% Blended Benchmark (CR) 1.85% 1.86% 1.86% Excess Return 0.74% 0.40% 0.40% Year-to-Date earnings on a current return basis for the Reserve were $2,052,405. 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 Report 03/31/2017 Airport Reserve Composition s: Sr. s 7

8 Report 03/31/2017 IV. Workers Compensation Composition $38,339,300 s: 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 first quarter of 2017 was 2.54%. Year-to-Date earnings on a current return basis for the Worker s Compensation were $230,452. s 8

9 Report 03/31/2017 s: Sr. V. Special Purpose s $54,416,279 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 1st Qtr Current Return 2017 YTD Earnings FAA Escrow Account $50,594, % $647,810 Bill Daniels Cableland Trust $3,821, % $45,771 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 March 31 st, 2017, 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 March 31, 2017, 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 March 31, 2017, appears to be accurately reflected. Signed this 28 th day of April 2017 Nicole Dragoo COO, Chief Compliance Officer 6225 Lusk Boulevard San Diego, CA Phone chandlerasset.com