Evaluating Your Investment Policy for Today and the Future NYCE May 29, 2013

Transcription

1 Evaluating Your Investment Policy for Today and the Future NYCE May 29, 2013 Presenters: David A. Miller, SVP & Treasurer, Centerline Capital Group John Olivo, Portfolio Manager, GSAM David Frontero, US Liquidity Sales, GSAM

2 Table of contents Introduction A. General Themes Impacting Liquidity Investors B. The Economic Environment Today C. Investment Policy Considerations Moderated Q&A Session 2

3 Introduction Goldman Sachs Asset Management The Environment Today Low Rates leave investors searching for Yield. U.S. multinational corporations are holding record levels of cash and seeking guidance on how to enhance return in a manner consistent with their risk tolerance especially given continued low rates. Globalization of Cash Needs. As multinational companies expand into economies with local currency controls and gather increasing balances in overseas corporate profits, the issues of trapped cash and non- U.S. dollar investment options have become increasingly important. Potential for Additional Regulation. Additional regulatory reform for money market funds in the U.S. and in Europe could occur in 2013, with the specifics and order of reforms still unclear. Negative Yield Environment in Europe. Given the low to negative yields in short-term investments in Europe, money market fund investing remains challenging, with funds limiting subscriptions or closing. Asset Scarcity. Central bank balance sheets in the U.S. and Europe have expanded leaving few assets available for investors. Additionally, the supply of money market suitable investments has declined while cash continues to build. As of April This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 3

4 A. General Themes Impacting Liquidity Investors

5 Rates have remained zero bound since the global recession /31/2008 3/29/ Federal Funds Effective Rate - US US 3 Month LIBOR US Government 12 Month Yield US Government 2 Year Yield German 2 Year Yield Interest rates are marginally lower across the U.S. sovereign curve while core European curves have rallied on flight-to-quality concerns Source: Bloomberg. As of March 29, This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 5

6 Fund Assets (millions) Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 (in millions) Goldman Sachs Asset Management Cash and short term balances have continued to grow as uncertainty has remained high US corporate cash* (S&P 500 non-financials) as a percentage of assets 12% 11% 10% 9% United States Commercial Bank Deposits $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 8% 7% 6% Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 Strong demand as evidenced by positive fund flows into short duration bond funds. Supply/demand imbalance as increased levels of cash are met with diminishing net supply as regulations and central bank actions remove bonds from the market. Short Duration Mutual Fund Flows 250, , , ,000 50,000 - (50,000) (100,000) ICI Short Term Gov't ICI Short Term Corporate ICI Short Term National Muni ,000 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) (30,000) (40,000) Source: J.P. Morgan, Bond Buyer, Federal Reserve. As of March 29, This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 6

7 Goldman Sachs Asset Management While cash balances have increased the supply landscape has changed 4,500, ,000, ,500, ,000, Commercial Paper Outstanding Asset-backed Commercial Paper Outstanding Domestic Financial Commercial Paper Outstanding Foreign Financial Commercial Paper Outstanding Domestic Nonfinancial Commercial Paper Outstanding Foreign Nonfinancial Commercial Paper Outstanding 2,500, ,000, ,500, ,000, , The Commercial Paper landscape has changed meaningful after the financial crisis as domestic issuance and ABCP has fallen while European non financials have increased As of March 31, Source: Bloomberg. All values are seasonally adjusted. 7

8 There are fewer money market assets for purchase due to continued delevering by financial institutions and GSEs US money market supply forecast ($bn) Total MMkt Supply YE 2008 Feb-13 YE 2013 Exp Change T-Bills 1,867 1, (788) Treasury Coupon 681 1, Rep 2,808 3, Discos 1, (699) Agency Coupons (208) YE forecast Dom Fin CP (72) For Fin CP (18) Non Fin CP ABCP (310) 6000 Total MMkt Supply (excluding Treasuries) Yankee CDs (171) Bonds < 1Y (146) Total 9,610 9,257 8,168 (1,442) Total x Treas. 7,062 6,075 5,592 (1,470) Source: JPMorgan estimates, Federal Reserve, BBerg. As of March 29, The economic and market forecasts presented herein are based on proprietary models for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 8

9 1-3y credit supply is more limited than prior years Total short dated issuance; $bn Fixed Floating FRN new issuance by maturity (excludes gov t gtd); $bn y to 18m 2y 3y FRN new issuance by industry and ratings (S&P); $bn Industry FY 2011 FY 2012 FY 2013 Ratings FY 2011 FY 2012 FY 2013 Banks - US 8% 3% 12% AAA 10% 0% 0% Banks - CA 24% 39% 27% AA 51% 66% 59% Banks - Frgn 48% 38% 34% A 35% 30% 39% Captive Fin 7% 10% 9% BBB 4% 3% 2% Corporates 13% 10% 18% Asset Mgr 0% 0% 0% Source for all graphs: J.P. Morgan and Bloomberg as of March 5, This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 9

10 B. The Economic Environment Today Goldman Sachs Asset Management

11 Uncertainty has restrained growth Elevated uncertainty in the last two years has kept businesses cautious Index 300 Economic Policy Uncertainty Index % 2.0 Business Investment (Contribution to GDP) Debt Ceiling Debate 1.5 Structures Equipment and Software 200 1st Iraq War 9/11 Lehman Bankruptcy Fiscal Cliff 1.0 Non-Residential Investment Policy Uncertainty Index Period Average Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Sources: Scott Baker, Nicholas Bloom and Steven J. Davis at as of March Bloomberg for capital goods data, as of November The Policy Uncertainty index attempts to quantify uncertainty based on three components: 1) newspaper coverage of policy-related economic uncertainty in 10 large US newspapers; 2) the number of federal tax code provisions set to expire in future years; and 3) disagreement among economic forecasters, based on the dispersion of forecasts in the Philadelphia Fed s survey of economic forecasters, as a proxy for uncertainty. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 11

12 The Fed is likely to remain accommodative Switch from calendar-based to data-based guidance still points to 2015 before rate hike The Fed has set two main thresholds for raising rates: Unemployment below 6.5%, or Inflation above 2.5%. Fed Central Tendency forecasts suggest policymakers do not expect to hit either threshold before late 2014 % 11 Threshold 1: Unemployment Below 6.5% 4.0 % Threshold 2: PCE Inflation Above 2.5% Actual 6.5% Fed Forecast Range Actual 2.5% Fed Forecast Range Source: GSAM, Federal Reserve. As of December The economic and market forecasts have been generated by GSAM for informational purposes as of December They are based on proprietary models and there can be no assurance that the forecasts will be achieved. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 12

13 The Fed s balance sheet expansion is likely to continue to grow and keep yields low We do think that these policies can bring interest rates down not just Treasury rates, but a whole range of rates, including mortgage rates and rates for corporate bonds and other types of important interest rates Fed asset growth assuming $85b/month in asset purchases $, trillions 5.0 Fed Assets (Actual) -- Fed Chairman Ben Bernanke Sept. 13, Plus $85b/month Source: Federal Reserve, Bloomberg, GSAM. As of March This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 13

14 Agency Debt US Aggregate 10-Year Treasury Agency MBS CMBS US IG Corporates EM External EM Corporates EMD Local US HY (BB-rated) US Bank Loans Non-Agency MBS Goldman Sachs Asset Management Central bank policy has pushed yields on traditional core fixed income sectors to very low levels One of the Fed s stated goals is to bring down interest rates across the yield spectrum by using rate guidance and asset purchases to lower expected returns on core sectors and push investors into riskier sectors. 12.0% 10.0% 8.0% Yield (lef t) Spread (right) Yield on 12/31/2011 (lef t) % % % % 0 Traditional Core Sectors Plus Sectors As of December 31, 2012 Source: Barclays, GSAM. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 14

15 GDP (% change, year-over-year) Goldman Sachs Asset Management But markets are calm and the private sector is growing Low implied volatility suggests reduced uncertainty, and growth has held up relatively well VIX Index Implied Volatility Equities (left axis) Interest Rates (right axis) MOVE Index % 4% 2% Private vs Public Sector GDP Growth Private Sector Public Sector % % 20-4% % 0 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13-8% Source: GSAM, Bloomberg, Merrill Lynch. Implied volatility as of Feb. 7, GDP as of Q4 12. The economic and market forecasts have been generated by GSAM for informational purposes as of December They are based on proprietary models and there can be no assurance that the forecasts will be achieved. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 15

16 Unscrambling money market reform Goldman Sachs Asset Management A X M O F S O C B I K J W Q B S C E U T K L I N F M U L P F N D I C N C A M C C O O F A O C E L S Y C S N M S P C E D E B W M T O A T C H F A E G U Z C L W E A P W G X W E F J V W B Q B C S M Organizations Proposing a Framework for Reform IOSCO - International Organization of Securities Commissions FSB Financial Stability Board FSOC Financial Stability Oversight Council PWG President s Working Group SEC Securities and Exchanges Commission EC European Commission ESMA European Securities and Markets Authority ESRB European Systemic Risk Board D A H E S R B A Source: GSAM. As of April This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 16

17 C. Investment Policy Considerations Moderated Q&A Session

18 The foundation of an Investment Policy should consider: Fiduciary Liquidity Investment Objectives Strategic Asset Allocation Communication Investment Policy Permitted Investments Concentration Limits Accounting Reporting Tax Policy Implementation For Illustrative purposes only. 18

19 An Investment Policy Statement should begin with a statement of objectives 1. An introduction to the Investment Policy identifies the mission and purpose of the Investment Policy Statement (IPS) and scope of the document. Investment Policy Investment Objectives 2. Portfolio objectives for consideration: Safety of principal, liquidity, duration, and performance targets An appropriate strategic asset allocation which identifies the regulatory environment, legal, accounting, and tax constraints, and client s risk tolerance. Objectives should be specific: i.e.: If the duration of the portfolio is less than 2 years, the return target should be consistent with the strategic asset allocation 19

20 Identifying and segmenting your cash is important Investment Policy Liquidity The Investment Policy should define how cash is viewed globally across the organization: Where is liquidity located? How much cash is required on a regional level? Is my cash trapped or subject to delay / limitations for repatriation? Other liquidity considerations (access to financing for large cash outlay)? Tertiary Liquidity For Illustrative purposes only. 20

21 Defining permitted investments is critical; understanding risk is equally as critical: Investment Policy Permitted Investments Examples of permitted investments: Sovereign Obligations (e.g. German bunds, UK gilts, US treasuries) Obligations which are implicitly or explicitly guaranteed by the government Supranationals and Foreign Agencies Short-term investments (e.g. money market funds, bank deposits, commercial paper, certificates of deposit, government debt, time deposits, repurchase agreements) Corporate Bonds Asset Backed Securities (e.g. auto, credit card, student loan) Mortgage Backed Securities (e.g.us agency mortgage backed, UK prime mortgages) Covered Bonds (e.g. Pfandbriefe) Rule 144A Securities Local Government Securities Equities (private and public) Prohibited securities and asset categories should be identified Considerations should include the risk of the securities and sectors as well as local laws, regulations, and/or restrictions 21

22 Along with concentration limits which help define the risk profile Investment Policy Concentration Limits Identify: Minimum short and long term credit ratings by eligible security type Credit quality concentration limits: i.e.: No more than 10% of the outstanding portfolio may be invested in securities rated between A+/A1/A+ Rules around split rated securities should be identified (lowest, highest, middle of three) Maximum maturity limits, however, should be flexible enough to capitalize on new issues and securities which trade based on average life rather then legal final maturity Concentration limits should be established for sectors and industry groups Maximum exposures to issues and issuers Consideration should be given for grouping short and long term counterparty exposures Ability to track limits with existing systems 22

23 An Investment Policy should consider your company s tax and accounting framework Investment Policy Accounting Tax Policy The corporate accounting framework (IAS, US GAAP) should be broadly described and investments that are considered for the portfolio should be consistent with the framework Accounting requirements should be identified along with a description of the accounting schedules required and who will prepare the data External reporting implications should be discussed and understood (LT investments) External manager guidelines should be written with consideration given to accounting policy (realized gain/loss constraints) Accounting for derivatives and other hedging activities should be specified along with the documentation requirements to support such activity Tax constraints / opportunities should be identified 23

24 Fiduciary responsibilities should be identified Goldman Sachs Asset Management Investment Policy Fiduciary Identify: Delegation of authority Role of the Investment Committee of the Board of Directors Should they be responsible to amend, supplement or terminate the policy? Role of the CFO and/or Treasurer Has the Investment Committee delegated the authority to carry out the administration of the policy to the CFO/Treasurer? Should the CFO/Treasurer by responsible for recommending a strategic asset allocation, permitted investments, advice or education to the Investment Committee? Process for flagging and handling policy exceptions and changes External Asset Managers permitted? Who is responsible for hiring and terminating those managers? How are managers evaluated prior to their assignment and how are they evaluated after they have been hired? What are the frequency of manager reviews? Who is responsible for selecting the custodian for the balance sheet assets? 24

25 Some additional considerations Investment Policy Reporting Who is responsible / what is the frequency of reporting and policy compliance checks Use of portals, custodians and third party performance aggregators Record Retention Monthly account statements from each manager Internal reports Summary performance reports Manager contracts Investment guidelines Policies for storing critical documents Operational Risk policies Disaster Recovery What policies should be identified to ensure business continuity for critical organizational functions? 25

26 What approach works best for my organization? Goldman Sachs Asset Management Investment Policy Implementation Benefits of managing our assets using internal vs. external management: Does our risk management framework support complex strategies? Does our risk management align with the strategic objectives for the portfolio? Shareholder transparency, optimize capital & liquidity, financial accounting concerns, investment losses, changing market practices, business continuity How do we build in-house expertise across different asset classes and evaluate our performance? Benefits of a separate account vs. a fund structure: Customized investment risk Increase transparency leading to improved risk management (counterparty & market exposures) Ability to manage liquidity while taking into consideration liabilities 26

27 Investment Policy - Observations Goldman Sachs Asset Management Cash segmentation tiering cash as primary /strategic and secondary/reserve provides diversification benefits and return opportunities. Consider not only cash balances today but consider future cash projections and build an investment policy that can accommodates change. Treat the task of updating your Investment Policy as a learning experience markets are dynamic and risks may be meaningfully different across assets that appear similar. Consider counterparty risk holistically across the organization. Leverage technology. Consider permitting a wide range of investments in the policy to accommodate different market environments and regional preferences but also to build relationships across the capital markets. Identify local nuances to ensure your global investment policy captures regional differences. As of April This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. 27

28 Additional information Goldman Sachs Asset Management THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. Index Benchmarks Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of failed or closed hedge funds may mean that each index overstates the performance of hedge funds generally. The portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk. This material has been prepared by GSAM and is not a product of Goldman Sachs Global Investment Research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current and GSAM has no obligation to provide any updates or changes. It should not be relied upon in making an investment decision. Portfolio Holdings may not be representative of current or future investments. The securities discussed do not represent all of the portfolio's holdings and may represent only a small percentage of the strategy s portfolio holdings. Future portfolio holdings may not be profitable. The strategy may include the use of derivatives. Derivatives often involve a high degree of financial risk because a relatively small movement in the price of the underlying security or benchmark may result in a disproportionately large movement in the price of the derivative and are not suitable for all investors. No representation regarding the suitability of these instruments and strategies for a particular investor is made. Confidentiality No part of this material may, without GSAM s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Goldman Sachs does not provide accounting, tax, or legal advice. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction. 28

29 Additional information References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark. IRS Circular 230 Disclosure: Goldman Sachs does not provide legal, tax or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients of Goldman Sachs should obtain their own independent tax advice based on their particular circumstances. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Compliance Review No: SA.OTU 2013 Goldman Sachs. All rights reserved. 29