Money Market Instruments

Transcription

1 SM Investment Consulting Services Finding Value Beyond Money Market Instruments October 20, 2011 Nancy Mar Senior Treasury Analyst Alt Altera C Corporation ti Linda Ruiz-Zaiko IInvestment t t Consultant C lt t Services S i Scott Warner VP - Senior Portfolio M Manager Northern Trust

2 Where to Find Value beyond MMF? Nancy Mar, Ph.D. Altera Treasury 2011 Altera Corporation

3 Overview of Altera Corporation A market leader in the development of programmable logic devices Headquartered in San Jose, CA Employs ~ 2,600 people worldwide Annual revenue of $2.17B and total cash of $3.27B as of July 1, 2011 Where can a firm, such as Altera, find value beyond the MMF universe? 2011 Altera Corporation 2

4 Questions to Ask Yourself First 1. Disregarding yield, where is the value in MMF? 2. Are Money Market Funds actually safe? 3. How are they compatible with the cardinal rules of Treasury, i.e., preserve capital and ensure liquidity? 2011 Altera Corporation 3

5 Value in Money Market Funds Satisfy operational cash needs Relatively simple to maintain in a normal economic environment High levels of overnight and 7-day liquidity Subject to SEC regulations Reactive regulatory body 2011 Altera Corporation 4

6 Disadvantages/Risks in Money Market Funds Disadvantages Relatively costly with typical expense ratios of bps A MMF that breaks the buck leads to a breaking of the cardinal rules of corporate treasury Current economic environment requires frequent due diligence reviews of portfolio holdings Risks Capital Preservation Lack of real time transparency in holdings No control over investment guidelines/policy No control over credit approved lists All assets reported at amortized cost any indicative unrealized losses Liquidityidit 2011 Altera Corporation 5 are hidden Generally highly liquid, but. Subject to the actions of all other investors A run would lead to high illiquidity no control Always want to be in front of the herd, but impossible to time

7 So where can we find value? 2011 Altera Corporation 6

8 2011 Altera Corporation 7

9 VALUE CANNOT BE MEASURED IN DOLLARS ALONE! 2011 Altera Corporation 8

10 Separately Managed Accounts External Managers In-house Managed 2011 Altera Corporation 9

11 Advantages of Separately Managed Accounts Capital Preservation Real time transparency Control over investment guidelines/policy Set duration and maximum life Create operational cash, strategic cash and/or core cash portfolios depending on cash flows Set asset allocation Set allowable investments Some control over credit approved list via established guidelines e.g. Explicitly prohibit certain issuers 2011 Altera Corporation 10

12 Advantages of Separately Managed Accounts Liquidity Liquidity profile determined by client Not subject to the actions of all other investors No fire sales of securities necessary to satisfy mass redemptions Securities are allowed to mature out of the portfolio 2011 Altera Corporation 11

13 External Managers Additional Benefits Access to credit research and expertise of portfolio managers Assets are in the name of the client and cannot be seized in the event of default of management firm Investment Managers have a fiduciary responsibility to the client Potentially less costly than MMF due to tiered pricing structure of investment managers Higher yield relative to MMF since guaranteed overnight liquidity is not required 2011 Altera Corporation 12

14 In-house Portfolio Management Advantages Total control No fees Disadvantages Requires some in-house expertise Requires development of credit approved list Maintenance and periodic review are necessary Potentially time consuming 2011 Altera Corporation 13

15 Disadvantages of Separately Managed Accounts Highly dependent d on risk tolerance of Board Guidelines reflect risk tolerance Accounting becomes more complicated External/SEC reporting considerations FAS 157 implications Potential FAS issues Impact to AOCI Additional fees from custodial bank and external consultants if contracted to run RFP processes in finding custodian and managers 2011 Altera Corporation 14

16 Necessary Infrastructure Custodial bank To safeguard assets Client assets are separate from the bank s balance sheet To settle trades To provide accounting information, reporting, compliance checks, portfolio analytics and risk assessment Bank s platform or other service provider (e.g. Clearwater Analytics) An internal investment t committee To review guidelines/policy on a periodic basis To review internal credit approved list on a periodic basis if running an in-house portfolio A roster of broker dealers to trade for in-house portfolio to get best execution and largest selection 2011 Altera Corporation 15

17 Summary Where can a corporation find value beyond the MMF universe? Answer: Separately managed accounts Why? Answer: There is tremendous value in control Altera Corporation 16

18 Thank you Nancy Mar, Ph.D. Altera Treasury 2011 Altera Corporation

19 N O R T H E R N T R U S T Finding Value Beyond Money Market Instruments t Current Appropriate Strategies for Customized, Short Duration, Separately Managed Accounts San Francisco Treasury Symposium - October 2011 Scott B. Warner Senior Portfolio Manager Enhanced Cash and Ultra Short Funds sw13@ntrs.com

20 Northern Trust Corporation Overview Founded d in Chicago in 1889, Northern Trust Corporation is a global l market leader of asset management and asset servicing solutions for institutions and private clients. Focus, stability and progress define us, a claim we support with key measures of success: A unique business focus Financial strength and stability 1 Corporate & Institutional Services (C&IS) worldwide institutional investors Assets under management Assets under custody US$662 billion US$4.4 trillion Asset Servicing Asset Management Assets under administration 2 Employees 3 US$943.8 billion 13, 350 Personal Financial Services (PFS) U.S. and European private clients Offices in Clients in Tier 1 capital ratio 4 S&P long-term debt rating 20 global locations 40+ countries 13.5% AA- Selected industry recognition Best Bank for Pension Solutions Treasury Management International (Dec. 2009) 11th Largest Manager of Worldwide Institutional Assets Pensions & Investments (May 2010)* Investment Management Firm of the Year Offshore award ACQ Finance Mag (2009) Global Custodian of the Year FT Pension & Investment Provider Awards (May 2008 and 2009) 1 As of March 31, 2011 (updated quarterly) Source: Northern Trust 2 Includes US$ 135 billion defined contribution funds (as of September 30, 2010) (updated on a quarterly lag basis) Source: Northern Trust 3 Total employees, 13,000 of which are permanent (as of March 31, 2011) (updated quarterly) Source: Northern Trust 4 As of March 31, 2011 (updated quarterly) Source: Northern Trust *Rankings based on total worldwide assets under management of $ billion as of December 31, The above rankings are not indicative of future performance. Source: Pensions & Investments 2010 Special Report on Money Managers which appeared in the publication's May 31, 2010 issue and online at Ranking information reprinted with permission. 19 Northern Trust Global Investments

21 Overview Balancing the conflicting demands of liquidity and yield with risks and opportunities Introduction Current Economic Environment and Market Risks Decisions Facing Investors Changes in the Money Market Fund Environment Spectrum of Choices in Short-Term Fixed Income Portfolio Considerations Portfolio Strategies in a Low Interest Rate Environment Conclusion and Questions 20 Northern Trust Global Investments

22 SM Investment Consulting Services Finding Value Beyond M Money M k t IInstruments Market t t Linda Ruiz-Zaiko I t tc lt t Services S i Investment Consultant

23 SM Investment Consulting Services Financial, Inc. Founded in 1987 Registered investment advisor under Investment Advisor Act of 1940 Licensed to provide investment advice Each consultant has over 25 years experience Corporate Liquidity Investment t Consulting 401(k) Plan Services Consulting Strategic investment plans 401(k) plan and performance monitoring Investment policy statements Investment evaluation, analysis, selection Money manager selection Investment watch list Manager peer comparisons Custom benchmarks Custodian evaluations/searches Performance evaluation Attribution analysis ERISA 404 ( c ) compliance review Fiduciary reviews Benchmark plan costs Provider searches C itt fid i d ti Attribution analysis Committee fiduciary education 42

24 SM Investment Consulting Services Improve Your Yield and Invest in America 43

25 SM Investment Consulting Services Municipal Markets Municipal issuance for 2010 ~ $433 B 2011 expected ~$200 B 2011 municipal bond issuance down across all sectors State & county issuance down >50% Electric power issuance down 69% Transportation down 54% General purpose down 46% Healthcare down 43% Utilities down 35% Housing down 23% Short term notes YTD $16 B down >25% Municipal bond fund assets plummeted in December 2010 Investor panic - Meredith Whitney said expect defaults in 2011 Municipal fund inflows returned 2Q

26 SM Investment Consulting Services Municipal Market American Jobs Act of 2011 $447 billion proposal surprise Limits the tax exemption on municipal bond interest From current 35% to 28% for high income taxpayers Applies to all municipal bonds, outstanding & newly issued Beginning in 2013 Municipal bond interest exemption has existed for 98 years Consensus is that the municipal interest provision is unlikely Would raise borrowing costs for cash-strapped issuers Increases uncertainty and may cause spreads to widen Municipal market is still liquid, active, with stable prices Tax treatment change more negatively impact longer maturities Impact more mutual funds and crossover buyers Municipal yields are more attractive than taxables across the yield curve (without the tax advantage) 45

27 SM Investment Consulting Services High Quality Municipal Bond Sectors State & Local General Obligations - GOs Backed by the Taxing Authority Revenue Bonds Essential Services Electric t i & Gas Water & Sewer University it & Higher Education Transportation Pre-Refunded d Bonds Escrowed to Maturity 46

28 SM Investment Consulting Services State Budgets State revenues - vulnerable to weak economy ~ 40% revenue from income & sales taxes Total budget shortfall in 2012 ~$102.9 B Largest budget gaps: Illinois, New Jersey, New York, Texas States addressed budget gaps Spending reserve funds Targeted broad-based budget cuts Personnel layoffs and pay cuts Increased taxes and fees Changed pension and retiree health benefits Privatized revenue sources 47

29 SM Investment Consulting Services Investment Research - GOs Official Statement of Bond Legal provisions Unlimited tax GO Limited check millage rate Review Economics and Demographics of Issuer Diverse economic base types of employers Wealth Per Capital Income vs. regional / national trends Population and employment trends Property tax trends Budget and legislative l process Reserves available 48

30 SM Investment Consulting Services Investment Research GOs Financial Condition of Issuer General Fund Operating surplus / deficit Fund balance and trend Actual vs. budget, future projections Sources of Revenues Income, sales / excise, property taxes, fees, etc. Stability or volatility of revenues Top tax payers and employers Expenses and Liabilities Services provided and ability to reduce costs Mandatory spending increases and ability to restrict costs Pension liabilities and benefits (healthcare) 49

31 SM Investment Consulting Services Investment Research GOs Debt Levels Debt Burden, Contingent and Unfunded Liabilities Outstanding debt and trend Debt service as % of budget Debt per capita Debt / Assessed Value debt ratio Indirect and overlapping debt Capital programs and funding plans Pension plan funding status Unfunded pension liabilities and post-retirement benefits (healthcare) Measures to Control Debt 50

32 SM Investment Consulting Services Credit Research Intensive Bonds Airport revenue Housing Healthcare Hospital Lease Pi Private University it Pollution Control Revenue Special Assessment Stadium / Convention Center Revenue Tobacco Transportation 51

33 SM Investment Consulting Services Investment Research of Revenue Bonds Official Statement of Revenue Bond Review legal covenants Financial Limits on additional debt Rate covenants Fund flows Reserve fund requirements Debt coverage - cashflow Debt to capital ratios Balance a sheet liquidity (higher education, healthcare) e) Maintain high cash balances > outstanding debt Stable operating margins 52

34 SM Investment Consulting Services Investment Research of Revenue Bonds Essential services Revenues / expenditures separate from general government operations Professional management (not politicized) Ability to raise rates and fees per bond covenants Regulatory oversight, rate setting ability (utilities) Competitive services to issuer (universities, healthcare) Frequent and candid disclosures 53

35 SM Investment Consulting Services Research Pre-Refunded Bonds Collateral in Escrow Review escrow document to confirm coupon, maturity, bond series, CUSIP Legally defeased or economically Amendments require approval of all bondholders Revocable or irrevocable escrow Irrevocable pledge of collateral to pay bonds at specific dates Separate and distinct escrow from escrow agent and issuer Bondholders must have perfected lien on escrow account Third party verification that deposited securities Are not arbitrage bonds per IRS rules Cash flows sufficient to make full / timely payment - interest & principal Substitution of original securities only with escrow -eligible Need new legal opinion, cashflow analysis, verify not arbitrage bond 54

36 SM Investment Consulting Services Research Pre-Refunded Bonds Collateral in Escrow Defined Eligible Securities per Escrow Non-call US Treasury direct obligations, strips Non-call direct, unconditional guaranteed by US Treasury full and timely principal and interest payment, strips US State t and Local Government Series (SLGS) REFCORP Resolution Funding Corp Excluded Securities Money Market Funds, Repos, CDs GICs Municipal and Pre-refunded Bonds Mutual funds 55

37 SM Investment Consulting Services Improve Your Yield and Invest in America 56