City and County of Denver

Transcription

1 Report 06/30/2017 s: Sr. I. Economic Commentary Capital markets in the second quarter of 2017 continued upwards in May while June gave up most of the quarter s gains, though still positive year to date. Markets responded to positive economic data with the economy near full employment, strong consumer confidence, manufacturing indicators signaling modest expansion, and favorable housing trends. The Federal Open Market Committee (FOMC) voted to increase the federal funds rate by 25 basis points at the mid-june meeting. The Fed noted that economic activity expanded at a moderate pace and the labor market remains solid. Inflationary measures declined, but the FOMC expects inflation to stabilize around its target of 2.0%. The Fed signaled it will begin unwinding its balance sheet, in addition to, one more rate hike before the end of the year. Payrolls were stronger than expected in the second quarter. The average increase in monthly payrolls was 194,000, up from 166,000 per month during the first quarter. Wage growth was lackluster with only a 0.2% increase in June, following a downwardly revised gain of 0.1% in May. On a year-over-year basis, wages were up 2.5% in June versus 2.4% in May. The unemployment rate ticked up to 4.4% in June from 4.3% in May. The U-6, a broader measure of unemployment, increased to 8.6% in June from 8.4% in May, however, this compares to 9.6% in June Manufacturing data indicated continued expansion, with the ISM Index value rising to 57.8 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 saw home prices increase 5.7% year over year in the April driven by tight inventory and total housing starts falling by 5.5% in May, following a 2.8% decrease in April. Allocation to credit securities, supranational securities, and assetbacked securities increased during the 2nd quarter. These asset classes continued to facilitate a modest growth in incremental earnings for the portfolios. Further purchase of these assets is 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 2.30% from 2.39% the prior quarter. s s Market Value Managed s $3,251,137,100 Special Purpose s $54,317,623 Finance Administrated $3,305,454,723 1

2 Report 06/30/2017 s: Sr. s II. Consolidated $2,787,382,383 Total Return 1-Month 3-Month YTD Total Return -0.06% 0.51% 0.99% Blended Benchmark (TR) -0.10% 0.47% 0.91% Excess Return 0.04% 0.04% 0.08% Current Return 1-Month 3-Month YTD Current Return 1.62% 1.66% 1.65% Blended Benchmark (CR) 1.51% 1.52% 1.50% Excess Return 0.11% 0.14% 0.15% Year-to-Date earnings on a current return basis for the Consolidated were $20,539,151. 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 modestly 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 second quarter of The Consolidated benchmarking indices are comprised of five BofA Merrill Lynch indices, creating a static weighted blended benchmark. A total of two blended benchmarks are utilized for the 1-5 year and 1-10 year strategies to closely reflect the portfolio duration and asset allocation constraints. 2

3 Report 06/30/2017 Consolidated Composition s: Sr. The Consolidated s net assets increased by approximately $140 million during the second quarter of On June 30th, 2017, net assets were $2.79 billion, compared to $2.65 billion on March 31 st, 2017, as inflows exceed expenditures. The increase in net assets was primarily due to cyclical cash inflows, consistent with historical second 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 second 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 second quarter extended duration more closely with the model and benchmark. s 3

4 Report 06/30/2017 Management Environment 2.5 Bloomberg United States Financial Conditions Index s: Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Sr. Yield U.S. Treasury Yield Curve 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y As of 6/30/2017 As of 12/30/2016 As of 6/30/2016 s The Federal Reserve raised the Fed Funds rate by 25 basis points to a range of 1.00%-1.25% during the second quarter of The Fed is projecting a 1.4% fed funds rate by the end of 2017, which implies one more 25 basis point hike. The one month LIBOR rate was 1.22% as of June 30th, 2017, an increase of 24 basis points from March 31st, As of June 30 th, 2017, the yield of the two-year Treasury index was 1.38%, and the five-year Treasury index was yielding 1.89%. As of March 31 st 2017, the yield of the two-year Treasury index was 1.25%, and the five-year Treasury index was yielding 1.92% The median of economists most recent forecasts is for a 1.44% two-year Treasury yield at the end of the third quarter of 2017 and a 1.53% yield at the end of The shape of the yield curve has flattened, as compared to moderate steepening at the beginning of The spread between the two-year Treasury index and the ten-year Treasury index was 92 basis points on June 30 th, 2017, compared to 125 basis points December 30 th,

5 Report 06/30/2017 Consolidated Top Holdings s: Top 5 Credit Holdings Issuer Market Value % of Industry Coco Cola Company 91,759, % Consumer Nordea Bank 74,756, % Financial Apple Inc 73,911, % Technology JP Morgan Chase 63,751, % Automobiles Bank of Tokyo Mitsubishi NY 54,819, % Financial Total 358,998, % *Credit holdings include commercial paper, asset-backed securities, and corporate bonds. Sr. Top 5 Agency Holdings Issuer Book Value % of FHLB 287,671, % FNMA 205,817, % FHLMC 101,683, % FFCB 91,131, % TVA 84,545, % 770,848, % s 5

6 Report 06/30/2017 s: Sr. III. Airport Reserve $418,141,385 Total Return 1-Month 3-Month YTD Total Return -0.21% 0.70% 1.25% Blended Benchmark (TR) -0.22% 0.67% 1.24% Excess Return 0.01% 0.03% 0.01% Current Return 1-Month 3-Month YTD Current Return 2.11% 2.10% 2.18% Blended Benchmark (CR) 1.80% 1.85% 1.86% Excess Return 0.31% 0.25% 0.32% Year-to-Date earnings on a current return basis for the Reserve were $4,209,620. 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 Airport Reserve benchmarking indices are comprised of five BofA Merrill Lynch indices, creating a static weighted blended benchmark. A total of one blended benchmark is utilized for the 1-10 year strategy to closely reflect the portfolio duration and asset allocation constraints. s 6

7 Report 06/30/2017 Airport Reserve Composition s: Sr. s 7

8 Report 06/30/2017 IV. Workers Compensation Composition $45,613,333 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 second quarter of 2017 was 2.93%. Year-to-Date earnings on a current return basis for the Worker s Compensation were $537,780. s 8

9 Report 06/30/2017 s: Sr. V. Special Purpose s $54,317,623 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 Denver Cableland Trust portfolio was established to fund the annual maintenance expenses for Cableland, a facility donated to the City. These portfolios are 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 2nd Qtr Current Return 2017 YTD Earnings FAA Escrow Account $50,026, % $1,295,999 Denver Cableland Trust $4,291, % $169,457 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 June 30 th, 2017, there was an outstanding balance of $0. 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 June 30, 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 June 30, 2017, appears to be accurately reflected. Signed this 20 th day of July 2017 Nicole Dragoo COO, Chief Compliance Officer 6225 Lusk Boulevard San Diego, CA Phone chandlerasset.com