Investing Public Funds in Colorado. Presented by Neil Waud, Managing Director Public Trust Advisors, LLC June 21, 2016

Transcription

1 Investing Public Funds in Colorado Presented by Neil Waud, Managing Director Public Trust Advisors, LLC June 21, 2016

2 Agenda Safety, Liquidity & Yield Managed Credit Downgrades Liquidity Premiums Total Return Concepts Legal Investments in Colorado Current Landscape of Major Asset Classes Market Transparency Money Market Reform 2

3 Part 1 Safety, Liquidity and Yield 3

4 Safety - AAA Isn t What It Used to Be 1980 More than 60 U.S. Companies rated AAA by S&P 2008 Down to 6 (Exxon, Microsoft, J&J, ADP, Pfizer, GE) 2011 S&P Downgrades U.S. Government to AA Johnson & Johnson / Microsoft 4

5 Managed Rating Downgrade What is a higher priority for management? a) Raising the dividend. b) Buying back shares. c) Maintaining a low debt level to obtain a pristine credit rating. Apple could easily have a AAA rating but chooses to borrow and reward shareholders. Lower rates, narrower spreads and higher demand have made borrowing much more attractive. AA-/Aa3 issuers (Chevron, IBM, etc.) bear watching to maintain CRS compliance. 5

6 Liquidity (Premiums) The degree that a security can be bought or sold without materially affecting the price 3 related factors that affect liquidity Size of the market Frequency of trades Ease of valuation Liquid investments tend to have a narrow spread between the bid (purchase) / ask (sale) price 6

7 Liquidity Not Necessarily a Gauge of Value Apple, Inc. (AAPL) one of the largest publicly traded corporations in the world by market capitalization. On average, over 45M shares trade every day. Closing price on 06/20/16 $ The Mona Lisa, property of the French Republic, currently on display at the Louvre in Paris. Valued at $100M in 1962 for insurance coverage. One of a kind, current price??? 7

8 Outstanding U.S. Bond Market Debt ($Billions) 14,000 12,000 10,000 8,000 6,000 4,000 2, Municipal Treasury Corporate Debt Federal Agency Securities Source: SIFMA 8

9 Yield to Maturity and Total Return Yield How much income has been earned over the initial cost? YTM = Total Income Earned Until Maturity Holding Period Return What s the percentage change in value over initial cost? Total Return = Income + Change in Market Value 9

10 Total Return The same in the end if held to maturity Years Remaining Total Return YTM Yield to Maturity = Steady Path Total Return = Variable Over Time BOTH = The Same If Held To Maturity 10

11 Part 2 Legal Investments in Colorado 11

12 1) Unites States Treasuries Direct obligations of the United States with a maximum maturity of five years Treasury Bills Treasury Notes Treasury Bonds U.S. Treasury Obligations Maturity of less than one year Maturity between one and 10 years Maturity between 10 and 30 years Floating Rate Treasury Notes (FRN) Pays quarterly interest based upon 3 month T-Bill rate Treasury Inflation Protected Securities (TIPS) Principal is adjusted as the Consumer Price Index (CPI) shifts up or down Coupon rate is constant Interest varies as coupon is applied to inflation adjusted principal Offered in 5, 10 and 30 year maturities 12

13 1-5 Treasury Yield Curve 2.00% 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Treasury Yield Curve /31/2015 6/20/2016 Source: Bloomberg, LP 13

14 Fed Funds Futures Contract 05/31/16 06/17/16 Source: Bloomberg, LP 14

15 FOMC Dot Plot Source: Bloomberg, LP 15

16 1-30 Treasury Yield Curve 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% /31/2015 6/20/2016 Source: Bloomberg, LP 16

17 Negative Rates Take Hold 24 Months Ago 06/30/2014 Country/Tenor 2 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Switzerland -0.04% -0.01% 0.13% 0.30% 0.64% 0.97% 1.22% 1.37% Japan 0.06% 0.08% 0.16% 0.27% 0.56% 0.90% 1.42% 1.68% Germany 0.02% 0.05% 0.34% 0.68% 1.24% 1.69% 2.04% 2.19% Austria 0.08% 0.19% 0.50% 0.95% 1.55% 1.78% 2.17% 2.33% Netherlands 0.07% 0.16% 0.41% 0.91% 1.48% 1.79% 2.11% 2.29% Belgium 0.08% 0.17% 0.51% 1.05% 1.69% 2.11% 2.55% 2.79% Finland 0.01% 0.04% 0.33% 0.66% 1.44% 1.89% 2.25% France 0.12% 0.21% 0.64% 0.92% 1.70% 2.30% 2.45% 2.71% Sweden 0.43% 0.93% 1.25% 1.83% 2.26% Denmark 0.08% 0.49% 1.61% 2.20% Ireland 0.21% 0.45% 0.88% 1.31% 2.34% Italy 0.59% 0.83% 1.35% 2.03% 2.84% 3.33% 3.66% 3.98% Spain 0.45% 0.75% 1.27% 1.84% 2.65% 3.31% 3.45% 3.95% United States 0.46% 0.87% 1.63% 2.14% 2.53% 3.36% Source: Bloomberg, LP 17

18 18 Months Ago 12/31/2014 Country/Tenor 2 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Switzerland -0.37% -0.37% -0.16% 0.02% 0.30% 0.43% 0.59% 0.72% Japan -0.03% -0.03% 0.02% 0.08% 0.31% 0.59% 1.05% 1.23% Germany -0.12% -0.10% 0.00% 0.14% 0.54% 0.89% 1.14% 1.38% Austria -0.10% -0.16% 0.01% 0.22% 0.65% 0.83% 1.26% 1.47% Netherlands -0.08% -0.09% 0.09% 0.27% 0.66% 0.89% 1.15% 1.46% Belgium -0.07% -0.05% 0.13% 0.36% 0.82% 1.18% 1.60% 1.90% Finland -0.09% -0.09% 0.04% 0.26% 0.64% 1.01% 1.39% France -0.07% -0.05% 0.16% 0.37% 0.82% 1.39% 1.60% 1.88% Sweden 0.01% 0.11% 0.39% 0.91% 1.40% Denmark -0.07% 0.08% 0.82% 1.34% Ireland -0.03% 0.23% 0.37% 0.55% 1.23% 1.80% Italy 0.44% 0.63% 0.90% 1.38% 1.86% 2.56% 2.89% 3.21% Spain 0.36% 0.54% 0.84% 1.11% 1.59% 2.23% 2.39% 2.92% United States 0.66% 1.07% 1.65% 1.97% 2.17% 2.75% Source: Bloomberg, LP 18

19 12 Months Ago 06/30/2015 Country/Tenor 2 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Switzerland -1.09% -1.00% -0.58% -0.29% 0.06% 0.40% 0.53% 0.74% Japan -0.01% 0.02% 0.12% 0.21% 0.45% 0.75% 1.20% 1.42% Germany -0.23% -0.21% 0.07% 0.31% 0.76% 1.13% 1.39% 1.57% Austria -0.14% -0.05% 0.25% 0.68% 1.13% 1.23% 1.59% 1.78% Netherlands -0.21% -0.09% 0.14% 0.57% 1.03% 1.20% 1.46% 1.71% Belgium -0.15% -0.03% 0.32% 0.72% 1.21% 1.47% 1.84% 2.13% Finland -0.24% -0.08% 0.22% 0.37% 0.89% 1.29% 1.60% France -0.18% -0.06% 0.32% 0.63% 1.19% 1.69% 1.88% 2.19% Sweden -0.29% 0.34% 0.61% 0.96% 1.56% Denmark -0.54% -0.01% 0.94% 1.58% Ireland 0.12% 0.24% 0.60% 0.93% 1.62% 2.08% 2.57% Italy 0.42% 0.63% 1.24% 1.78% 2.33% 2.78% 3.11% 3.28% Spain 0.42% 0.64% 1.12% 1.71% 2.29% 2.82% 3.19% 3.34% United States 0.64% 1.00% 1.65% 2.08% 2.35% 3.12% Source: Bloomberg, LP 19

20 6 Months Ago 12/31/2015 Country/Tenor 2 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Switzerland -0.99% -0.98% -0.68% -0.44% -0.12% 0.23% 0.40% 0.62% Japan -0.02% -0.02% 0.02% 0.06% 0.26% 0.54% 0.99% 1.26% Germany -0.35% -0.31% -0.05% 0.16% 0.63% 0.94% 1.22% 1.48% Austria -0.33% -0.26% -0.04% 0.35% 0.89% 1.01% 1.54% 1.75% Netherlands -0.39% -0.28% -0.04% 0.26% 0.79% 0.98% 1.41% 1.58% Belgium -0.35% -0.30% 0.02% 0.39% 0.96% 1.61% 1.73% 2.02% Finland -0.35% -0.26% 0.01% 0.30% 0.91% 1.38% 1.54% France -0.32% -0.21% 0.08% 0.40% 0.98% 1.56% 1.70% 2.01% Sweden -0.46% 0.28% 0.58% 0.98% 1.75% Denmark -0.70% 0.20% 0.87% Ireland -0.23% -0.12% 0.19% 0.70% 1.14% 1.67% 2.19% Italy -0.04% 0.09% 0.50% 1.04% 1.59% 2.00% 2.32% 2.69% Spain -0.01% 0.13% 0.66% 1.23% 1.76% 2.31% 2.73% 2.97% United States 1.05% 1.31% 1.76% 2.09% 2.27% 3.02% Source: Bloomberg, LP 20

21 Now - U.S. Rates Look Relatively Attractive 06/14/2016 Country/Tenor 2 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 30 Year Switzerland -1.10% -1.08% -0.99% -0.85% -0.55% -0.29% -0.15% 0.00% Japan -0.28% -0.28% -0.28% -0.29% -0.19% -0.04% 0.16% 0.22% Germany -0.59% -0.59% -0.47% -0.34% -0.01% 0.06% 0.29% 0.55% Austria -0.52% -0.45% -0.40% -0.14% 0.24% 0.30% 0.76% 1.01% Netherlands -0.51% -0.48% -0.26% -0.10% 0.25% 0.42% 0.47% 0.68% Belgium -0.47% -0.41% -0.23% -0.02% 0.46% 0.84% 0.92% 1.35% Finland -0.49% -0.47% -0.30% -0.06% 0.34% 0.53% 0.71% France -0.45% -0.39% -0.19% 0.00% 0.42% 0.77% 1.03% 1.22% Sweden -0.65% -0.39% -0.13% 0.23% 0.98% Denmark -0.56% -0.28% 0.19% 0.63% Ireland -0.41% -0.31% -0.03% 0.37% 0.82% 1.13% 1.61% Italy 0.08% 0.17% 0.52% 0.91% 1.50% 1.82% 2.18% 2.57% Spain 0.04% 0.11% 0.58% 0.86% 1.56% 1.93% 2.34% 2.71% United States 0.72% 0.84% 1.13% 1.41% 1.61% 2.42% 21

22 2) Government Agency & Instrumentalities Any security issued by, or fully guaranteed by, or for which the full credit of the following is pledged for payment with a maximum maturity of five years: Federal Home Loan Mortgage Association (FHLMC) Federal National Mortgage Associations (FNMA) Federal Farm Credit Bank (FFCB) Federal Home Loan Bank (FHLB) Government National Mortgage Association (GNMA) World Bank (IBRD) Federal Land Bank Export-Import Bank Tennessee Valley *No subordinated securities may be purchased under CRS 22

23 GSE Questions & Answers What is a Government Sponsored Enterprise (GSE)? A financial service corporation formed by Congress. What is the intended mission of a GSE? To enhance the flow of credit to targeted sectors of the economy. So a GSE is backed by the U.S. Government? Does not carry full-faith and credit, has an implied guarantee. 23

24 Federal National Mortgage Association Federal Home Loan Mortgage Corporation FNMA Created in 1938 FHLMC Created in 1970 Borrows in the open market to purchase mortgage loans from banks and lenders The purchases free up cash for banks and lenders to make additional mortgage loans The spread between the amount earned on purchased mortgages and the cost of the debt they issue Profits come from two main sources The fees collected for guaranteeing timely payment of principal and interest on the loans that they purchase 24

25 Federal Home Loan Bank System Created in 1932 Provides owner-member institutions with funding for housing finance, community lending and liquidity needs 11 regional banks of the FHLB system are cooperatively owned by over 7,300 financial institutions Federal Farm Credit Bank System Created in 1916 Nationwide system of banks and associations providing credit to farmers, rural homeowners and ranchers The first GSE established by Congress 25

26 GSE Outstanding Debt (Millions) ,300,000 1,200,000 1,100,000 1,000, , , , , , , , , , Fannie Mae Freddie Mac Farm Credit FHLB Source: SIFMA 26

27 Government National Mortgage Association GNMA established in 1968 Wholly owned government corporation within the Department of Housing and Urban Development Provides liquidity to federally sponsored mortgage lending programs (FHA/VA mortgages) Carries the full faith and credit of the U.S. Government 27

28 The World Bank IBRD Established in 1944 Offers loans to middle-income developing countries to advance economic development and eradicate poverty Owned and governed by its member countries and is headquartered in Washington, D.C. Carries the explicit support of the member countries and has maintained a AAA credit rating since 1959 Top six shareholders as of June 30, 2014 US (15%), Japan (8%), China (5%), Germany (5%), France (4%), UK (4%) 28

29 What Happened During Global Financial Crisis? Mortgage market shifted away from regulated GSEs towards unregulated private lenders Borrower pool expanded to increase earnings that were dependent on volume GSEs lowered lending standards to compete with private lenders Increasing number of borrowers with poor credit were unable to pay their mortgage Foreclosures on the rise added to the oversupply of inventory as home prices dropped Depreciation in home prices led to mounting losses at the GSEs FNMA & FHLMC placed under conservatorship to stabilize the mortgage and financial markets 29

30 Federal Housing Finance Agency (FHFA) Conservatorship U.S. Government provides guidance and financial support to FNMA & FHLMC enabling them to provide continued liquidity and stability to the mortgage market. Government injected $188 billion in exchange for preferred shares Treasury covers full value of any losses incurred by the GSEs The GSEs have now paid well over $200 billion in dividends to the Government Fannie and Freddie still insure the majority of new mortgages Long-term, continued operation in a government-run conservatorship is not sustainable for Fannie Mae and Freddie Mac because each company lacks capital, cannot rebuild its capital base, and is operating on a remaining, finite line of capital from taxpayers. Until Congress determines the future of Fannie Mae and Freddie Mac and the housing finance market, FHFA will continue to carry out its responsibilities as Conservator. Source: fhfa.gov, frbatlanta.org 30

31 GSE Spreads Source: Bloomberg, LP 31

32 3) Municipal Debt General and Revenue Obligations of any state or political subdivision, institution, department, agency, instrumentality or authority of any of such governmental entities with a maximum maturity of five years Minimum Credit Rating By At Least Two NRSROs. Colorado Entities Outside of Colorado A AA *Municipals are attractive due to enhanced yields and low-default track record, but should not be mistaken for risk free debt. 32

33 Competitive Vs. Negotiated Bond Sales Competitive Issuer advertises that it s bonds are for sale Broker dealers bid on the issuance at a designated date and time The bonds are awarded to the bidder offering the lowest interest cost to the issuer Negotiated Broker dealer is selected by the issuer to purchase the bonds Broker dealer in turn sells the bonds to its customers Presale process where customer interest is gauged before final bond price is set Negotiated underwriting is more common YTD 3X volume and 3:2 ratio of issuance 33

34 US Taxable (AAA) Muni Spreads Source: Bloomberg, LP 34

35 Muni Mania Source: Wall Street Journal, 06/04/16 35

36 4) Corporate and Bank Securities Denominated in U.S. dollars with three year maximum maturity Minimum Credit Rating By At Least Two NRSROs Money-Market Instruments Commercial Paper Negotiable CD A-1 / P-1 / F1 Bankers Acceptance All Other Corporate MTN AA- / Aa3 / AA- Unless Authorized By Governing Body The Securities Must Not exceed 50% of total investment portfolio Not exceed 5% of total investment portfolio per single corporation or bank issuer Be issued by a corporation or bank organized and operating within the United States *Subordinated Debt Is Prohibited 36

37 Credit Default Swap Index: CDX Investment Grade (IG) Source: Bloomberg, LP 37

38 US Commercial Paper (A-1/P-1) Spreads Source: Bloomberg, LP 38

39 US Corporate (AA) Spreads Source: Bloomberg, LP 39

40 Market Transparency FINRA Financial Industry Regulatory Authority (finra.org) EMMA Electronic Municipal Market Access (emma.msrb.org) WSJ Wall Street Journal Market Data Center (markets.wsj.com) 40

41 SEC Money Market Reform SEC (2a-7) Money Market Reform The SEC has adopted rules intended to promote financial stability in regard to money market investments that will take effect on October 14, 2016 The new rules mandate that prime and municipal money market funds move from a stable $1.00 NAV to a floating NAV The new rules will also allow money market funds to temporarily suspend withdrawals or impose fees for investors who redeem in times of extreme market volatility 41

42 LGIPs / Money Market Funds in Colorado Colorado Law Requires money market investments to maintain a constant $1.00 NAV share price State Securities Commissioner requires LGIP at all times, be in "substantial compliance" with SEC 2a-7, unless compliance is waived by the Commissioner March 18, 2016 State Securities Commissioner waived the floating rate provision along with the liquidity gates and fees, referencing unnecessary burdens on providers and participants 42

43 Disclosures This presentation is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions and is not a recommendation to buy, sell, implement or change any securities or investment strategy, function or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented and are for discussion purposes only and should not be used for making calculations and/or decisions. Of course past performance is not an indication of future performance. Any financial and/or investment decision may incur losses. The investment advisor providing these services is Public Trust Advisors, LLC (Public Trust), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940, as amended. Registration with the SEC does not imply a certain level of skill or training. The data in this presentation is unaudited. Performance comparisons will be affected by changes in interest rates. Investment returns fluctuate due to changes in market conditions. Investment involves risk, including the possible loss of principal. No assurance can be given that the performance objectives of a given strategy will be achieved. Past Performance is no guarantee of future results. Any financial and/or investment decision may incur losses. 43