City and County of Denver

Transcription

1 Report 09/30/2017 s: Sr. I. Economic Commentary Capital markets in the third quarter of 2017 continued their upward trends seen in the first half of the year. Markets responded to continued 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 leave the federal funds rate unchanged. The Fed noted that it will begin to unwind it s $4.5 trillion balance sheet gradually to minimize disruption to markets. Inflationary measures continued to decline in the third quarter, thus the FOMC lowered its 2018 inflation forecast. The Fed s economic projections indicated one more rate hike before year end. Payrolls were mixed in the third quarter. September payrolls declined 33,000 due to Hurricanes Harvey and Irma. The third quarter average of 91,000 stands less than the second quarter average of 198,000. Wage growth earnings jumped to 0.5% in September, but is likely distorted by Harvey and Irma. On a year-over-year basis, wages were up 2.9% in September versus 2.7% in August. The unemployment rate unexpectedly fell to 4.2% in September down from 4.4% in August signaling that the labor market continues to reduce slack. The U-6, a broader measure of unemployment, decreased to 8.3% in September from 8.6% in August. Manufacturing data indicated continued expansion, with the ISM Index value rising to 60.8 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 5.8% year over year in July driven by tight inventory. Total housing starts increased 1.6% in August offsetting a 6.5% decline in multi-family starts. Allocation to credit securities, supranational securities, and assetbacked securities in the portfolios increased during the 3rd quarter. These asset classes continued to facilitate a modest growth in incremental earnings for the portfolios. Further purchases of these assets are 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 increased to 2.33% from 2.30% the prior quarter. s s Market Value Managed s $3,157,205,162 Special Purpose s $55,039,777 Finance Administrated $3,212,244,939 1

2 Report 09/30/2017 s: Sr. s II. Consolidated $2,695,737,808 Total Return 1-Month 3-Month YTD Total Return -0.23% 0.37% 1.36% Blended Benchmark (TR) -0.24% 0.37% 1.28% Excess Return 0.01% 0.00% 0.08% Current Return 1-Month 3-Month YTD Current Return 1.69% 1.66% 1.65% Blended Benchmark (CR) 1.53% 1.57% 1.52% Excess Return 0.16% 0.09% 0.13% Year-to-Date earnings on a current return basis for the Consolidated were $33,330,401. 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 third 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 09/30/2017 Consolidated Composition Characteristics Average Duration 2.29 yrs Average Coupon 1.93% A, 6.9% Credit Quality (S&P) AAA, 28.4% s: Sr. Average Yield to Maturity 1.68% Average Rating (S&P) Average Life LGIP, 4.3% MBS, 2.1% CMO, 3.9% Muni, 3.7% Supra, 8.9% ABS, 5.3% Corps, 15.2% Asset Allocation Comm Paper, 10.4% AA yrs U.S. Agency, 27.6% U.S. Treasury, 18.6% AA, 64.7% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Maturity Distribution 16.7% The Consolidated s net assets decreased by approximately $916 million during the third quarter of On September 30th, 2017, net assets were $2.69 billion, compared to $2.79 billion on June 30th, 2017, as expenditures exceed inflows. The decrease in net assets was primarily due to cyclical expenditures, consistent with historical third quarter activity. A large portion of expenditures for the City occur during the second 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 third 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 third quarter extended duration more closely with the model and benchmark. 5.0% 0.0% 7.1% 19.0% 16.4% 33.2% 5.6% 2.0% 0.0% s 3

4 Report 09/30/2017 Management Environment 2.5 Bloomberg United States Financial Conditions Index s: Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Sr. Yield U.S. Treasury Yield Curve 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y As of 9/30/2017 As of 12/30/2016 As of 9/30/2016 s The Federal Reserve left the Fed funds rate unchanged in the range of 1.00%-1.25% during the third quarter of The Fed is projecting a 1.5% fed funds rate by the end of 2017, which implies one more 25 basis point hike likely in December The one month LIBOR rate was 1.23% as of September 30th, 2017, an increase of one basis points from June 30th, As of September 30th, 2017, the yield of the two-year Treasury index was 1.48%, and the five-year Treasury index was yielding 1.94%. As of June 30th, 2017, the yield of the twoyear Treasury index was 1.38%, and the five-year Treasury index was yielding 1.89% The median of economists most recent forecasts is for a 1.61% two-year Treasury yield at the end of the year. 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 85 basis points on September 30th, 2017, compared to 125 basis points December 30th,

5 Report 09/30/2017 Consolidated Top Holdings s: Top 5 Credit Holdings Issuer Market Value % of Industry Coca Cola Company 92,004, % Consumer Pfizer, Inc. 74,907, % Pharmaceutical Apple Inc 74,083, % Technology Toyota Motor Corp 50,078, % Automobiles Nordea Bank AB 49,928, % Financial Total 341,001, % *Credit holdings include commercial paper, asset-backed securities, and corporate bonds. Sr. Top 5 Agency Holdings Issuer Book Value % of FHLB 224,276, % FNMA 152,541, % FHLMC 94,631, % FFCB 72,384, % TVA 61,696, % 605,532, % s 5

6 Report 09/30/2017 III. Airport Reserve $417,432,259 s: Sr. Total Return 1-Month 3-Month YTD Total Return -0.47% 0.45% 1.71% Blended Benchmark (TR) -0.45% 0.45% 1.69% Excess Return 0.02% 0.00% 0.02% Current Return 1-Month 3-Month YTD Current Return 2.35% 2.17% 2.18% Blended Benchmark (CR) 1.78% 1.86% 1.86% Excess Return 0.57% 0.31% 0.32% Year-to-Date earnings on a current return basis for the Reserve were $6,473,015. The 1-5 Year Strategy Blended Benchmark consists of 67.50% Boa 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 09/30/2017 s: Airport Reserve Composition Characteristics Average Duration 3.48 yrs Average Coupon 2.42% Average Yield to Maturity 1.90% Average Rating (S&P) AA+ Average Life 3.77 yrs A, 10.3% AA, 60.0% Credit Quality (S&P) AAA, 29.7% Sr. CMO, 7.0% Muni, 4.2% Supra, 10.0% ABS, 5.6% Corp, 15.5% Asset Allocation MBS, 2.0% Comm Paper, 0.7% U.S. Agency, 32.6% U.S. Treasury, 22.4% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Maturity Distribution 30.2% 26.1% 15.6% 11.6% 7.3% 5.2% 4.0% 0.0% s 7

8 Report 09/30/2017 s: Sr. IV. Workers Compensation Composition $44,035,095 Characteristics Average Duration 4.06 yrs Average Coupon 3.28% Average Yield to Maturity 2.30% Average Rating (S&P) Average Life Asset Allocation MBS, 8.2% LGIP, 2.3% CMO, 6.3% Muni, 23.6% Supra, 14.7% ABS, 2.2% AA yrs U.S. Agency, 27.8% Corps, 14.9% A, 3.2% AA, 64.5% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Credit Quality (S&P) Maturity Distribution 14.0% 4.0% 6.3% 0.0% 28.1% 9.1% 6.0% 32.5% 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 third quarter of 2017 was 2.79%. Year-to-Date earnings on a current return basis for the Worker s Compensation were $835, % 0.0% AAA, 32.3% s 8

9 Report 09/30/2017 s: Sr. V. Special Purpose s $55,039,777 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 3rd Qtr Current Return 2017 YTD Earnings FAA Escrow Account $50,817, % $1,944,567 Denver Cableland Trust $4,222, % $203,673 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 September 30th, 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 Administrator 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 September 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 September 30, 2017, appears to be accurately reflected. Signed this 20 th day of October 2017 Nicole Dragoo COO, Chief Compliance Officer 6225 Lusk Boulevard San Diego, CA Phone chandlerasset.com