Town of Danville. Investment Report. Period Ending September 30, 2015 CHANDLER ASSET MANAGEMENT

Transcription

1 CHANDLER ASSET MANAGEMENT Investment Report Town of Danville Period Ending September 30, Lusk Boulevard San Diego, CA Phone Fax

2 Table of Contents SECTION 1 Economic Update SECTION 2 Account Profile SECTION 3 Portfolio Holdings SECTION 4 Glossary of Investment Terms 1

3 SECTION 1 Economic Update 2

4 Economic Update In light of the weak September jobs report and the latest reading on inflation, we believe the probability of a fed funds rate hike by the Federal Reserve before year-end has further diminished. Nonfarm payrolls rose by 142,000 in September, below the consensus forecast of 201,000. Meanwhile, the PCE price index is still running well below the Fed s 2.0% target, at just 0.3% on a year-over-year basis in August. In our view, a rate hike is still possible before year-end, but depending on domestic and global economic data, as well as any potential financial market volatility fueled by a US debt ceiling debate over the next few months, it could be pushed out to Fed funds futures currently imply that the Fed could remain on hold until March or even June of next year. The Federal Open Market Committee (FOMC) left policy rates unchanged at its September meeting. The Committee cautioned that recent global economic and financial developments may restrain economic activity. Overall, the Fed s September policy statement was dovish and the outlook for future monetary policy changes remains uncertain. There are two remaining FOMC meetings scheduled this year US economic data has been mixed. Over the past three months, payrolls have increased by an average of 167,000 per month, compared to the trailing six-month average of 199,000. In September the unemployment rate was unchanged at 5.1%, but the participation rate edged down and wages were flat. Meanwhile, housing still appears to be a growing source of strength for the US economy. In addition, consumer confidence remains strong, which should bode well for fourth quarter holiday shopping. The manufacturing sector, onthe other hand, remains under pressure, largely due to the strength ofthe US dollar. Second quarter GDP growth was revised upward to an annualized rate of 3.9% from the second estimate of 3.7%. Market participants currently expect annualized GDP growth of about 2.4% in the third quarter, and 2.7% growth in the fourth quarter. Interest rate volatility remains elevated due to continued uncertainty regarding the outlook for global economic growth and the timing of the first fed funds rate hike. Yields on 2-year and 10-year Treasury notes declined in September, offsetting increases in August. Over the past three months, the yield curve flattened with the yield on 10-year Treasuries falling roughly 40 basis points. Mixed US economic data, divergent central bank monetary policies, and concerns about weakening economic growth in China and other emerging markets have influenced interest rates. 3

5 Employment MOM Change In (000's) Nonfarm Payroll (000's) Rate (%) 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Unemployment Rate Underemployment Rate (U6) Unemployment Rate (U3) 0 4.0% Source: US Department of Labor Source: US Department of Labor The September employment report was weaker than expected. Nonfarm payrolls rose by142,000 inseptember, well below the consensus forecast of 201,000. July and August payrolls were revised down by a total of59,000. The unemployment rate was unchanged at 5.1% in September. Meanwhile, the participation rate declined to 62.4% from 62.6%, to its lowest level since A broader measure of unemployment called the U-6, which includes those whom are marginally attached to the labor force and employed part time for economic reasons, declined to 10.0% from 10.3%. Wages were flat on a month-over-month basis in September, and were up 2.2% on a year-over-year basis. Over the past three months, payrolls have increased by an average of 167,000 per month, compared to the trailing six-month average of 199,000. 4

6 Consumer Retail Sales YOY % Change Consumer Confidence 6.0% % YOY (%) Change 4.0% 3.0% 2.0% Index Level % % 65 Source: US Department of Commerce Source: Federal Reserve Retail sales rose 0.2% on a month-over-month basis in August, following an upwardly revised gain of 0.7% in July. On a yearover-year basis, retail sales rose 2.2% in the month, following a 2.6% year-over-year gain in July. The July and August gains signal an improving trend in consumer spending. Ongoing improvement in the labor market, along with low gas prices, should continue to have a positive influence on consumer discretionary spending. Consumer confidence increased to in September from in August, with strength in both the present situation and expectations components. This report bodes well for consumer spending, heading into the holiday shopping season. 5

7 Economic Activity MOM ( %) Change 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% Leading Economic Indicators (LEI) 3 Month Average (%) Change 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% -0.4% Chicago Fed National Activity Index Source: The Conference Board Source: Federal Reserve Bank of Chicago The index of Leading Economic Indicators (LEI) rose 0.1% in August after being flat in July. The LEI was slightly weaker than expectations in August and points to slow economic growth. The Chicago Fed National Activity Index 3-month moving average was 0.01 in August, up slightly from in July. Overall, this index points to softness in overall economic activity. 6

8 Housing MOM Change (In Thusands of Units) Muli Family Housing Starts Single Family Housing Starts Housing Starts YOY( %) Change 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% S&P/CaseShiller 20 City Composite Home Price Index Source: US Census Bureau Source: S&P Total housing starts fell 3.0% in August, below expectations. Both single-family housing starts and multi-family starts fell 3.0%. However, total housing starts are up 16.6% year-over-year, with single-family starts up 14.9% and multi-family starts up 19.8% on that basis. Housing data tends to be volatile on a month-to-month basis, but the underlying trends suggest the housing sector is a growing source of strength for the US economy. According to the S&P Case-Shiller index, home prices softened in July, down 0.2% on a month-over-month basis, but prices are still up 5% ona year-over-year basis. Housing inventory remains tight which could lead to firming pricing ahead. 7

9 Manufacturing Institute of Supply Management Purchasing Manager Index Expanding Rate (%) 80.0% 79.5% 79.0% 78.5% 78.0% 77.5% Capacity Utilization 50 Contracting 77.0% % % Source: Institute for Supply Management Source: Federal Reserve During September, the ISM manufacturing index declined to 50.2 from 51.1 in August. Overall, manufacturing trends remain under pressure, however, a reading above 50.0 still suggests expansion in the manufacturing sector. Capacity utilization, which is production divided by capacity, increased to 78.0% in August from 77.7% in July. The capacity utilization rate is lower than the long-run average of 80.1% ( ). Overall, growth in the US manufacturing sector has been hindered by the strong US dollar and a sluggish global economy. 8

10 Gross Domestic Product (GDP) Components of GDP 9/14 12/14 3/15 6/15 Gross Domestic Product (GDP) Personal Consumption Expenditures Gross Private Domestic Investment Net Exports and Imports Federal Government Expenditures State and Local (Consumption and Gross Investment) Total 2.3% 2.9% 1.2% 2.4% 1.2% 0.4% 1.4% 0.9% 0.4% -0.9% -1.9% 0.2% 0.3% -0.4% 0.1% 0.0% 0.1% 0.2% -0.1% 0.5% 4.3% 2.1% 0.7% 3.9% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% GDP QOQ % Change GDP YOY % Change Source: US Department of Commerce Source: US Department of Commerce Real annualized GDP growth in the second quarter of 2015 was revised upward to 3.9% from the second estimate of 3.7%. The consensus estimate for second quarter GDP growth was 3.7%. The upward revision was driven by increases in personal consumption expenditures, nonresidential investment and residential investment. 9

11 Inflation 3.0% Consumer Price Index (CPI) CPI YOY % Change 3.0% Personal Consumption Expenditures (PCE) YOY( %) Change 2.5% 2.0% 1.5% 1.0% 0.5% Core CPI YOY % Change YOY( %) Change 2.5% 2.0% 1.5% 1.0% 0.5% PCE Price Deflator YOY % Change PCE Core Deflator YOY % Change 0.0% 0.0% -0.5% -0.5% Source: US Department of Labor Source: US Department of Labor In August, Consumer Price Index (CPI) inflation was unchanged from July, up 0.2% on a year-over-year basis. Headline inflation remains low, in light of a precipitous decline in energy prices. The year-over-year Core CPI (CPI less food and energy) was also unchanged at 1.8% in August. The Personal Consumption Expenditures (PCE) price index was unchanged in August, up 0.3% on a year-over-year basis. The Core PCE price index was up 1.3% on a year-over-year basis in August, up slightly from 1.2% in July. Overall, inflation remains below the Fed's 2.0% target. 10

12 Bond Yields 3.5% 3.0% 2.5% US Treasury Note Yields 2-Year 5-Year 10-Year 3.5% 3.0% 2.5% US Treasury Yield Curve Sep-15 Jun-15 Sep-14 Yield (%) 2.0% 1.5% 1.0% 0.5% Yield (%) 2.0% 1.5% 1.0% 0.5% 0.0% 0.0% -0.5% Source: Bloomberg Source: Bloomberg Interest rate volatility remains elevated. The yield on the two-year Treasury note fell about 8 basis points in September after increasing by approximately the same amount in August. Meanwhile, the yield on the ten-year Treasury note fell roughly 12 basis points in September after increasing about 4 basis points in August. Concerns about slowing global economic growth, the continued decline in oil prices and ongoing uncertainty about Fed monetary policy has fueled financial market turbulence. During the past three months, the Treasury yield curve has flattened with the yield on 10-year Treasuries falling about 40 basis points. Mixed US economic data, divergent central bank monetary policies, and concerns about weakening economic growth in China and other emerging markets have influenced interest rates. 11

13 SECTION 2 Account Profile 12

14 Objectives Investment Objectives The primary investment objectives of the Town of Danville are to preserve principal and to maintain adequate liquidity to meet the Town's cash flow requirements. The Town expects to achieve a rate of return which is consistent with its primary objectives. Chandler Asset Management Performance Objectives Our performance objective is to achieve a return that equals the return on an unmanaged index of one-to-three year Treasury securities (a "market rate of return"). Strategy In order to meet its objectives, the Town invests in securities permitted under California Government Code Section et seq. and under its Investment Policy. The maximum maturity of the Town's investments is five years, unless specifically authorized by the Town Council. The Town pursues a "buy and hold" strategy. 13

15 Compliance Town of Danville - All Accounts September 30, 2015 Category Standard Comment Treasury/Agency Issues No Limit Complies Municipal Bonds "A" rated Complies Banker s Acceptances "A-1"; 40% max; 180 days max maturity Complies Commercial Paper "A-1"; 25% max; 270 days max maturity Complies Repurchase Agreements 5% max; 30 days max maturity Complies Negotiable CDs "A-1"; 30% max; 2 years max maturity Complies Corporate Medium Term Notes COMPLIANCE WITH INVESTMENT POLICY Assets managed by Chandler Asset Management are in full compliance with State law and the Town s investment policy. "A" rated; 30% max, 5 year max maturity (Town Council directive as of 4/17/12: 15% maximum. Of the 15% total permitted, no more 5% shall be rated in the A category by S&P and Moody's, with the remaining notes rated AA or higher.) Complies LAIF Monitored by Town Complies Mortgage Pass-Through Securities 15% max; US Gov't Agency only Complies CMOs and ABS ""; 15% maximum Complies Money Market Mutual Funds 15% max; 10% per fund Complies Inverse floaters, range notes Prohibited Complies Interest only strips Prohibited Complies Zero interest accruals Prohibited Complies Per issuer max 5% (except gov ts) Complies Maximum maturity 5 years Complies 14

16 Account Profile Portfolio Characteristics Danville Short Term Treasury Pool 09/30/ /30/2015 Benchmark* Portfolio Portfolio Average Maturity (yrs) Modified Duration Average Purchase Yield n/a 0.93 % 0.91 % Average Market Yield 0.61 % 0.62 % 0.67 % Average Quality** AA+/Aaa AA+/Aaa Total Market Value 77,353,192 77,722,126 * BAML 1-3 Yr US Treasury Index ** Benchmark is a blended rating of S&P, Moody's, and Fitch. Portfolio is S&P and Moody's respectively. An Agency and a Corporate note were purchased during the quarter to extend the duration and structure of the portfolio to be more consistent with Chandler objectives, however, the portfolio duration is still below the 1-3 year Treasury benchmark. During the reporting period, several maturities facilitated the new purchases and the $655,000 net withdrawal from the portfolio. The purchased securities ranged in maturity from March 2019 to October

17 Sector Distribution Danville Short Term Treasury Pool September 30, 2015 June 30, 2015 The sector allocation was relatively stable. The two largest changes were the 2.0% decrease in the Agency allocation, which was offset by the 1.5% increase in the Money Market Fund allocation

18 Issuers 17 17

19 Duration Distribution Danville Short Term Treasury Pool September 30, 2015 vs. June 30, /30/ % 7.0 % 24.7 % 31.9 % 13.5 % 13.0 % 0.0 % 0.0 % 6/30/ % 8.4 % 16.0 % 41.3 % 18.2 % 7.1 % 3.6 % 0.0 % The duration of the portfolio shortened slightly, currently 1.49 versus 1.61 at the end of the prior quarter. Financial markets are likely to remain volatile in the near-term as the Federal Reserve considers the course of monetary policy in light of continued global headwinds. The Fed may push their first interest rate increase to 2016 as global weakness continues to plague the market. We anticipate keeping the duration close to the benchmark in the coming quarter using the proceeds from maturities and sales to extend the duration of the portfolio

20 Danville Short Term Treasury Pool Historical Average Purchase Yield Percent (%)

21 Investment Performance 20

22 Growth Over Time $2,500,000 Growth of $1 Million Danville Total Return Danville Realized Return LAIF $2,000,000 $1,500,000 $1,000,000 Historical Return of $1 Million Invested on March 31, 1995 As of: 09/30/2015 Dollar Value Return Danville Total Return $2,306, % Danville Realized Return $2,258, % LAIF $1,851, % 21 21

23 Account Profile Portfolio Characteristics Danville NERIAD Improvement Fund ( A) 09/30/ /30/2015 Benchmark* Portfolio Portfolio Average Maturity (yrs) Modified Duration Average Purchase Yield n/a 0.21 % 0.21 % Average Market Yield % 0.10 % 0.16 % Average Quality** /Aaa /Aaa Total Market Value 813, ,327 * BAML 3-Month US Treasury Bill Index ** Benchmark is a blended rating of S&P, Moody's, and Fitch. Portfolio is S&P and Moody's respectively

24 Issuers 23

25 SECTION 3 Portfolio Holdings 24

26 Danville Short Term Treasury Pool Account #21 Holdings Report As of 9/30/15 CUSIP Security Description Par Value/Units AGENCY Purchase Date Book Yield Cost Value Book Value Mkt Price Mkt YTM Market Value Accrued Int. % of Port. Gain/Loss Moody/S&P Fitch Maturity Duration 31331J2S1 FFCB Note 1.5% Due 11/16/2015 1,000,00 03/21/ % 1,023,38 1,000, % 1,001, , % G0SB0 FNMA Note 0.375% Due 12/21/2015 1,400,00 06/27/ % 1,392, ,399, % 1,400, , % 1, RN9 FHLB Note 1% Due 3/11/2016 1,000,00 08/26/ % 1,007,06 1,001, % 1,003, % 2, G0VA8 FNMA Note 0.5% Due 3/30/2016 1,500,00 05/15/ % 1,502,67 1,500, % 1,501, % 1, EADQ9 FHLMC Note 0.5% Due 5/13/2016 1,000,00 04/23/ % 1,002,54 1,000, % 1,001, , % R9 FHLB Note 0.375% Due 6/24/2016 1,400,00 05/30/ % 1,391,81 1,398, % 1,398, , % G0XP3 FNMA Note 0.375% Due 7/5/2016 1,000,00 08/26/ % 987,21 996, % 1,000, % 3, ECV27 FFCB Note 0.75% Due 7/19/2016 1,600,00 11/21/ % 1,609, ,602, % 1,604, , % 1, EACW7 FHLMC Note 2% Due 8/25/2016 1,850,00 Various 0.65 % 1,944, ,872, % 1,876, , % 4, G0CM3 FNMA Note 1.25% Due 9/28/2016 1,600,00 12/13/ % 1,603, ,600, % 1,612, % 12, EADS5 FHLMC Note 0.875% Due 10/14/2016 1,400,00 10/22/ % 1,408, ,402, % 1,405, , % 3, G0ES8 FNMA Note 1.375% Due 11/15/2016 1,815,00 Various 0.78 % 1,854, ,826, % 1,832, , % 5, V5G7 FFCB Note 5.2% Due 11/28/ ,00 11/18/ % 696, , % 617, , % 5, PV2 FHLB Note 1.625% Due 12/9/2016 1,400,00 10/11/ % 1,433, ,412, % 1,418, , % 5, G0GY3 FNMA Note 1.25% Due 1/30/2017 1,600,00 02/22/ % 1,612, ,603, % 1,615, , % 11, ECG99 FFCB Note 0.66% Due 2/22/2017 1,600,00 02/25/ % 1,599, ,599, % 1,599, , % MN8 FHLB Note 1% Due 3/10/2017 1,575,00 03/21/ % 1,551, ,568, % 1,583, % 15, G0ZB2 FNMA Note 0.75% Due 4/20/2017 1,400,00 03/11/ % 1,393, ,396, % 1,401, , % 4, DD8 FHLB Note 1% Due 6/21/2017 1,000,00 12/05/ % 1,017,18 1,006, % 1,006, , % EADJ5 FHLMC Note 1% Due 7/28/2017 1,400,00 01/07/ % 1,392, ,396, % 1,409, , % 13,

27 Danville Short Term Treasury Pool Account #21 Holdings Report As of 9/30/15 CUSIP Security Description Par Value/Units AGENCY Purchase Date Book Yield Cost Value Book Value Mkt Price Mkt YTM Market Value Accrued Int. % of Port. Gain/Loss Moody/S&P Fitch Maturity Duration 3135G0MZ3 FNMA Note 0.875% Due 8/28/2017 1,000,00 02/05/ % 994,99 997, % 1,001, % 4, EADL0 FHLMC Note 1% Due 9/29/2017 1,300,00 12/16/ % 1,292, ,295, % 1,307, % 11, EEFE5 FFCB Note 1.125% Due 12/18/2017 1,000,00 12/16/ % 1,001,75 1,001, % 1,007, , % 5, EADN6 FHLMC Note 0.75% Due 1/12/2018 1,200,00 Various 1.22 % 1,179,72 1,187, % 1,198, , % 11, G0TG8 FNMA Note 0.875% Due 2/8/2018 1,250,00 12/05/ % 1,236, ,239, % 1,251,91 1, % 12, G3NR7 FHLMC Callable Note 1X 2/21/ % Due 2/21/ ,00 02/09/ % 803,08 802, % 807, , % 5, NR EADP1 FHLMC Note 0.875% Due 3/7/2018 1,050,00 09/30/ % 1,031, ,037, % 1,050, % 13, G0WJ8 FNMA Note 0.875% Due 5/21/2018 1,200,00 06/16/ % 1,174, ,182, % 1,199, , % 16, M2 FHLB Note 1.5% Due 3/8/2019 1,260,00 05/26/ % 1,267, ,266, % 1,273, , % 6, EADG1 FHLMC Note 1.75% Due 5/30/2019 1,550,00 Various 1.46 % 1,567, ,565, % 1,581, , % 15, EE5 FHLB Note 1.625% Due 6/14/2019 1,500,00 06/23/ % 1,504,50 1,504, % 1,520, , % 16, EADK2 FHLMC Note 1.25% Due 8/1/2019 1,175,00 11/25/ % 1,152, ,156, % 1,174, , % 17, G0ZG1 FNMA Note 1.75% Due 9/12/2019 1,500,00 06/23/ % 1,507,86 1,507, % 1,526, , % 19, EADM8 FHLMC Note 1.25% Due 10/2/2019 1,300,00 Various 1.58 % 1,281, ,283, % 1,297, , % 13, Total Agency 44,211, % 44,420, ,226, % 44,491, , % 264, Aaa LAIF 90LAIF$00 Local Agency Investment Fund State Pool 1,047, Various 0.34 % 1,047, ,047, % 1,047, , % NR / NR NR Total LAIF 1,047, % 1,047, ,047, % 1,047, , % NR / NR NR 26

28 Danville Short Term Treasury Pool Account #21 Holdings Report As of 9/30/15 CUSIP Security Description Par Value/Units MONEY MARKET FUND FI Purchase Date Book Yield Cost Value Book Value Mkt Price Mkt YTM Market Value Accrued Int. % of Port. Gain/Loss Moody/S&P Fitch Maturity Duration 94975H296 Wells Fargo Treasury Plus MMFD 453 1,240, Various 0.01 % 1,240, ,240, % 1,240, % Aaa / Total Money Market Fund FI 1,240, % 1,240, ,240, % 1,240, % Aaa / Aaa US CORPORATE CX9 Wal-Mart Stores Note 1.5% Due 10/25/ ,00 05/24/ % 531, , % 520, , % Aa2 / AA AA AK0 Microsoft Note 2.5% Due 2/8/2016 1,300,00 09/19/ % 1,382, ,308, % 1,310, , % 1, Aaa / AA DE0 Wal-Mart Stores Note 0.6% Due 4/11/ ,00 04/10/ % 601, , % 600, , % Aa2 / AA AA PAC6 Google Inc Note 2.125% Due 5/19/2016 1,000,00 06/20/ % 1,046,77 1,007, % 1,010,39 7, % 2, Aa2 / AA NR HJA9 JP Morgan Chase Note 3.15% Due 7/5/ ,00 04/23/ % 671, , % 661, , % 7, A3 / A A GX3 IBM Corp Note 1.95% Due 7/22/2016 1,000,00 03/27/ % 1,038,63 1,009, % 1,011, , % 2, Aa3 / AA- A DV8 Procter & Gamble Co Note 1.45% Due 8/15/2016 1,160,00 07/27/ % 1,188, ,166, % 1,170, , % 3, Aa3 / AA- NR YAD3 3M Co. Note 1.375% Due 9/29/ ,00 10/17/ % 717, , % 705, % 1, Aa3 / AA- NR BD9 Berkshire Hathaway Note 1.9% Due 1/31/2017 1,200,00 08/27/ % 1,242, ,212, % 1,216, , % 3, Aa2 / AA A BFG0 Wells Fargo Corp Note 1.5% Due 1/16/ ,00 02/10/ % 848, , % 849, , % A2 / A+ AA G6W9 General Electric Capital Corp Note 1.625% Due 4/2/ ,00 01/12/ % 879, , % 879, , % 1, A1 / AA+ NR AJ9 Apple Inc Note 1% Due 5/3/2018 1,000,00 08/04/ % 989,40 989, % 995,33 4, % 5, Aa1 / AA+ NR Total US Corporate 10,855, % 11,138, ,900, % 10,930, , % 29, Aa3 / AA AA US TREASURY TT7 US Treasury Note 0.25% Due 10/15/2015 1,500,00 07/12/ % 1,493, ,499, % 1,499, , %

29 Danville Short Term Treasury Pool Account #21 Holdings Report As of 9/30/15 CUSIP Security Description Par Value/Units US TREASURY Purchase Date Book Yield Cost Value Book Value Mkt Price Mkt YTM Market Value Accrued Int. % of Port. Gain/Loss Moody/S&P Fitch Maturity Duration PJ3 US Treasury Note 1.375% Due 11/30/ ,00 06/23/ % 981, , % 977, , % 1, PS3 US Treasury Note 2% Due 1/31/2016 1,550,00 08/30/ % 1,634, ,556, % 1,559, , % 3, QF0 US Treasury Note 2% Due 4/30/ ,00 06/20/ % 843, , % 808, , % 1, VG2 US Treasury Note 0.5% Due 6/15/2016 1,500,00 09/27/ % 1,498, ,499, % 1,502, , % 3, RF9 US Treasury Note 1% Due 8/31/2016 1,500,00 08/29/ % 1,528, ,506, % 1,508, , % 1, RJ1 US Treasury Note 1% Due 9/30/2016 1,600,00 12/13/ % 1,631, ,608, % 1,609, % 1, RM4 US Treasury Note 1% Due 10/31/2016 1,600,00 01/29/ % 1,623, ,606, % 1,610, , % 3, B74 US Treasury Note 0.625% Due 2/15/2017 1,300,00 02/28/ % 1,298, ,299, % 1,302, , % 3, SM3 US Treasury Note 1% Due 3/31/2017 1,650,00 04/28/ % 1,656, ,653, % 1,662, % 8, SY7 US Treasury Note 0.625% Due 5/31/2017 1,600,00 09/19/ % 1,599, ,599, % 1,601, , % 1, TG5 US Treasury Note 0.5% Due 7/31/2017 1,000,00 01/15/ % 993, , % 998, % UZ1 US Treasury Note 0.625% Due 4/30/2018 1,200,00 05/22/ % 1,173, ,182, % 1,193, , % 11, ST8 US Treasury Note 1.25% Due 4/30/2019 1,600,00 08/04/ % 1,600, ,600, % 1,608, , % 8, Total US Treasury 19,375, % 19,554, ,391, % 19,442, , % 50, Aaa TOTAL PORTFOLIO 76,729, % 77,401, ,806, % 77,151, , % 345, Aaa TOTAL MARKET VALUE PLUS ACCRUED 77,353,

30 Danville NERIAD Improvement Fund ( A) Account #24 Holdings Report As of 9/30/15 CUSIP Security Description Par Value/Units AGENCY Purchase Date Book Yield Cost Value Book Value Mkt Price Mkt YTM Market Value Accrued Int. % of Port. Gain/Loss Moody/S&P Fitch Maturity Duration 3135G0SB0 FNMA Note 0.375% Due 12/21/ ,00 06/12/ % 550, , % 550, % Total Agency 550, % 550, , % 550, % Aaa MONEY MARKET FUND FI 94975H296 Wells Fargo Treasury Plus MMFD , Various 0.01 % 262, , % 262, % Aaa / Total Money Market Fund FI 262, % 262, , % 262, % Aaa / Aaa TOTAL PORTFOLIO 812, % 813, , % 813, % Aaa / Aaa TOTAL MARKET VALUE PLUS ACCRUED 813,

31 SECTION 4 Glossary of Investment Terms 30

32 Glossary of Investment Terms Agencies. Shorthand market terminology for any obligation issued by a government-sponsored entity (GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full faith and credit of the US government. Examples are: FDIC. The Federal Deposit Insurance Corporation provides insurance backed by the full faith and credit of the US government to certain bank deposits and debt obligations. FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds. FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB issues discount notes and bonds. FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing market. FHLMC, also called FreddieMac issues discount notes, bonds and mortgage pass-through securities. FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as FannieMae, issues discount notes, bonds and mortgage pass-through securities. GNMA. The Government National Mortgage Association, known as GinnieMae, issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government. PEFCO. The Private Export Funding corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the US government. TVA. The Tennessee Valley Authority provides flood control and power and promotes development in portions of the Tennessee, Ohio and Mississippi River valleys. TVA currently issues discount notes and bonds. 31

33 Glossary of Investment Terms Asked. The price at which a seller offers to sell a security. Average life. In mortgage-related investments, including CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected. Banker s acceptance. A money market instrument created to facilitate international trade transactions. It is highly liquid and safe because the risk of the trade transaction is transferred to the bank which accepts the obligation to pay the investor. Benchmark. A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of securities allowed under a specific investment policy. Bid. The price at which a buyer offers to buy a security. Broker. A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position. Certificate of Deposit (CD). A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs may be marketable. Collateral. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies. Collateralized Mortgage Obligations (CMO). Classes of bonds that redistribute the cash flows of mortgage securities (and whole loans) to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities. Commercial paper. The short-term unsecured debt of corporations. Cost yield. The annual income from an investment divided by the purchase cost. Because it does not give effect to premiums and discounts which may have been included in the purchase cost, it is an incomplete measure of return. 32

34 Glossary of Investment Terms Coupon. The rate of return at which interest is paid on a bond. Credit risk. The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer. Current yield. The annual income from an investment divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor s cost, current yield is unrelated to the actual return the investor will earn if the security is held to maturity. Dealer. A dealer acts as a principal in security transactions, selling securities from and buying securities for his own position. Debenture. A bond secured only by the general credit of the issuer. Delivery vs. payment (DVP). A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser s agent. Derivative. Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components ( Stripped coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate or index. Discount. The difference between the par value of a bond and the cost of the bond, when the cost is below par. Some shortterm securities, such as T-bills and banker s acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality. Diversification. Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk. Duration. The weighted average time to maturity of a bond where the weights are the present values of the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See modified duration). 33

35 Glossary of Investment Terms Federal funds rate. The rate of interest charged by banks for short-term loans to other banks. The Federal Reserve Bank through open-market operations establishes it. Federal Open Market Committee: A committee of the Federal Reserve Board that establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves. Haircut: The margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction (i.e. a repo). Leverage. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate higher than the cost of borrowing. Liquidity. The speed and ease with which an asset can be converted to cash. Margin. The difference between the market value of a security and the loan a broker makes using that security as collateral. Market risk. The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates. Market value. The price at which a security can be traded. Marking to market. The process of posting current market values for securities in a portfolio. Maturity. The final date upon which the principal of a security becomes due and payable. Medium term notes. Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts either on a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences. Modified duration. The percent change in price for a 100 basis point change in yields. Modified duration is the best single measure of a portfolio s or security s exposure to market risk. 34

36 Glossary of Investment Terms Money market. The market in which short term debt instruments (Tbills, discount notes, commercial paper and banker s acceptances) are issued and traded. Mortgage pass-through securities. A securitized participation in the interest and principal cashflows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security. Mutual fund. An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund s prospectus. Mutual funds can be invested in various types of domestic and/or international stocks, bonds and money market instruments, as set forth in the individual fund s prospectus. For most large, institutional investors, the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio. Premium. The difference between the par value of a bond and the cost of the bond, when the cost is above par. Prepayment speed. A measure of how quickly principal is repaid to investors in mortgage securities. Prepayment window. The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed. Primary dealer. A financial institution (1) that is a trading counterparty with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S. Government securities market. Prudent person (Prudent investor) rule. A standard of responsibility which applies to fiduciaries. In California, the rule is stated as Investments shall be managed with the care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and with like aims to accomplish similar purposes. Realized yield. The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities, which have not been sold from the portfolio. 35

37 Glossary of Investment Terms Regional dealer. A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities, and that is not a primary dealer. Repurchase agreement (RP, Repo). Short term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller s point of view, the same transaction is a reverse repurchase agreement. Safekeeping. A service to bank customers whereby securities are held by the bank in the customer s name. Structured note. A complex, fixed income instrument, which pays interest, based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes which have coupons that increase when other interest rates are falling, and which fall when other interest rates are rising, and "dual index floaters," which pay interest based on the relationship between two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements. Total rate of return. A measure of a portfolio performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains, and losses in the portfolio. U.S. Treasury obligations. Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds. Treasury bills. All securities issued with initial maturities of one year or less are issued as discounted instruments, and are called Treasury bills. The Treasury currently issues three- and six-month Tbills at regular weekly auctions. It also issues cash management bills as needed to smooth out cash flows. Treasury notes. All securities issued with initial maturities of two to ten years are called Treasury notes, and pay interest semi-annually. Treasury bonds. All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually. 36

38 Glossary of Investment Terms Volatility. The rate at which security prices change with changes in general economic conditions or the general level of interest rates. Yield to Maturity. The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost. Copyright 2015 by Chandler Asset Management, Inc. 37