Page 2 of 5 Checking Account - $3,391,760 This is the Authority s commercial banking account for accounts payable, payroll, deposits and electronic ac

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1 Meeting Date: Subject Summary of Issues Recommendations Financial Implications Options Attachments (See APC Packet dated 5/7/15) Accept Quarterly Cash and Investment Report for the Period Ended March 31, 2015 The Authority s Investment Policy calls for a quarterly report on investment activity to be prepared and submitted to the Executive Director, APC, and the Authority Board. The accompanying report covers transactions from January 1 through March 31, Staff seeks acceptance of this report. A summary of balances and transactions is provided in the text below. N/A A. Investment Summary for Quarter Ended March 31, 2015 B. Investment Detail for Quarter Ended March 31, 2015 C. Investment Transactions for Quarter Ended March 31, 2015 D. Compliance Report for the Quarter Ended March 31, 2015 Changes from Committee None Background The Authority s Investment Policy calls for a quarterly report to be submitted to the Executive Director, APC, and the Authority Board. The report summarizes investment balances, transactions, returns, and other pertinent investment matters. The Authority s cash and securities are invested in separate portfolios depending upon the objectives for the assets being managed. As of March 31, 2015, the combined total market value for all cash and investments was $217,674, A.3-1

2 Page 2 of 5 Checking Account - $3,391,760 This is the Authority s commercial banking account for accounts payable, payroll, deposits and electronic activity. Unencumbered funds at the end of each business day are invested in an interest bearing account with Wells Fargo Bank. Portfolio Cash Account - $6,769,527 The Investment Portfolio s balance is invested in the Wells Fargo Investment Government Money Market fund while cash is in transition for the purchase of investment securities. Local Agency Investment Fund (LAIF) - $32,517,671 LAIF is a pooled investment fund managed by the State Treasurer s Office for the investment of public agency funds. LAIF is a short term investment alternative for the Authority. The LAIF return was 0.27% for the quarter. Investment Portfolio - $95,696,106 The Investment Portfolio includes individual securities, such as Treasury Notes, Federal Agency Securities, high quality corporate notes and other securities permitted by the Authority s Investment Policy. The portfolio is actively managed by PFM Asset Management (PFM), the Authority s independent investment advisor. The investment strategy is to manage total return consistent with 1 to 3 year maturity treasuries as benchmarks for performance and maturity duration. Annualized returns for the portfolio and the benchmarks are as follows: Annualized Returns as of March 31, 2015 CCTA 1-3 Year UST Index* Past Year 1.13% 1.00% Past 2 Years 0.77% 0.69% Effective Duration (Years) * This index is the Bank of America Merrill Lynch 1 3 years U.S. Treasury Note Index. This is a commonly used total return index of all U.S. Treasuries with a maturity between 1 and 3 years. The figures above represent total return numbers. Total return is a period-to-period performance measurement that includes income, realized and unrealized gains and losses. Total return is an industry standard method of measuring performance. This differs from yield, which is simply a snapshot projection of the income to be earned for the coming year, and 2.A.3-2

3 Page 3 of 5 includes no principal value changes. Total return for the twelve months ended March 31, 2015 was 1.13%. Cash received on the portfolio totaled $260,766. Summary and detail information regarding securities within the portfolio can be found in the accompanying reports from PFM. PFM Portfolio Manager Commentary: U.S. economic growth has slowed perceptibly in recent months, which could be due to another harsh winter, or perhaps reflects emerging weakness. Retail sales, personal consumption, and durable goods indicators were somewhat weaker than they were in the fourth quarter of Labor markets were a bright spot, as job creation was strong and the unemployment rate continued its downward trend. The euro zone showed signs of reviving from its no-growth torpor as the European Central Bank (ECB) launched its much-publicized asset purchase program. Quantitative easing (QE) in Europe was matched by a dovish stance by the Federal Reserve (Fed), which suggested after its March meeting that the first move to tighten would be some time off. Inflation remains below the Fed s preferred level, and a strong dollar and low oil prices could keep a damper on prices for some time. The Federal Open Market Committee s (FOMC s) March policy statement was accompanied by FOMC members economic forecasts, which showed that expectations for growth and interest rate rises in the coming quarters were lower than they were in previous forecasts. Bond Markets Treasury yields fell modestly for most maturities in March; most notably, three and fiveyear Treasuries ended the month about 0.12% lower. Longer maturities (10 years and greater) fell 0.05% to 0.07%. This rally resulted in positive returns for virtually all fixedincome indices and continued the trend of lower rates that started at the end of Inflation below targets, global capital flows, and QE in the euro zone are pushing against the natural tendency for U.S. interest rates to rise as the U.S. economy expands. The Agency sector was unable to keep pace with the market rally. This caused returns for the sector to trail Treasury counterparts, with the greatest impact on longer maturities. 2.A.3-3

4 Page 4 of 5 While high-quality corporate securities (rated A or better) generated positive returns, they also generally underperformed comparable-maturity Treasuries. Issuers with lower credit quality fared better as their higher yields contributed incremental income. The mortgage-backed securities (MBS) sector produced similar returns to those of investment-grade corporates. Continued Fed participation in the market, such as the likelihood of the Fed continuing to reinvest pay-downs from its large mortgage portfolio for the foreseeable future and a passive view of intermediate-term inflation provided some support for what could otherwise be a volatile sector. PFMAM Outlook We expect U.S. interest rates to trend modestly higher in coming months, with the pace of change contained by the weak outlook for inflation and central banks desire to avoid market disruptions due to abrupt actions. U.S. monetary policy is likely to tighten as the year progresses, with the impact felt mostly in short and intermediate maturities. We believe that the key driver of fixed-income returns will be the incremental income earned in sectors other than Treasuries. We will look to position portfolio durations and yield curve placements in a way that supports maximizing non-treasury assets while carefully managing duration. Investment-grade corporates, a key component of our current strategy for the Authority, remain fairly supported by the growing economy, and we believe their spreads compared to Treasuries continue to offer value. They are also the preferred vehicle for capturing value appreciation known as yield curve roll-down. The opportunity for incremental returns in Agencies is modest. Intermediate maturities can offer a few basis points of incremental yield, and some specific callable structures hold modest value. The MBS sector offers another opportunity to add to returns through diversification, as noted, Agency bonds and notes are currently not very attractive alternatives to Treasuries. The use of MBS requires diligent analysis of security-specific collateral and cash-flow characteristics to identify securities that hold value and have manageable prepayment risks. 2.A.3-4

5 Page 5 of Series B Bonds - $64,241,515 This portfolio contains Measure J construction bond proceeds from the 2012 Series B Sales Tax Revenue Bonds issued on December 18, The bond proceeds are invested in a local agency investment fund, the Capital Asset Management Program (CAMP), and drawn down on a monthly basis as needed to fund invoices related to expenditures for Measure J projects. CAMP s return was 0.07% for the month of March Securities Held in Escrow - $15,058,028 The Authority has an Interest Rate Swap contract with Bank of America as a tool to hedge against variable interest rate exposure on the Authority s $201.5 million Floating Rate Notes (FRNs). The Swap s market value changes as long term interest rates change. As interest rates decline, the market value of the Swap declines. For the past 6 months, long term interest rates have been declining due to concerns over a weakening global economy. As rates decline, the Swap value has declined to a negative $53.3 million as of March 31st; a change from a negative $48.2 million the prior quarter end. The Authority is required to post collateral in the form of cash or securities for amounts below a negative $40 million. Bank of America currently holds $14.9 million (par value) of Authority securities as collateral. While held by Bank of America, all interest generated from these securities passes through to the Authority. The securities will be returned to the Authority s custody bank when long term interest rates rise and the value is greater than a negative $40 million. Certification: The investment portfolio is in compliance with the Authority's adopted investment policy. Furthermore, as required by State regulation, it is certified that the Authority has sufficient cash liquidity to meet expected expenditure requirements over the next six months for fiscal operations. This information has been reviewed and approved by the Authority s Chief Financial Officer. 2.A.3-5

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