Sr. I. Economic Commentary Volatility returned to capital markets during the first quarter of 2018, with declining U.S. equities and modest flattening of the treasury yield curve. While headline economic data remained mostly positive, markets responded to geopolitical fears regarding trade and global conflict. The Federal Open Market Committee (FOMC) increased the federal funds rate 25 basis points to a range of 1.50% - 1.75% in March. The Fed continued to unwind it s $4 trillion balance sheet in the first quarter to minimize disruption to markets. Inflationary data remained stable; however, the FOMC s economic projections indicate two additional rate hikes during 2018. Payrolls were up in the first quarter with March payrolls rising by 103,000. The average payroll increase was 202,000. Wages growth was modest at 0.3% in March, but wage inflation remained subdued. On a year-overyear basis, wages increased 2.7% in March. The monthly unemployment rate remained steady at 4.1% in March, unchanged for the year, signaling that the labor market is near full employment. The U-6, a broader measure of unemployment, declined to 8.0% in March from 8.2% in January and February. Manufacturing data indicated continued expansion, with the ISM Index value of 59.3 by quarter end. An ISM Index value above 50 is viewed as expansionary, signaling steady growth over the 2018 calendar year. The housing sector saw home prices increase 6.4% year over year in January driven by tight inventory. Total housing starts decreased 7.0% in February, as multi-family starts also realized a decline of 26.1%. Exposure to credit securities in the portfolios continued during the first quarter. The credit spreads versus U.S. Treasury securities widened modestly as the Federal Reserve continues to unwind its balance sheet. Additional asset classes continue to facilitate modest growth in incremental earnings for the portfolios. The City s investment portfolio outperformed the stated benchmark indices by 0.07% as the 10-year U.S. Treasury yield increased to 2.74% from 2.41% the prior quarter. s s Market Value Managed s $3,336,508,798 Special Purpose s $53,774,815 Finance Administrated $3,390,283,613 1
Sr. s II. Consolidated $2,872,311,160 Total Return 1-Month 3-Month YTD Total Return 0.27% -0.32% -0.32% Blended Benchmark (TR) 0.28% -0.40% -0.40% Excess Return -0.01% 0.08% 0.08% Current Return 1-Month 3-Month YTD Current Return 1.87% 1.79% 1.79% Blended Benchmark (CR) 2.39% 2.22% 2.22% Excess Return -0.52% -0.43% -0.43% Year-to-Date earnings on a current return basis for the Consolidated were $12,863,699. The 1-5 Year Strategy Blended Benchmark consists of 67.50% ICE BofAML 1-5 Year US Treasury & Agency Index, 17.50 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 7.50% ICE BofAML AAA US Asset Backed Securities, 5.00% ICE BofAML 0-3 Year US Agency CMOs and 2.50% ICE BofAML 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% ICE BofAML 1-10 Year US Treasury & Agency Index, 15.00 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 5.00% ICE BofAML AAA US Asset Backed Securities, 7.50% ICE BofAML 0-10 Year US Agency CMOs and 7.50% ICE BofAML 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 ICE BofAML Treasury/Agency 1-5 year index and the ICE BofAML 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 continue to rise. 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 first quarter of 2018. The Consolidated benchmarking indices are comprised of five ICE BofAML 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
Consolidated Composition Characteristics Average Duration 2.31 yrs Average Coupon 2.09% Average Yield to Maturity 2.44% Average Rating (S&P) AA+ Average Life 2.43 yrs Asset Allocation A, 10.2% AA, 56.5% Credit Quality (S&P) Maturity Distribution AAA, 33.3% Sr. LGIP, 2.0% Commercial Paper, 9.7% MBS, 2.3% CMO, 3.7% Muni, 3.8% Supra, 8.7% ABS, 5.4% Corps, 15.1% U.S. Agency, 29.4% U.S. Treasury, 19.9% The Consolidated s net assets increased by approximately $230 million during the first quarter of 2018. On March 31st, 2018, net assets were $2.87 billion, compared to $2.64 billion on December 31st, 2017, as inflows exceed expenditures. The increase in net assets was primarily due to cyclical tax revenue consistent with historical first quarter activity. A large portion of inflows for the City occur 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 higher during the first quarter. The WAM consistently increased throughout the quarter, as the portfolio exposure to core asset classes increased for asset liability matching throughout 2018. While modestly short benchmark duration, rebalancing and securities purchase activity during the first quarter extended duration more closely with the model and benchmark. The model continues to remain short benchmark duration. 35.0% 3 25.0% 2 15.0% 1 5.0% 14.9% 9.4% 18.2% 18.6% 30.5% 6.2% 2.2% 0-0.5 0.5-1 1-2 2-3 3-5 5-7 7-10 10+ s 3
Management Environment 2.5 Bloomberg United States Financial Conditions Index 0-2.5 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 U.S. Treasury Yield Curve 3.00% 2.50% Sr. Yield 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y As of 9/30/2017 As of 3/31/2017 As of 3/31/2018 2.00% 1.50% 1.00% 0.50% 0.00% s The Federal Reserve increased the Fed funds rate to the range of 1.50%-1.75% during the first quarter of 2018. The Fed is projecting a 2.40% fed funds rate by the end of 2018, which implies three more 25 basis point hikes by the end of the year. The one-month LIBOR rate was 1.88% as of March 31st, 2018, an increase of 32 basis points from December 31 st, 2017. As of March 31st, 2018, the yield of the two-year Treasury index was 2.08%, and the fiveyear Treasury index was yielding 2.56%. As of December 31 st, 2017, the yield of the twoyear Treasury index was 1.88%, and the five-year Treasury index was yielding 2.21% The median of economists forecast is for a 2.70% two-year Treasury yield at the end of 2018. The shape of the yield curve continued to flatten as short-term interest rates increased faster than long-term interest rates. The spread between the two-year Treasury index and the tenyear Treasury index was 47 basis points on March 31st, 2018, compared to 52 basis points December 31st, 2017. 4
Consolidated Top Holdings Top 5 Credit Holdings Issuer Market Value % of Industry Coca-Cola, Co. 74,316,465 2.7% Beverages Toyota Motor Credit Corp. 70,224,161 2.5% Automobiles Exxon Mobil Corp. 63,625,645 2.3% Energy JPMorgan Chase & Co. 54,114,371 1.9% Financials Apple, Inc. 53,108,396 1.9% Technology Total 315,389,038 11.3% *Credit holdings include commercial paper, asset-backed securities, and corporate bonds. 1.9% 1.9% 2.7% 2.5% 2.3% Sr. Top 5 Agency Holdings Issuer Book Value % of FNMA 291,125,892 10.4% FHLB 260,624,949 9.3% FHLMC 196,102,032 7.0% FFCB 70,972,764 2.5% TVA 59,527,303 2.1% 878,352,940 31.3% 2.1% s 2.5% 7.0% 9.3% 10.4% 5
III. Airport Reserve $416,627,100 Sr. Total Return 1-Month 3-Month YTD Total Return 0.41% -0.66% -0.66% Blended Benchmark (TR) 0.45% -0.71% -0.71% Excess Return -0.04% 0.05% 0.05% Current Return 1-Month 3-Month YTD Current Return 2.08% 2.13% 2.13% Blended Benchmark (CR) 2.68% 2.49% 2.49% Excess Return -0.60% -0.36% -0.36% Year-to-Date earnings on a current return basis for the Reserve were $2,189,775. The 1-5 Year Strategy Blended Benchmark consists of 67.50% ICE BofAML 1-5 Year US Treasury & Agency Index, 17.50 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 7.50% ICE BofAML AAA US Asset Backed Securities, 5.00% ICE BofAML 0-3 Year US Agency CMOs and 2.50% ICE BofAML 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% ICE BofAML 1-10 Year US Treasury & Agency Index, 15.00 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 5.00% ICE BofAML AAA US Asset Backed Securities, 7.50% ICE BofAML 0-10 Year US Agency CMOs and 7.50% ICE BofAML 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 ICE BofAML 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
Airport Reserve Composition Characteristics Average Duration 3.41 yrs Average Coupon 2.36% A, 10.1% Credit Quality (S&P) AAA, 28.4% Average Yield to Maturity 2.60% Average Rating (S&P) AA+ Average Life 3.69 yrs AA, 61.5% Sr. CMO, 6.5% Muni, 4.1% Supra, 10.3% ABS, 4.6% Corps, 15.3% Asset Allocation MBS, 3.5% CP, 0.7% U.S. Agency, 32.7% U.S. Treasury, 22.3% 4 35.0% 3 25.0% 2 15.0% 1 5.0% Maturity Distribution 33.4% 22.7% 16.7% 11.1% 8.0% 4.0% 4.1% 0-0.5 0.5-1 1-2 2-3 3-5 5-7 7-10 10+ s 7
IV. Workers Compensation Composition $47,570,538 Characteristics Average Duration 4.35 yrs Average Coupon 2.81% A, 5.2% Credit Quality (S&P) AAA, 31.6% Average Yield to Maturity 2.90% Average Rating (S&P) AA+ Average Life 5.64 yrs AA, 63.2% Sr. Muni, 20.9% MBS, 6.7% CMO, 4.5% Supra, 15.3% Asset Allocation ABS, 6.2% U.S. Agency, 20.8% U.S. Treasury 1 Corps, 15.6% Maturity Distribution 7.8% 3.7% 3.1% 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 2009. 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 first quarter of 2018 was 2.58%. Year-to-Date earnings on a current return basis for the Worker s Compensation were $255,936. 35.0% 3 25.0% 2 15.0% 1 5.0% 33.0% 14.5% 19.1% 18.8% 0-0.5 0.5-1 1-2 2-3 3-5 5-7 7-10 10+ s 8
Sr. V. Special Purpose s $53,774,815 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 1st Qtr Current Return 2018 YTD Earnings FAA Escrow Account $49,696,000 6.69% $647,811 Denver Cableland Trust $4,078,815 3.52% $34,134 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 March 31st, 2018, 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 (www.denv) or by contacting the at 720-913-3091. s Administrator s 9
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 March 31, 2018, 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 March 31, 2018, appears to be accurately reflected. Signed this 12 th day of April 2018 Nicole Dragoo COO, Chief Compliance Officer 6225 Lusk Boulevard San Diego, CA 92121 Phone 800.317.4747 chandlerasset.com