Agenda for Today Effective Policy and Strategies For Today s Economic Environment Objectives and Goals Decisions Policy Permissible s Strategy Implementation Case Studies 2 Objectives & Goals Making Informed Decisions Policy Legal Remember: Legal may not be suitable Reporting Internal Controls Safety Preservation of principal Monitor & Rebalance Objectives & Goals Cash Forecasting Liquidity What are your liquidity needs? Market Rate of Return Does the investment have a market yield? Implement Strategy Outlook Horizon 3 4 1
Policy Internal Controls & Due Diligence Scope Statement of Objectives Ethics Identify s Maximum Maturities Diversification Authorized Dealers Reporting The investment policy provides GUIDELINES for investing. And PROTECTION for you! Proper Administrative Systems» Identify potential weaknesses in investment functions Written Procedures to Select Financial Institutions Organizational Structures» Who performs specific investment functions? Training Programs» Does each employee receive annual training? Periodic Internal Audits» Check procedures of outside investment professionals 5 6 History of Ohio Laws Know the Risks of Investing ORC 135.14: Schools, Townships, Cities, etc. ORC 135.35: Mainly Counties or other agencies Charter City: May not follow state guidelines Market Risk Credit Risk Liquidity Risk Reinvestment Rate Risk Political Risk Decline in market value Securities, dealers, banks, CDs Ability to sell Reinvesting maturities in lower interest rates Headline Risk A well diversified portfolio will help reduce these risks. 7 8 2
Price Yield Relationship Price Fixed Coupon Rate Yield Permissible s 9 10 Treasury Securities Government Securities Full faith and credit of the U.S. government Most liquid type of security Purchase directly from U.S. Treasury or through a broker/dealer» Primary market» Secondary market Regular auction schedule Full faith and credit or implied backing by U.S. government Benchmarks, reference notes and global auctions Customized structures Various call types Bought through broker/dealers» New issue» Secondary market D D 11 12 3
Government Securities Certificates of Deposit Know how a Government Security Works» Interest payments» Safety» Price fluctuations» Liquidity Things to Consider in Today s Markets» Be careful of structures with multiple coupon rates» Be cognizant of call options on securities» Compare bond price with other dealers» Know the difference between the yield and coupon rate! Credit Risk» Although the deposit is guaranteed, there is no guarantee that the institution will not fail.» Potential administration or headline risk Liquidity Risk» CDs are not liquid investments and may have early withdrawal penalties if not held to maturity. Other factors that should be considered with FDIC insured CDs:» Financial strength of the institution» CDARs Program» Change in FDIC insurance 13 14 Commercial Paper Corporate Securities Need additional training approved by AOS Less than 25% portfolio allocation Maturity restriction of 180 or 270 days Highest rating category from two of the three rating agencies (Moody s, S&P, Fitch) Company assets in excess of $500 million Holding must be less than 10% of issuer s outstanding commercial paper program ORC 135.35 permits up to 15% of interim funds in corporate securities. Must be rated AA or better and have a two year maturity. Know what you are buying and the risk associated.» Credit risk» Liquidity risk 15 16 4
Municipal Securities Mutual Funds ORC 135.14 permits entities to purchase obligations of the State. ORC 135.35 permits entities to purchase obligations of political subdivisions of the State. Charter Cities could have specific language for purchasing municipals. Know what you are buying and the risks associated. No-load money market funds invested in:» Government securities» Repurchase agreements collateralized by government securities Registered Company Sponsored by mutual fund company and regulated by SEC 17 18 Repurchase Agreements Bankers Acceptances Term loan with collateral in the form of securities Master Repurchase Agreement outlines procedures Reverse repo enables investment officer to leverage the portfolio PROHIBITED Need additional training approved by AOS Less than 25% portfolio allocation Maturity restriction of 180 days 19 20 5
STAR Ohio STAR Plus Pool of assets Similar Policy to money market fund Daily interest income Daily liquidity (within guidelines) State administered Purchase directly from Treasurer of State Convenience of one account and one statement All deposits are demand deposits and are 100% FDIC-insured Up to $15 million in deposits per legal entity Weekly withdrawal and daily deposit capability Daily transparency with 24/7 online access to account information 21 22 Cash Equivalent Options Fixed Income Securities PROS Safety usually very high Meet current cash flow needs Very easy to administer CONS Reinvestment Risk Can t lock in fixed rates Due diligence on underlying investments PROS Match investments to expected cash flow Diversify portfolio risks Locked in higher fixed rates CONS Safety considerations Market price/liquidity risk Can be difficult to administer 23 24 6
Implementing Strategy Who will help you invest? STAR Ohio/Plus STAR Ohio Know the investments of STAR Ohio Look over the annual report Plus Understand how program works Monitor deposit Banks Banks Make sure they understand nuances of public entities Work with banks you know and trust Advisors Acts as a fiduciary in the client s best interest Who do they work with? What are their credentials? Check them out: www.advisor.sec.gov Brokers Recommends suitable investments Who do they work with? What do they do and how much do they charge? Check them out: www.finra.org CASE STUDY: Construction Fund Perform the Due Diligence Before Investing 25 26 Develop a Draw Schedule Typical Draw Schedule Monthly cash flows Make sure to include all costs» Architect fees, construction costs, etc. $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- 27 28 7
Construction Fund Strategy Largely dictated by draw schedule» How confident are you in the draw schedule? Match investment maturities to monthly cash needs Callable vs. Non-Callable securities Awareness of liquidity of securities if unexpected cash needs arise (i.e. U.S. Treasury vs. Bank CD) CASE STUDY: General Fund 29 30 Cash Forecast & Horizon Cash vs. Core Part of your daily tasks Look at both current and historic cash flows Review Cash Flows Questions to Ask How much to keep liquid? How much to invest longer term? Better align investments for improved investment returns Keeping too much liquidity is an opportunity cost Establish Horizons for Funds Cash Management Cash Portfolio» Operating needs for current year» Funds with uncertain time horizon Management Core Portfolio» Cash balance with time horizon greater than once a year» Apply investment strategy to maximize earnings 31 32 8
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 6/5/2014 Typical Cash vs. Core Establish Outlook $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 General Fund Monthly Ending Balance CASH CORE Identify major forces and factors that influence the markets» What is the macroeconomic situation? Understand current economic status and trends» Economic indicators» Market commentaries Identify future scenarios and their investment implications» What are the economists saying? Identify factors that signal a change in the current economic environment» Become an economist $- 33 34 Yield Curve Analysis Yield Curve Analysis Normal Yield Curve Steep Yield Curve Yield Slopes gently upward. Long-term rates are higher than short-term rates. Expectations are interest rates will increase in the future. Yield Steepens as the spread between short and long term securities widens. Typically signals an economic expansion is expected. Years to Maturity Years to Maturity 35 36 9
Yield Curve Analysis Yield Curve Analysis Inverted (Negative) Sloped Yield Curve Flat (Humped) Yield Curve Yield Years to Maturity Expectations are for lower rates. Short term rates higher than long term. Typically signals an economic slowdown, or recession. Yield Years to Maturity Long-term yields are the same as short term rates. Interest rates are highest in the intermediate maturity range. Typically, odds high for economic slowdown. Indicator that rates may be higher in the near term, then decline. 37 38 Disclosure Investing in securities involves inherent risks, including the risk that you can lose the value of your investment. There is no assurance that the investment process will consistently lead to successful results. Opinions and forecasts regarding financial markets, economic indicators, portfolio composition and holdings, are all subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security. The information presented is not intended as legal or tax advice. You should consult an appropriate professional to obtain legal and/or tax advice. Thank You, Inc. 6125 Memorial Drive Dublin, OH 43017 Phone: 866.633.3371 www.meederinvestment.com Management 39 10