Pima County Community College Finance and Audit Committee Presentation January 20, 2017 John Utter Managing Director, Head of Institutional Client Service U.S. Scott Cabalka VP, Institutional Portfolio Manager RBC Global Asset Management (U.S.) Inc. Minneapolis Boston Chicago 800.553.2143 us.rbcgam.com
Table of Contents I. Market Update II. III. Portfolio Review Appendix I. Professionals & Bios II. Glossary of Investment Terms III. Investment Policy Statement 2
Market Review 3
Post-Election - Elevated Volatility & Uncertainty Issues impacting the bond market Lower taxes Lower regulations Infrastructure and defense spending Immigration reform Trade reform Fed Strong dollar Geo-political (European 2017 Elections) Updated as of January 2017 4
Post-Election - Elevated Volatility & Uncertainty Timing and scale of these two outcomes drives the trajectory of the Fed and inflation: Fiscal stimulus positive for short-term growth Strong congressional support to reduce corporate and individual taxes Stimulates growth but negative for the deficit Implementing additional fiscal stimulus (infrastructure spending, defense, etc.) is more challenging Immigration and Trade negative for growth Reduced supply of labor creates wage pressure Removes labor growth as an input to organic growth Tariffs or other reductions in free trade are negative to growth Updated as of January 2017 5
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Federal Reserve and Rate Expectations Fed 1300 Bloomberg Dollar Index More hawkish in tone - but it may take more time than they think 1200 Elevated uncertainty is a reason to be measured Factors keeping rates low 1100 1000 900 Strong US Dollar functions as a monetary tightening Demographic headwinds Accommodative central banks in Europe and Asia 2.5% 2.0% 10-year Breakevens Factors pushing rates higher 1.5% Growth prospects improving Fiscal stimulus improves Fed Model 1.0% Inflation expectations rising 10-year Breakevens rising Slow Fed not off the table with strong USD and Rates headwinds coupled with high uncertainty around timing and impact of changes As of 12.31.16 Source: RBC GAM, Bloomberg 6
Yield Change (bps) Yield U.S. Treasury Curve Over the Past Year 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1m 6m 12m 2yr 3yr 5yr 7yr 10yr 30yr 12/31/16 09/30/16 12/31/15 120 70 20-30 1m 6m 12m 2yr 3yr 5yr 7yr 10yr 30yr 3 mo chg 1 yr chg As of 12.31.16 Source: Bloomberg 7
2-Year/5-Year/10-Year Treasury Yields 3.0% 3.0% 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 As of 12.31.16 Source: Bloomberg 2-Yr Treasury 5-Yr Treasury 10-Yr Treasury 8
Expected Path of Fed Funds 3.5% 3.0% 2.5% 2.0% Fed expectations of rate hikes have dropped sharply over the last 2 years, but rebounded in December 2016 RBC GAM-US Expectations Fed Fund Futures 1.5% 1.0% 0.5% Fed Dots Dec 2015 Fed Dots Sep 2016 Fed Dots Dec 2016 0.0% DEC 16 MAR 17 JUN 17 SEP 17 DEC 17 MAR 18 JUN 18 SEP 18 DEC 18 MAR 19 JUL 19 OCT 19 As of 12.31.16 Source: Bloomberg, The Federal Reserve, RBC GAM-US. Past performance is not indicative of future results. Fed Dots: Each quarter, FOMC participants are asked to assess appropriate monetary policy. Each blue dot indicates the average value (rounded to the nearest 1/8 percentage point) for all FOMC participants judgment of the midpoint of the appropriate target range for the federal funds rate at the end of the specified calendar year or over the longer run. Weighted average of FOMC participant responses at the previous FOMC meeting (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm). RBC GAM-US Expectations / Model Rates are based on projected economic, geo-political and market conditions. Views of RBC Global Asset Management are as of the date of publication and are subject to change without notice. The information is not a guarantee of future rates and actual results may differ materially from those described as a result of various factors. 9
RBC GAM-US Fair Value Treasury & Fed Funds Rate Forecast Current Market Rate RBC GAM-US Modeled Fair Rate RBC GAM-US Forecast 1 Year Forward Fed Funds 0.625% 0.625% 1.211% 1 Yr 0.81% 0.72% 1.35% 2 Yr 1.19% 1.04% 1.62% 3 Yr 1.45% 1.33% 1.90% 5 Yr 1.93% 1.89% 2.35% 10 Yr 2.44% 2.46% 2.74% We believe market is fair valued to slow pace of rate hikes Timing is not as important as trajectory As of 12.31.16 Source: RBC GAM-US. RBC GAM-US Model Rates are based on projected economic, geo-political and market conditions. Views of RBC Global Asset Management are as of the date of publication and are subject to change without notice. The information is not a guarantee of future rates and actual results may differ materially from those described as a result of various factors. 10
Economic Outlook Previous outlook may be revised higher but is contingent upon stimulus initiatives preceding geo-political or trade war event Outlook Domestic Growth: 2.0% - 2.25% Real U.S. GDP in 2017 Close to Full Employment: Jobs growth has been solid Inflation: Expectations on the rise is it from domestic growth or a result of trade reform? Monetary Policy: USD strength and global economic outlook is limiting the Fed s ability to raise rates Market Volatility: Very high for near future Risks to Outlook Deterioration of geo-political issues - Global populism rising Monetary policy error by the Fed (should they move too fast) Growth accelerates with Trump, Fed is behind and rates spike further Updated as of January 2017 11
Portfolio Review 12
Investment Policy Compliance General Objectives Safety of Principal Liquidity Return Compliance with Investment Principles Suitable and Authorized Investments Diversification Maximum Maturity Credit Quality Quarterly Reporting 13
Integrated Risk Management Multi-Layer Controls to Manage Risk in Client Portfolios 14
Further Investment Policy Requirements Eligible Investments: US Treasury Securities (concentration max: 100%) Obligations of the US Government, its Agencies and Instrumentalities, including Agency mortgage backed securities (concentration max: 100%) Arizona municipal bonds (concentration max: 20%) Maximum maturity: 5 Years Please also refer to the Investment Guidelines and Arizona State Statutes, located in the Appendix of this presentation. 15
Portfolio Performance Pima County Community College 1-3 Year Portfolio YTD 2016 4Q 2016 3Q 2016 2Q 2016 1Q 2016 1 Year 3 Years Since Inception (7.1.12) Total Portfolio (Gross of Fees) 1.03-0.46 0.04 0.48 0.97 1.03 0.89 0.77 Total Portfolio (Net of Fees) 0.96-0.48 0.03 0.47 0.95 0.96 0.81 0.70 BofAML 1-3 Year Tsy & Agy Index 0.89-0.43-0.10 0.52 0.90 0.89 0.69 0.61 As of 12.31.16 Source: RBC GAM, BofAML All returns for periods greater than one year are shown on an annualized basis. Past performance is not indicative of future results. 16
Portfolio Performance Pima County Community College Cash Management Portfolio YTD 2016 4Q 2016 3Q 2016 2Q 2016 1Q 2016 1 Year 3 Years Since Inception (5.1.12) Total Portfolio (Gross of Fees) 0.63 0.10 0.12 0.18 0.22 0.63 0.31 0.27 Total Portfolio (Net of Fees) 0.56 0.08 0.11 0.17 0.20 0.56 0.24 0.20 BofAML 91 Day T-Bill Index 0.33 0.08 0.10 0.07 0.07 0.33 0.14 0.12 As of 12.31.16 Source: RBC GAM, BofAML All returns for periods greater than one year are shown on an annualized basis. Past performance is not indicative of future results. 17
Portfolio Characteristics Pima County Community College 1-3 Year Portfolio Sector Distribution Duration Distribution Gov't Related 8.4 32.5 3-5 Years 0.0 7.8 Securitized 0.0 49.5 1-3 Years 78.3 92.8 Treasury 18.0 91.6 Less Than 1 Year 7.2 13.9 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Pima County Community College - 1-3 Yr BofAML 1-3 Yr Tsy & Agy Pima County Community College - 1-3 Yr BofAML 1-3 Yr Tsy & Agy Characteristics Pima County Community College 1-3 Yr BofAML 1-3 Yr Tsy & Agy Effective Duration 1.87 years 1.82 years Market Yield 1.49% 1.17% Average Quality AAA AAA As of 12.31.16 Source: RBC GAM, BofAML, Sector and Duration distribution charts is excluding cash & equivalents 18
Portfolio Characteristics Pima County Community College Cash Management Portfolio Sector Distribution Duration Distribution Gov't Related 0.0 35.1 100.0 Less Than 1 Year Treasury 64.9 100.0 100.0 0% 20% 40% 60% 80% 100% Pima County Community College - Cash Management BofAML 91 Day T-Bill 0% 20% 40% 60% 80% 100% Pima County Community College - Cash Management BofAML 91 Day T-Bill Characteristics Pima County Community College Cash Management BofAML 1-3 Yr Tsy & Agy Effective Duration 0.41 years 0.14 years Market Yield 0.69% 0.45% Average Quality AAA AAA As of 12.31.16 Source: RBC GAM, BofAML, Sector and Duration distribution charts is excluding cash & equivalents 19
Holdings as of December 31, 2016 Pima County Community College 20
Holdings as of December 31, 2016 Pima County Community College 21
Holdings as of December 31, 2016 Pima County Community College 22
Holdings as of December 31, 2016 Pima County Community College 23
Holdings as of December 31, 2016 Pima County Community College 24
Holdings as of December 31, 2016 Pima County Community College 25
Holdings as of December 31, 2016 Pima County Community College 26
Holdings as of December 31, 2016 Pima County Community College 27
Appendix 28
The Fixed Income Team Focus and Integration Investment team empowered to excel through researchfocused, sector-team structure Institutional Portfolio Managers provide continuous review and client communication Lead Portfolio Managers and Sector Teams average 20 years of experience Brian Svendahl, CFA Co-Head, U.S. Fixed Income Municipal Research Raye Kanzenbach, CFA Senior Portfolio Manager Laurie Mount Analyst John Utter Head of Institutional Client Service U.S. Bridget Tompkins Client Service Manager Mike Lee, CFA Chief Executive Officer, President & Chief Investment Officer Lead Portfolio Managers Sector Teams Government & Mortgage Research Scott Kirby Senior Portfolio Manager Eric Hathaway, CFA Portfolio Manager Valinie Dayaljee Junior Analyst Whitney Rueckl Junior Analyst Brandon Swensen, CFA Co-Head, U.S. Fixed Income Credit Research Jake Rath, CFA Portfolio Manager James Weinand, CFA Portfolio Manager Alexey Baskakov, CFA Senior Analyst John Northup, CFA Analyst Matt Mueller, CFA Analyst Institutional Portfolio Managers / Client Service Ronald Homer Managing Director President Access Capital Catherine Banat Institutional Portfolio Manager Scott Cabalka Institutional Portfolio Manager Randy Harrison, CFA Institutional Portfolio Manager Stacy Johnson, CFA Institutional Portfolio Manager Risk Management Joshua Howard, CFA Director of Investment Risk Edith Lotterman, CFA Senior Performance Analyst Tiffany Knutson Senior Performance Analyst Michael Scheel Performance Analyst Steven Azar Senior Investment Risk Analyst Patrick Sonmene Investment Risk Analyst Sydney Seydel Investment Risk Analyst Joe Taffe Operational Risk Analyst Amy Carlson Associate Portfolio Manager Chris Boppre Associate Portfolio Manager As of 1.1.17 29
Professionals John A. Utter Managing Director, Head of Institutional Client Service U.S. John Utter is responsible for developing and implementing industry leading client service practices and leads the firm's client service efforts, including the development of asset allocation solutions for ultra high net worth and off-shore clients. He joined RBC GAM-US in 2010 from RiverSource Investments, where he was a divisional sales director leading a sales team that helped clients with investment solutions ranging from traditional equities and fixed income to portable alpha and absolute return strategies. Before that, John spent 15 years in institutional sales assisting banks, insurance companies and hedge funds in the U.S. and Europe with their fixed income investments. He began his career in the investment industry in 1988. John earned a BA from St. Lawrence University, holds FINRA Series 7, 24 and 63 licenses and is registered as an Associated Person with the National Futures Association. Scott Cabalka Vice President, Institutional Portfolio Manager Scott Cabalka is responsible for client service coverage of the RBC Money Market Funds, local government investment pools, and other short fixed income solutions. Scott provides guidance on investment policy and implementation for all of our short mandates. In addition, he leads our communication with clients invested in our short fixed income strategies and ensures that they receive the most appropriate solutions and service. Before joining RBC GAM-US in 1993, Scott was an account executive at Merrill Lynch, where he focused on short strategies for institutional investors. He has specialized in short fixed income since he began working in the investment industry in 1980. Scott earned a BS and an MBA in Finance from the University of Minnesota Carlson School of Management and holds a FINRA Series 7 license. 30
Glossary of Investment Terms Total Return The sum of all investment income plus the changes in the capital valuation in the portfolio. Market Value The current face amount of the security multiplied by the market price. Market Yield The portfolio's overall yield, as measured by the market valuations of the portfolio holdings. Book Yield The yield to maturity of a security, as calculated at the time of purchase. Duration The measure of interest rate sensitivity which estimates the price change of a security (or a portfolio of securities) resulting from a change in interest rates. Duration may also be considered to be a measure of the "average maturity" of a stream of payments associated with a bond. It reflects a weighted average of the lengths of time until the remaining payments are made from a bond (or portfolio). Convexity A measure of interest rate sensitivity, used along with duration, which estimates the incremental price change resulting from the change in interest rates. OAS Option-Adjusted Spread (OAS) is a measure of a security's extra return over the return of a comparable risk-free security. Spread Duration The measure of the sensitivity of a security's price to changes in spreads, relative to U.S. Treasuries (a risk-free security). Wider (or more narrow) spreads will cause the price of the securities to fall (rise). Amortized Cost Unrealized Gain, Unrealized Loss The price paid for the security, plus or minus adjustments for any purchase discounts of premiums associated with the purchase. The gain/loss that would be recognized from selling an asset, as compared to the reported amortized cost. 31
IPS 32
IPS 33
Arizona Statutes 34
Arizona Statutes 35
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