Loading...
HomeMy WebLinkAboutCouncil Presentation 09-10-2019 - Investment Policy© PFM 0 Town of Marana Presented by: Yiannis Kalaitzidis, Finance Director Luke Schneider, CFA, Director PFM Asset Management LLC 855.885.9621 pfm.com 1820 East Ray Road Chandler, AZ 85225 Investment Policy Study Session © PFM 1 Summary Proposed policy changes Sector overview Conclusion © PFM 2 Proposed Policy Changes © PFM 3 Investment Policy Update Modernize language, clarify requirements, and align the policy with A.R.S. and best practices Last updated February 2000 Proposed changes enhance the portfolio’s diversification and total return Essential areas covered in the proposed policy: •Investment philosophy and objectives •Investment authority •Authorized investments •Investment guidelines and Compliance •Reporting Town of Marana Investment Policy, February 2000 © PFM 4 Investment Policy Update Current Policy Objectives:Safety, Liquidity & Return Investments only include:U.S. treasuries & agencies, State LGIP funds Invests money in all of Town’s funds Town Manager responsible for investment decisions Proposed Policy Objectives:Safety, Liquidity & Return (No Change) Investments include:Match Arizona Revised Statute 35-323 Invests money in all of Town’s funds, including newly created Self-Insurance Trust funds Finance Director is responsible for program under direction of Town Manager Town of Marana Investment Policy, February 2000 © PFM 5 Investment Policy Recommendations State Statute Current Policy Recommended Policy Allowable Investments Max Maturity Sector Limit Allowable Max Maturity Sector Limit Allowable Max Maturity Sector Limit U.S. Treasury 5 years 100%√5 years 100%√5 years 100% Federal agency 5 years 100%√5 years 100%√5 years 100% Bankers’ acceptances 270 days 100%---√270 days 100% Federally insured time deposits 5 years 100%---√5 years 100% Time deposits 5 years 100%---√5 years 100% Negotiable certificates of deposit 5 years 100%---√5 years 50% Commercial paper 270 days 100%---√270 days 50% Fully collateralized repurchase agreements 180 days 100%---√180 days 25% Corporate Notes 5 years 100%---√5 years 50% Municipal bonds 5 years 100%---√5 years 25% Money market mutual funds -100%---√90 days 20% Local government investment pools -100%√-100%√90 days 100% © PFM 6 Sector Overview © PFM 7 Risks of Investing in Corporate Securities Credit/Default Risk •Risk that an issuer will be unable to meet its financial obligations Market Value Risks •Credit spread: risk of financial loss resulting from changes in credit spreads used in the mark-to- market of a fixed income product •Downgrade: risk that a bond’s price will decline due to a downgrade in its credit rating Risks can be managed with the appropriate procedures, policies, and limitations in place © PFM 8 Historical Default Rates Source:Moody’s 2017 Annual Default Study:Corporate Default and Recovery Rates. Annual Corporate Default Rates by Letter Rating 2006 –2017 Year Aaa Aa A Baa Ba B Caa-C 2006 ----0.2%1.1%5.9% 2007 ------5.0% 2008 -0.5%0.4%1.0%2.3%4.0%10.7% 2009 --0.2%0.9%1.8%7.2%25.9% 2010 --0.2%0.1%-0.4%8.5% 2011 -0.2%-0.4%0.2%0.3%5.9% 2012 ---0.1%0.1%0.5%7.8% 2013 --0.1%0.1%0.6%0.9%6.2% 2014 --0.1%-0.1%0.5%4.6% 2015 ----0.3%2.2%6.8% 2016 ----0.1%1.5%9.1% 2017 ----0.2%0.3%6.4% © PFM 9 Going Beyond Credit Ratings Issuer Analysis Macro Analysis •Balance sheet analysis •Earnings: actual and projections •Asset quality and impairments •Corporate governance •Price movement of fixed income and equity securities •Monitor credit default swap levels •Trading volume •Analysts’ recommendations •Industry trends •Competitive environment •Business cycle •Regulatory environment •Rating agency actions •Sovereign credit developments © PFM 10 Sector Returns Source: Bloomberg as of 6/30/2019. Three and nine month commercial paper yields, rated A-1+. -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 3 Month CP 9 Month CP S&P LGIP 1-3 Treasury 1-3 Agency 1-3 Corp AAA-A 1-3 Corp AA 1-5 Treasury 1-5 Agency 1-5 Corp AAA-A 1-5 Corp AA Historical Sector Annualized Returns 2015 2016 2017 2018 2019 © PFM 11 Conclusion Proposed policy update allows for: More investment sectors Enhanced portfolio diversification Greater level of analysis to manage risk Potential for greater rate of return Opportunity to modernize language, clarify requirements, and align the policy with A.R.S. and best practices. Town of Marana Investment Policy, February 2000 © PFM 12 Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public;however,PFM Asset Management LLC cannot guarantee its accuracy,completeness,or suitability.This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation.All statements as to what will or may happen under certain circumstances are based on assumptions,some but not all of which are noted in the presentation.Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control.Changes in assumptions may have a material effect on results.Past performance does not necessarily reflect and is not a guaranty of future results.The information contained in this presentation is not an offer to purchase or sell any securities.