R AS S E T MANAGE ME NT CHANDLE The Impact of Current Conditions on Public Agency Investing 6225 Lusk Blvd | San Diego, CA 92121 | Phone 800.317.4747 | Fax 858.546.3741 | www.chandlerasset.com
UNEMPLOYMENT 14% Recession 12% United States California 10% 8% 6% 4% 2% 0% Source: U.S. Department of Labor 2
REAL ESTATE % Change in Prices Area 1 Year 3 Year 5 Year National -3.78% -7.43% -33.40% Los Angeles -5.37% -3.48% -40.17% San Diego -5.28% 0.32% -37.28% San Francisco -5.92% 0.86% -40.75% S&P/Case-Shiller Home Price Index 300 250 200 150 100 Recession S&P/Case-Shiller National Home Price Index San Diego 50 San Francisco Los Angeles 0 Source: Standard and Poor’s 3
LEADING INDICTORS Leading Economic Indicators Starts - Single Family Housing 600 2 500 1.5 400 1 Percent (%) (000's) 300 0.5 0 200 -0.5 100 -1 0 2/10 4/10 6/10 8/10 10/10 12/10 2/11 4/11 6/11 8/11 10/11 12/11 2/12 2/10 4/10 6/10 8/10 2/11 4/11 6/11 8/11 2/12 10/10 12/10 10/11 12/11 Source: US Department of Commerce Source: The Conference Board Single-family housing starts declined 9.9% in February to 457,000, compared to 507,000 in January. However, there was strength in multi-family starts which rose 21.1% in the month. The housing market remains under pressure, but seems to have stabilized following several years of sharp declines. Some housing data has recently surprised to the upside. The LEI increased 0.7% in February. In our view, the ongoing positive trend in the LEI is indicative of a slow economic growth environment. 4
GDP GDP Quarterly Percent Change 6.0 4.0 2.0 Percent (%) 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11 9/11 12/11 Source: U.S. Department of Commerce 5
YIELD CURVES 5.00% U.S. TREASURY YIELDS 4.00% 3.00% 2.00% 1.00% MAR 11 FEB 12 MAR 12 0.00% 3 mo 2 yr 5 yr 30 yr 10 yr Source: Bloomberg 6
WORLD ECONOMY 10 G 8 D P 6 4 % 2 C h 0 a -2 n Estimates g Advanced Economies -4 e Emerging and developing economies -6 Year Source: IMF 7
EUROPEAN BOND YIELDS 10 Year European Gov't Bond Yields 8.00% Italy Spain Germany 7.00% 6.00% 5.00% 10 Year Gov't Yield 4.00% 3.00% 2.00% 1.00% 0.00% Source: Bloomberg 8
FEDERAL RESERVE MONETARY POLICY Interest Rate Policy Interest Rate Policy In response to the crises the Fed has lowered the overnight bank lending rate or Fed Funds rate from 4.25% in the beginning of 2008 to 0.00% - 0.25% Discount rate has been lowered from 4.75% to 0.75% Disclosing the time frame of interest rate policy (Hold rates low until December, 2014) . Open Market Operations Quantitative Easing I On March 18, 2009, the Fed announced purchases of $750 billion of agency mortgage- backed securities and $300 billion of Treasury securities. Quantitative Easing II The Fed announced on November 3, 2010, that it will purchase $600 billion in new treasury securities while simultaneously reinvesting maturing bonds of about $300 billion. Sell $400 billion of Treasuries in the 3 month – Maturity Extension Program (Operation Twist) 3 year range and purchase an equal amount in the 6 year – 30 year range Source: Federal Reserve 9
FEDERAL RESERVE BALANCE SHEET Fed's Balance Sheet $3,000,000 $2,500,000 $2,000,000 Assets In Millions $ $1,500,000 $1,000,000 $500,000 $0 4/25/2007 10/25/2007 4/25/2008 10/25/2008 4/25/2009 10/25/2009 4/25/2010 10/25/2010 4/25/2011 10/25/2011 Other Assets Emergency Programs Discount Window Borrowing GSE Debt Agency Mortgage Back Security Treasury Bonds Source: Federal Reserve 10
INFLATION EXPECTATIONS 20 Year TIPS Implied Inflation Rate 3.50% Recession 20 Year TIPS Implied inflation Rate 3.00% 2.50% TIPS Implied Inflation Rate 2.00% 1.50% 1.00% 0.50% 0.00% Source: Bloomberg 11
PUBLIC AGENCY INVESTIBLE UNIVERSE Maximum Specified % of Investment Type Maximum Maturity Portfolio Minimum Quality Requirements LOCAL AGENCY BONDS 5 YEARS NONE NONE U.S. TREASURY OBLIGATIONS 5 YEARS NONE NONE STATE OBLIGATIONS — CA AND OTHERS 5 YEARS NONE NONE CA LOCAL AGENCY OBLIGATIONS 5 YEARS NONE NONE U.S. AGENCY OBLIGATIONS 5 YEARS NONE NONE E BANKERS’ ACCEPTANCES 180 DAYS NONE 40% 25% OF THE “A - 1” IF THE ISSUER HAS ISSUED LONG -TERM F AGENCY’S DEBT IT MUST BE RATED “A” WITHOUT 270 DAYS COMMERCIAL PAPER — SELECT AGENCIES MONEY G REGARD TO MODIFIERS H 40% OF THE “A - 1” IF THE ISSUER HAS ISSUED LONG -TERM I AGENCY’S DEBT IT MUST BE RATED “A” WITHOUT 270 DAYS COMMERCIAL PAPER — OTHER AGENCIES MONEY J REGARD TO MODIFIERS H K NEGOTIABLE CERTIFICATES OF DEPOSIT 5 YEARS NONE 30% K CD PLACEMENT SERVICE 5 YEARS NONE 30% REPURCHASE AGREEMENTS 1 YEAR NONE NONE 20% OF THE REVERSE REPURCHASE AGREEMENTS AND SECURITIES L NONE M BASE VALUE OF 92 DAYS LENDING AGREEMENTS THE PORTFOLIO MEDIUM-TERM NOTES N 5 YEARS 30% “A” RATING O MULTIPLE P,Q MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS N/A 20% COLLATERALIZED BANK DEPOSITS 5 YEARS NONE NONE “AA” RATING R MORTGAGE PASS-THROUGH SECURITIES 5 YEARS 20% BANK/TIME DEPOSITS 5 YEARS NONE NONE COUNTY POOLED INVESTMENT FUNDS N/A NONE NONE MULTIPLE S JOINT POWERS AUTHORITY POOL N/A NONE LOCAL AGENCY INVESTMENT FUND (LAIF) N/A NONE NONE Source: CDIAC 12
CREDIT DOWNGRADES (Moody’s / Standard & Poor’s) Government Corporate Issuer 2007 2012 Issuer 2007 2012 United States Aaa/AAA Aaa/AA+ Johnson & Johnson Aaa/AAA Aaa/AAA FNMA Aaa/AAA Aaa/AA+ General Electric Company Aaa/AAA Aa3/AA+ FHLMC Aaa/AAA Aaa/AA+ Caterpillar Inc A2/A A2/A FHLB Aaa/AAA Aaa/AA+ JP Morgan Chase & Company Aa2/AA- Aa3/AA+ FFCB Aaa/AAA Aaa/AA+ General Electric Capital Corp Aaa/AAA A1/AA+ State of California A2/A+ A1/A- Goldman Sachs Aa3/AA- A1/A- International Wells Fargo Corp Aa1/AA+ A2/A+ Germany Aaa/AAA Aaa/AAA Citigroup Aa3/AA A3/A- France Aaa/AAA Aaa/AA+ Bank of America Aa1/AA Baa1/A- Spain Aaa/AAA A3/A Toyota Motor Credit Corp Aaa/AAA Aa3/AA- Italy Aa2/A+ A3/BBB+ Ford Motor Credit Corp B1/B Ba1/BB+ Source: Bloomberg 13
KEY INTEREST RATES Term US Treasury US Agency US Corporate Municipal GO O/N 0.01% 0.01% 0.05% 0.03% 3 Month 0.08% 0.13% 0.17% 0.17% 6 Month 0.13% 0.18% 0.34% 0.22% 1 Year 0.17% 0.22% 0.49% 0.29% 2 Year 0.28% 0.33% 0.64% 0.50% 3 Year 0.42% 0.57% 0.89% 0.75% 4 Year 0.64% 0.83% 1.23% 0.92% 5 Year 0.87% 1.15% 1.58% 1.14% Source: Bloomberg 14
FINAL COMMENTS ■ Remember your fiduciary obligation. ■ Invest the portfolio with a defined strategy. ■ Remember “SLY” ■ Safety ■ Liquidity ■ Yield 15
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