October 4, 2006 Peter Palfrey, CFA Vice President, Senior Portfolio - - PowerPoint PPT Presentation

▶
october 4 2006
SMART_READER_LITE
LIVE PREVIEW

October 4, 2006 Peter Palfrey, CFA Vice President, Senior Portfolio - - PowerPoint PPT Presentation

Nov 08, 2022 334 likes •581 views

FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION October 4, 2006 Peter Palfrey, CFA Vice President, Senior Portfolio Manager Ken Johnson Vice President, Client Portfolio Manager CONTENTS Investment Results Portfolio Characteristics Market

slide-1
SLIDE 1

Peter Palfrey, CFA

Vice President, Senior Portfolio Manager

Ken Johnson

Vice President, Client Portfolio Manager

FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION

October 4, 2006

slide-2
SLIDE 2

2

CONTENTS

Investment Results Portfolio Characteristics Market Review& Outlook Guideline Summary /Account Team Appraisal of Holdings

slide-3
SLIDE 3

3

INVESTMENT RESULTS THROUGH 8/31/2006

A nnualized YTD S ince 2006 1-Year 2-Year 3-Year Inception

Fresno CountyEm ployees Retir. A ssn . - G ross 2.74% 2.52% 3.50% 4.89% 3.77% Fresno CountyEm ployees Retir. A ssn . - Net 2.57% 2.26% 3.24% 4.65% 3.53% Leh m anA ggregateBondInd ex * 2.16% 1.71% 2.92% 3.98% 5.10%

Inception07/ 31 / 2001 *LehmanUniversal from7/ 31 / 2001to6/ 30/ 2003; andLehmanA ggregatefrom6/ 30/ 2003to8/ 31/ 2006 Returnsov er oneyearareannualized. Informationisreportedonatradedatebasis. DataSource: Bloomberg, LehmanBrothersResearch

slide-4
SLIDE 4

4

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index Yield to Maturity

5.87% 5.42%

Average Maturity

7.20 years 6.66 years

Effective Duration

4.66 years 4.62 years

Coupon Rate

5.53% 5.31%

Average Quality

Aa3 Aa2

Durationused is: Effectiv e Data source: LehmanBrothers Research

CHARACTERISTICS SUMMARY AS OF 08/31/2006 Characteristics

slide-5
SLIDE 5

5

Converts 1% Treasury 16% High Yield 13% US Credit 21% Asset-backed 6% Mortgage-backed 36% CMBS 5% Cash 1%

FIXED INCOME PORTFOLIO STATISTICS: Period ending 08/31/2006

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index Portfolio Overview

CMBS 5% Mortgage-backed 35% Asset-backed 1% US Credit 23% Agency 11% Treasury 25%

slide-6
SLIDE 6

6

Maturity Distribution

FIXED INCOME PORTFOLIO STATISTICS: Period ending 08/31/2006

Portfolio Overview

4% 0% 19% 21% 23% 21% 41% 46% 2% 6% 11% 6%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Under 1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years Over 20 Years

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index

65% 79% 3% 5% 2% 8% 17% 8% 13% 0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% AAA AA A BAA BA & Below

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index

Quality Distribution

slide-7
SLIDE 7

7

Duration/Yield Curve Security/Industry Specific

PORTFOLIO THEMES – CORE PLUS

  • We recently reduced our duration to 100% of benchmark, reflecting the recent

decline in yields to “fair” value. The Federal Reserve Bank has already raised short rates by 425 basis points since the most recent monetary tightening process began in June, 2004, and has signaled a “pause” as of the August 8th FOMC meeting, while continuing to reassure the market that it remains “vigilant” against the threat of increased inflationarypressures. The FOMC is now more “data dependent” regarding potential future FOMC actions.

  • Our emphasis on a combination of shorter and longer maturities (barbelled)

has been reduced to a more “curve-neutral” stance.

  • Tactical use of “TIPS” based on break-even spreads versus near to

intermediate term inflation expectations outlook.

  • Reduced overweight to corporate bonds

– Yield advantage versus Treasurys approaching fair value – Emphasis is on higher yielding securities that have stable to improving credit trends

  • Approximately market-neutral weight to mortgages

– Mortgages currently offer an attractive nominal yield advantage versus cash and Treasurys. – Potential extension/prepayment risk needs to be managed through security and maturity sector selection

  • Non-Dollar exposure has been increased, particularly to Asia.
  • Shifting exposure to those industries that we believe will perform best in the

present “mid-economic cycle” environment

Bond Market Environment Sector

Updated as of 9/ 11/ 06

slide-8
SLIDE 8

8

US CORPORATES: INVESTMENT GRADE OAS

Bond Market Environment

Opt ion Adj usted S pread (bps) Option Adj ust ed S pread (bps)

Monthly Data Source: L ehman Brothers; History Through Aug

  • 2006

50 75 100 125 150 175 200 225 250

Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06

50 75 100 125 150 175 200 225 250

U.S. Corporate Investment Grade 10-Year Average

slide-9
SLIDE 9

9

US INVESTMENT GRADE CREDIT QUALITY TRENDS

Bond Market Environment

Yearly Data Source: Moodys; History Through Aug-2006

168 103 123 194 151 137 90 68 98 87 90 131 127 236 283 168 115 127 92 54 71 82 56 52 67 89 105 116 109 104 40 42 58 67 56 167 147 99 107 49 90 108

25 50 75 100 125 150 175 200 225 250 275 300 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 # of Upgrades & Downgrades Each Year

Downgrades Upgrades

slide-10
SLIDE 10

10

US CORPORATES: HIGH YIELD OAS

Bond Market Environment

Opt ion Adj usted S pread (bps) Option Adj ust ed S pread (bps)

Monthly Data Source: L ehman Brothers; History Through Aug

  • 2006

200 300 400 500 600 700 800 900 1000 1100

Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06

200 300 400 500 600 700 800 900 1000 1100

U.S. Corporate High Yield 5-Year Average

slide-11
SLIDE 11

11

US HIGH YIELD CREDIT QUALITY TRENDS

Bond Market Environment

Yearly Data Source: Moodys; History Through Aug-2006

75 86 109 175 241 201 90 64 92 123 114 226 317 409 370 336 272 37 48 75 57 50 64 84 97 100 167 92 258 195 252 97 325 137 100 115 189 246 178 94 167 153

50 100 150 200 250 300 350 400 450 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 # of Upgrades & Downgrades Each Year

Downgrades Upgrades

slide-12
SLIDE 12

12

Bond Market Environment

Per cent Per cent

Seasonally-A djusted A nnualized Rate; Shaded A reas Denote N BE R-Designated Recessions Source: Commerce Department; L oomis Sayles; H istory Through Q2:2006; F orecast T hrough Q4:2007 10Q -09F

History Forecast

6% 7% 8% 9% 1 0% 1 1% 1 2% 1 3% 1 4%

4 8 5 1 54 57 60 63 66 69 7 2 7 5 78 81 84 87 90 9 3 9 6 99 02 05 08

6% 7% 8% 9% 10% 11% 12% 13% 14%

CORPORATE PROFITS with IVA & CCAdj* as a PERCENT of GDP *Inventory Valuation and Capital Consumption Adjustments

slide-13
SLIDE 13

13

US DEFAULT TRENDS

Bond Market Environment

Billions of Dollars Percent

Monthly Data Source: Moodys; History Through Aug-2006, Moodys Forecast Through: Aug-2007

0% 2% 4% 6% 8% 10% 12% 14%

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

0% 2% 4% 6% 8% 10% 12% 14%

Trailing 12-month Issuer Default Rates Forecast

slide-14
SLIDE 14

14

EMERGING MARKETS BLENDED SPREAD

Bond Market Environment

Blended Spread (bps) Blended S pread (bps)

Monthly Data Source: JP Morg an, Bloomberg JPEGBL SD Index ;History Through Aug-2006

100 200 300 400 500 600 700 800 900 1000 1100 1200

98 99 00 01 02 03 04 05 06

100 200 300 400 500 600 700 800 900 1000 1100 1200

JPMorgan Emerging Markets Bond Indices EMBI Blended Spread

slide-15
SLIDE 15

15

CBOE MARKET VOLATILITY INDEX

Bond Market Environment

Percent Percent

Weekly Data Source: Wall Street Journal; History Through Aug-2006

10 15 20 25 30 35 40

Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06

10 15 20 25 30 35 40

slide-16
SLIDE 16

16

MBS YIELD SPREAD

Bond Market Environment

Weekly Data Source: Lehman Brothers; History Throug h Aug

  • 2006

60 80 100 120 140 160 180

Au g-96 Au g-97 A ug-98 A ug-99 Au g-00 Aug-01 A ug-02 A ug-03 Au g-04 Aug-05 A ug-06

Yield Spread 2 Year Moving Average 10 Year Average

Opt ion Adj ust ed Spread (bps)

slide-17
SLIDE 17

17

PORTFOLIO THEME – US DOLLAR

  • Large U.S. budget deficits forecasted for the next few years may be largely financed

by foreigners, especially OPE C and Asian governments pegging their currencies. Bond Market Environment

Updated by L S economics as of 09/ 06/ 06

U.S. Treasury debt will continue to rise rapidly for the rest of this decade.

Billions of Dollar s %of GDP

U nified Budget Basis; F iscal Years; Annual Data Source: Office of Management and Budget; Com merce Department; A n nual H istory T hrough CY 2 011 06A-14

FEDERAL GOVERNMENT SURPLUS/DEFICIT

  • 60 0
  • 50 0
  • 40 0
  • 30 0
  • 20 0
  • 10 0

10 0 20 0 30 0

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3

OM B Pro jection s (le ft s cale ) O MB His to ry (le ft s cale ) % o f G DP, His tory (rig ht s cale ) Pro jection s for % o f GDP (right scale )

slide-18
SLIDE 18

18

PORTFOLIO THEME – NON US DOLLAR

  • The currencies of countries that run current account deficits greater than 5% of

GDP often depreciate significantly. The U.S. deficit was 6.3% of GDP in 2005 and is forecasted to be remain over 6% in 2006, 2007, and 2008. Bond Market Environment

Updated by L S economics as of 09/ 06/ 06

The current account deficit points to long-term weakness in the US dollar.

Billions of Dollars Percent of GDP

Seasonally Adjusted, Quarterly Data; Shaded Areas D enote N BE R-Desig nated Recessions Source: Commerce D epartment; L oomis Sayles; H istory T hroug h Q1 :200 6; F orecast T hrough Q4:2007 07Q -12F

U.S. CURRENT ACCOUNT

History Forecast

  • 1000
  • 900
  • 800
  • 700
  • 600
  • 500
  • 400
  • 300
  • 200
  • 100

100 200

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

  • 10.0
  • 9.0
  • 8.0
  • 7.0
  • 6.0
  • 5.0
  • 4.0
  • 3.0
  • 2.0
  • 1.0
  • 0. 0
  • 1. 0
  • 2. 0

Level (Left Scale) Percent of GNP (Right Scale)

slide-19
SLIDE 19

19

FEDERAL FUNDS RATE Vs. 10-YEAR TREASURY NOTE YIELD

Bond Market Environment

Percent Percent

Week ly Data Source: Federal Reserve; H istory Through September 15, 2006 12W-13

1 2 3 4 5 6 7 8 9 10

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

1 2 3 4 5 6 7 8 9 10

Fed Funds Rate 10-Year T-Note Yield

slide-20
SLIDE 20

20

Current Situation and Outlook

Inflation

  • Overall CPI inflation increased 4.2% year-to-

year in July. Stabilization of energy prices should trim inflation in 2007. Employment

  • The labor market has continued to see only quite

moderate job growth. Initial jobless claims remain relatively low, however. Monetary Policy

  • The Federal Reserve tightened by 425 bp since June

2004 to a funds rate of 5.25% on June 29. The Fed paused at its August 8 meeting. We believe the Fed is now on indefinite hold. Investment Conclusions and Concerns

  • The 10-year Treasury yield trended up mid-January

to late-June, but fell below 5.00% after early-July due to geopolitical risk, high oil prices, some softer economic data, and the Fed’s decision to pause.

PORTFOLIO THEME

Updated as of 09/ 06/ 06 by L S E conomics

Bond Market Environment

Per cent Percent

C hain-Weighted, Seasonally-A djusted, Quarterly Data; Shaded A reas Deno te NBE R -Designated Recessions Source: Commerce D epartment; H istoryThrough Q2:2006 01Q -02B

REAL GROSS DOMESTIC PRODUCT - Quarte rly Growt h, Annualized

  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 6% 7% 8%

98 99 00 01 02 03 04 05 06 07

  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% Thousands of Persons Thousands of Persons

F our-Week Moving A verage; S easo nally Adju sted; Week ly Data Source: Department of L abor; H istory Through A u gust 2 6, 2006 03W-01

INITIAL UNEMPLOYMENT CLAIMS

250 300 350 400 450 500

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

250 300 350 400 450 500

slide-21
SLIDE 21

21

Bond Market Environment

  • According to revised estimates, real GDP rose a moderate 2.9% in

Q2:2006. Improving exports and capex should support growth in H2:2006 and 2007, offsetting the deterioration in housing. The budget deficit has stabilized thanks to soaring tax revenues. Inflation should ease in 2007 as energy prices stabilize.

ECONOMIC FORECAST

Calendar year – A verage basis. 2006, 2007, & 2008 are projected by L S E conomics as of 09/ 06/ 06.

2005 2006 2007 2008 R eal G D P G rowth 3 .2 % 3.4 % 2 .9 % 3 .2 % C PI Inflation 3 .4 % 3.6 % 2 .7 % 2 .3 % C urre nt A ccount Ba lance (billion)

  • $79 2
  • $8 38
  • $84 8
  • $86 2

F ede ra l B udge t B alanc e, NIPA D e finition (billion)

  • $30 9
  • $1 45
  • $21 1
  • $21 3

U nemployment R ate

5.1% 4.7 % 5.1% 5.2%

slide-22
SLIDE 22

22

§

Benchmark: Lehman Brothers US Aggregate Index

§

Position Limits: 5% per issuer (excluding Governments and GSE’s)

§

Below Investment Grade: up to 20% permitted

§

Minimum Quality: “B3” by Moody’s or Standard & Poor’s

§

Non-Investment Grade EMG: not permitted

§

Duration: +/- 30% to the Benchmark

§

Non-Dollar: not permitted

GUIDELINE SUMMARY

Fresno County Employees Retirement Association

slide-23
SLIDE 23

23

ACCOUNT TEAM

Contact Information Teresa Woo Portfolio Analyst Email twoo@ loomissayles.com Phone 617-748-1712 Fax 617-482-5032 Kenneth M. Johnson V ice President, Client Portfolio Manager Email kjohnson@ loomissayles.com Phone 617-960-2033 Fax 617-482-5032 Peter W. Palfrey, CFA V ice President, Senior Portfolio Manager Email ppalfrey@ loomissayles.com Phone 617-346-9798 Fax 617-542-1358

slide-24
SLIDE 24

24

This report is a service provided to customers of L oomis Sayles for informational purposes and is not a recommendation to purchase or sell securities. The performance shown is g ross of manag ement fees. Past performance is not a g uarantee of future results. L oomis Sayles believes the information contained in this report is reliable but we do not guarantee its accuracy.