STATE TREASURERS OFFICE LGIP Stakeholders Meeting 9/26/2018 - PowerPoint PPT Presentation

STATE TREASURERS OFFICE LGIP Stakeholders Meeting 9/26/2018 Investment Consultants Deanne Woodring, CFA President and Senior Portfolio Advisor Dave Westcott, CFA Chief Investment Officer and Senior Portfolio Advisor Government Portfolio Advisors 503-248-9973 Deanne@gpafixedincome.com www.gpafixedincome.com

1980 - 1990 2 year Yields High 17% Low 6% Average 10% 1

1990-2000 2 year Yields High 9% Low 3.5% Average 5.75% 2

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$10,000,000 1980 – 2018 1 year Earnings 2 Year Yields High 17% 17% = $ 1,700,000 Low .15% 5% = $ 500,000 Average 5% .15% = $ 15,000 6

Economic and Rate Observations Impacting the Markets 7

Quarterly Rate Change 9/30 9/30/1 /17 12/3 12/31/1 /17 3/31 3/31/1 /18 6/30 6/30/1 /18 NM L LGI GIP 1.01 1.01 1.20 1.20 1.50 1.50 1.81 1.81 3-month bill 1.05 1.38 1.61 1.92 2- year note 1.49 1.88 2.27 2.53 5 -year note 1.94 2.20 2.56 2.74 10- year note 2.33 2.41 2.74 2.86 Economic Projections Q3 Q3-18 18 Q4-18 Q4 18 Q1 Q1-19 19 Q2 Q2-19 19 Real GDP 2.90 2.90 2.90 2.60 CPI (YOY%) 2.80 2.50 2.30 2.30 Unemployment 3.80 3.70 3.70 3.70 8

1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 8/1/2017 8/15/2017 8/29/2017 FOMC Rate Change to Fed Funds 9/12/2017 9/26/2017 10/10/2017 10/24/2017 Two Year Note 11/7/2017 11/21/2017 12/5/2017 12/19/2017 Fed Funds Upper Bound 1/2/2018 1/16/2018 1/30/2018 2/13/2018 2/27/2018 3/13/2018 3/27/2018 4/10/2018 4/24/2018 5/8/2018 5/22/2018 6/5/2018 6/19/2018 7/3/2018 7/17/2018 7/31/2018 8/14/2018 8/28/2018 9

Probability of More Rate Hikes 100% Probability of Hike at Sept 26 Meeting to 2.25% 90% 80% 70% 60% 50% 40% 30% 20% 10% Probability of Hike at Dec 19 Meeting to 2.50% 0% 10

10 12 0 2 4 6 8 07/08 11/08 03/09 Unemployment to 2 Year Notes 07/09 11/09 03/10 US Unemployment 07/10 11/10 03/11 07/11 11/11 03/12 07/12 11/12 03/13 07/13 11/13 Two-Year Treasury 03/14 07/14 11/14 03/15 07/15 11/15 03/16 07/16 11/16 03/17 07/17 11/17 03/18 07/18 11

GDP Relationship to 2 Year Notes 6.000 US GDP Quarter-over-Quarter % Change 5.000 Two-Year Treasury 4.000 3.000 2.000 1.000 - 0.000 (1.000) 03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 09/16 12/16 03/17 06/17 09/17 12/17 03/18 06/18 12

Inverted Yield Curves – Sign of Recession Spread Relationship of 3 mth Bill to 10 Year Note 5.000 3 month Bill – 2% 10 Year Note – 2.95% 4.000 Current Spread .95% 3.000 2.000 1.000 0.000 - (1.000) 09/88 09/89 09/90 09/91 09/92 09/93 09/94 09/95 09/96 09/97 09/98 09/99 09/00 09/01 09/02 09/03 09/04 09/05 09/06 09/07 09/08 09/09 09/10 09/11 09/12 09/13 09/14 09/15 09/16 09/17 13

How are Public Funds Investing Around the Country? Updating Policies, Procedures and Practices Identifying resources Identifying Capabilities Implementing Best Practice Standards Identifying Liquidity Balances LGIP an and B Ban ank B Bal alances Identifying Core Investment Components Investing based on NMSA 6.10.10 Maturities typically to 5 years Utilizing market benchmarks to control risk 14

PUBLIC FUND INVESTING TRENDS FOR 2019 – ACT Investing C ONFIDENCE T RANSPARENCY ACCOUNTABILITY Understand the Clearly document all Establish rules to manage investment purpose and elements of an your investments while strategy, which will lead investment program providing support for the to confident investment that adheres to investment decision- decisions. industry best practice making process . standards. 15

Growth of $1,000,000 Dollars Three-Month Bill Investment(Left Axis) Two-Year Note Investment(Left Axis) Two-Year Note Yield(Right Axis) $5,000,000 14 $4.6MM $4,500,000 12 $3.6MM $4,000,000 10 $3,500,000 8 $3,000,000 6 $2,500,000 4 $2,000,000 2 $1,500,000 $1MM in 1983 $1,000,000 0 5/83 5/84 5/85 5/86 5/87 5/88 5/89 5/90 5/91 5/92 5/93 5/94 5/95 5/96 5/97 5/98 5/99 5/00 5/01 5/02 5/03 5/04 5/05 5/06 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 5/18 Source Bloomberg 16

Public Funds are Identifying Balances to be Dedicated to Liquidity (LGIP) and Investing Core 17

Review of Historical Performances Based on Maturity Annual Total Returns for Benchmarks 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (1.00) 0-3 Treasury Benchmark 0-5 Treasury Benchmark 10 Year Returns - Long Term Value of Longer Maturities 3 Month Bill 0.56 0-3 Treasury 1.01 0-5 Treasury 1.50 18

LGIP Characteristics and Results 6/30/18 19

LGIP Asset Allocation as of 6/30/18 Total LGIP Allocation 15% Repo Bank Deposit s Treasury Agency 69% Corp/ CP 10.83% 20

Performance of LGIP in Yield Earnin ings Yie ield ld 6/30/ 6/ 30/2018 2018 6/ 6/30/ 30/17 17 - 6/ 6/30/ 30/18 18 Ma Mark rket Value LGIP LG P FU FUND JP Mo Morg rgan Days Quart rter r End Yield Annualized R Rate LGIP DailyGross Yield $ 738,987,800 50 1.866% 1.32% S&P LGIP Govt Pools Gross Yield 33 1.810% 1.31% LGIP Daily Net Yield 1.816% 1.27% S&P LGIP Govt Pools Net Yield 1.760% 1.15% CHANGE I IN P PORTFOLIO F FROM 6 6/30/17 t to 6/ 6/30/18 LG LGIP Fu P Fund Market V Value+ Repo Bank Tre Ba reasury ry Agency cy Corp/CP Co CP 6/30/2018 $ 738,987,800 15.59% 4.69% 10.83% 68.89% 0.00% 6/30/2017 $ 885,076,477 20.37% 1.52% 12.55% 65.56% 0.00% Change over Period $ (146,088,677) -4.78% 3.17% -1.73% 3.33% 0.00% 21

Comparison to Other State LGIP Prime versus AAAm style 6-30-18 Prime and longer maturity – 6 months Average Maturity – Include Corporates and CP State tate Rate ate Dur Duration Asse sset A t Allocat ation Oregon 2.25% Six months 50% Corporate Utah 2.50% Six months 87% Corporates/10% CP/Variable Rate Final 2021 Florida Prime 2.02% Six months est. 20% Corporates AAAm Like – 60 day Average Maturity – All Governments and Govt Repo State Rate Duration Asset Allocation NM LGIP 1.81% 60 days 100 Govt/Bank Deposits and Repo - fully Collateralized ) Colorado SAFE 1.80% 60 days 100% Govt/Bank Deposits and Repo - fully Collateralized Washington LGIP 1.89% 60 days 100% Govt/Repo/Bank Deposits fully Collateralized 22 Source: Websites

NMSTO – LGIP POLICY OBJECTIVES Safet ety Liquidi dity ty Retur urn Managing Maintaining Managing with in quality of the the AAAm sufficient investment in constraints and liquidity to meet US treasury, selectively placing participants Agency, maturities demands Repurchase Agreements and Bank Deposits 23

NMSTO – MANAGING RISK Interest Rate Credit Risk Reinvestment Risk Rate Risk Risk Risk Risk Level Level Level Low Low Low 24

Key Points of Focus in the STIC Monthly Reports Asset Allocation • Present current asset allocations in LGIP • Present changes in asset allocation over the quarter • Compare the asset allocations to the S&P GIP All Govt Index Performance Measurement and Risk Management • Review transactions for the quarter • Report on the performance of the fund relative to the benchmark • Review the S&P report and provide an NAV sensitivity analysis Investment Strategy Review • Participate in the weekly calls • Provide strategic input to the portfolio management team 25

SUMMARY AND TAKE-AWAYS STO’ O’s a approach t to managing g the e LGI GIP wi with Accountability: y:  S&P Rating of AAAm and oversight on a weekly basis  Investment Policy guidelines  Benchmark of the S&P Government Pools STO’ O’s a approach t to managing g the e LGI GIP wi with Confiden ence: e:  Asset allocation oversight and invests with intention  Cash flow analysis and review  Broker Dealer relationships  Policy compliance STO’ O’s a approach t to managing g the e LGI GIP wi with Transparen ency: y:  STIC reports –http://www.nmsto.gov/stic-binders/LGIP Section  Quarterly oversight report by GPA  Information available upon request 26