7029325330 rphillipsmainstreetcapcom Portfolio Benchmarking Government Investment Officers Association March 17 2011 Municipal Investment Managers wwwMainStreetCapcom Municipal Investment Managers ID: 637010
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Slide1
Rick Phillips
President & Chief Investment Officer
702-932-5330 rphillips@mainstreetcap.com
Portfolio Benchmarking
Government Investment Officers Association March 17, 2011
Municipal Investment Managers
www.MainStreetCap.comSlide2
Municipal Investment Managers
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2
Disclosure
The views expressed herein are those of the speaker and do not necessarily represent the views of Main Street Capital Advisors. Views are based on data available at the time of this presentation and are subject to change based on market and other conditions. Main Street cannot guarantee the accuracy or completeness of any statements or data. The information provided does not constitute investment advice and it should not be relied upon as such. It is not a solicitation to buy and/or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizons. All material has been obtained from sources believed to be reliable, but we make no representation or warranty as to its accuracy and you should not place any reliance on this information. Past performance is no guarantee of future results
.
© Copyright 2011 Main Street Capital Advisors, LLC. All Main Street logos, trademarks and service marks appearing herein are property of Main Street Capital Advisors, LLC. This document may not be copied or distributed by the recipient. This document is provided for informational purposes only.Slide3
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GFOA Model Investment Policy
Safety:
Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.
Liquidity:
The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio may be placed in money market mutual funds or local government investment pools, which offer sameday liquidity for short-term funds.
Yield:
The investment portfolio shall be designed with the objective of attaining a market rate of return
throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs
. Return on investment is of secondary importance compared to the safety and liquidity objectives described above.
The core of investments are limited to relatively low risk securities in anticipation of earning a
fair return
, relative to the risk being assumed
.
Securities shall generally be held until maturity, with the following exceptions:
•
A security with declining credit may be sold early to minimize loss of principal.
•
A security swap would improve the quality, yield, or target duration in the portfolio.
•
Liquidity needs of the portfolio require that the security be sold.Slide4
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Presentation Summary
Discuss
Pros
and
Cons
and
the
Mechanics
of
each method of benchmarking:
So
you can determine which type of benchmarking is
appropriate
and
suitable
for your entity
.
Main Takeaways
You
Should Benchmark the Portfolio
The Benchmark Needs to be RelevantSlide5
Municipal Investment Managers
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5
Primary Factors to Consider
To Be Relevant, Benchmarks
S
hould
R
eflect the
General
C
haracteristics
of a Portfolio’s:
Sector Allocations
Duration/Maturity
Turnover Slide6
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6
Municipal Portfolio Structure: Typical Allocation
Sector
Target Allocation %
Money Markets
20%
Treasuries
10%
Agencies
Bullets (non-call)
40%
Callables
30%
Total
100%
More than One Benchmark Component is Usually Needed--CustomizeSlide7
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Keeping Score of Your Portfolio
Yield Return
Book Return
Total ReturnSlide8
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8
Yield Return
Portfolio’s Month End Average Weighted Book/Purchase Yield
Security
Maturity
Duration
Wgt
Dur
Par Value
% of Portfolio
Book
Yld
Wgt
Yld
LGIP
3/1/2011
0.00
0.00
5,000,000
4.00%
0.15%
0.01%
Agency
3/31/2011
0.08
0.01
10,000,000
8.00%
0.20%
0.02%
Treasury
4/30/2011
0.17
0.01
10,000,000
8.00%
0.25%
0.02%
Agency
5/31/2011
0.25
0.02
10,000,000
8.00%
0.20%
0.02%
Treasury
6/30/2011
0.33
0.03
10,000,000
8.00%
0.30%
0.02%
Agency
7/31/2011
0.42
0.03
10,000,000
8.00%
0.25%
0.02%
Treasury
8/31/2011
0.50
0.04
10,000,000
8.00%
0.35%
0.03%
Agency
9/30/2011
0.59
0.05
10,000,000
8.00%
0.30%
0.02%
Treasury
10/31/2011
0.67
0.05
10,000,000
8.00%
0.35%
0.03%
Agency
11/30/2011
0.75
0.06
10,000,000
8.00%
0.30%
0.02%
Treasury
12/31/2011
0.84
0.07
10,000,000
8.00%
0.40%
0.03%
Agency
1/31/2012
0.92
0.07
10,000,000
8.00%
0.35%
0.03%
Treasury
2/29/2012
1.00
0.08
10,000,000
8.00%
0.40%
0.03%
Total
0.52
125,000,000
100.00%
0.30%Slide9
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Yield Return - Custom Benchmark
Sector Weight
LGIP 4%
Treasury* 48%
Agency# 48%
Total 100%
Month-End Yields:
*GB1=1 Yr T-Bill
#AGDN360Y= 1Yr Agency
Yld
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
LGIP Yld
0.19
0.18
0.20
0.22
0.23
0.23
0.21
0.21
0.22
0.20
0.19
0.19
Tsy
Yld
0.38
0.38
0.32
0.31
0.28
0.23
0.25
0.21
0.26
0.27
0.24
0.24
Agy
Yld
0.48
0.50
0.49
0.44
0.34
0.30
0.26
0.24
0.29
0.24
0.21
0.22
Wgt
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
Tsy
48%
48%
48%
48%
48%
48%
48%
48%
48%
48%
48%
48%
Agy
48%48%48%48%48%48%48%48%48%48%48%48% Wgt Yld0.420.430.400.370.310.270.250.220.270.250.220.23
1.14% 12 Month Moving Avg
Jun 08 to May 09Slide10
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Yield Return: Pros and Cons
Pros:
Ease of Calculation
Ease of Understanding (presenting to governing boards)
Helpful for Budgeting Interest Income
Cons:
Does Not Account for Realized Capital Gains or Losses
Subject to Yield To Maturity AssumptionsSlide11
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Yield to Maturity Assumption
Step-Up Example: 5 Year Maturity, Annual 1% Steps, Purchased at Par
Coupons:
Yr 1 -- 1%
Yr 2 -- 2%
Yr 3 -- 3%
Yr 4 -- 4%
Yr 5 -- 5%
Avg -- 3%
What is the YTM?
1% or 3% or %?
Future
Coupon Payments Are Reinvested at the
Purchase YieldSlide12
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Book Return
+ Accrued/Received Interest
+/- Amortization or Premiums/Discounts
+/- Realized Gains/Losses
Average Daily Book Balance for the Period
= Book ReturnSlide13
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Total Return
+ Accrued/Received Interest
+/- Amortization or Premiums/Discounts
+/- Realized Gains/Losses
+/- Unrealized Gains/Losses
Time Weighted Invested Value for the Period
(Market Value Based)
= Total ReturnSlide14
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Interest Rates Decline 50 Basis Points for the Month
Calculation of Return
Book Return vs
Total Return
Interest Collected
300,000
Plus Accrued Interest at End of Period
150,000
Less Accrued Interest at Beginning of Period
(100,000)
Less Accrued Interest at Purchase During Period
(50,000)
Interest Earned During Period
300,000
Adjusted by Premiums and Discounts
50,000
Adjusted by Realized Capital Gains or Losses
100,000
Adjusted by Mark-to-Market
N/A
Earnings During Period
450,000
Daily Weighted Balance for Period
100,000,000
Book Rate of Return - Period
0.45%
Book Rate of Return - Annualized
5.40%
Interest Collected
300,000
Plus Accrued Interest at End of Period
150,000
Less Accrued Interest at Beginning of Period
(100,000)
Less Accrued Interest at Purchase During Period
(50,000)
Interest Earned During Period
300,000
Adjusted by Premiums and Discounts
N/A
Adjusted by Realized Capital Gains or Losses
100,000
Adjusted by Mark-to-Market
750,000
Earnings During Period
1,050,000
Daily Weighted Balance for Period
100,000,000
Total Rate of Return - Period
1.05%
Total Rate of Return - Annualized
12.60%
Mark-to-Market: $100,000,000 x 1.5 duration x .50%= $750,000 Slide15
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Book Return – Under the Hood
Sample Benchmark Composition:
(Combined Liquidity and Core Portfolio)
Sector
Maturity
Index
Bberg
Ticker
Moving Average
LGIP
1 Day
LGIP
N/A
Monthly Distb. Rate
Agy
Discount Notes
0-6 Months
3 Mon
Discount Notes
AGDN090Y
6 Month
Commercial
Paper
0-3 Months
A1/P1 45 Day Dealer CP
DCPB045Y
3 Month
CDs
0-3 Months
A1/P1 45 Day CDs
DCDB45D
3 Month
Agy
Bullets
1-3 Years
1-3 Yr Agency Bullets
G1PB
12 Month
Agy
Callables
1-3 Years
1-3 Yr Agency Callables
G1PC
12 Month
T-Notes
1-3 Years
1-3 Yr Treasuries
G102
12 Month
Corporate
Notes
1-3 Years
1-3 Yr Corp Notes A-AAA
C1A1
12 MonthSlide16
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Yield & Book Return Benchmark
The
viewsSlide17
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Moving Average Benchmarks
Date
12 MMA
24 MMA
Var
Dec-01
3.70
4.95
-1.25
Dec-02
2.55
3.12
-0.58
Dec-03
1.64
2.09
-0.45
Dec-04
2.41
2.02
0.38
Dec-05
3.89
3.15
0.74
Dec-06
4.80
4.35
0.45
Dec-07
4.26
4.53
-0.27
Dec-08
1.91
3.09
-1.17
Dec-09
0.95
1.43
-0.48
Dec-10
0.65
0.80
-0.15
Avg
2.68
2.95
-0.28Slide18
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Book Return: Pros and Cons
Pros:
Matches Budgeting Process
Closely Matches Actual Cash Flows
Cons:
Subject to Manipulation of Realized Gains/Losses
May Not Reflect Portfolio’s Market Volatility Changes
(The Primary Reason for GASB 31)Slide19
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Total Return Parameters/Rules
Bank of America/Merrill Lynch 1-3 Year Treasury and Agency Index
(Ticker: G1A0)
Issue Size: $250 Million and Up (Agy*), $1 Billion and Up (Tsy*)
Monthly Rebalanced
Index “Buys” all Tsy and Agy Fixed Rate Securities Between 1-3 Yrs
Index “Sells” all Tsy and Agy Fixed Rate Securities Less Than 1 Yr
“Buys” Newly
A
dded Securities at the Bid Side – Worth about 12’ish Basis Points Annually
*Non-Subordinated # Non-TIPSSlide20
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1-3 Yr Govt Index Sector Allocation
Sector
Percent
Tsy
76.2%
FNMA
7.4%
FHLMC
6.6%
FHLB
4.7%
FFCB
0.8%
TVA
0.2%
Corp FDIC
4.1%
Total
100%Slide21
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21Slide22
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% of
Mkt
Val
Bullets 95.2%
Calls 4.8%
# of Issues
Bullets 260
Calls 231Total 491% of IssuesBullets 53%Calls 47%Slide23
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1-3 YR Govt Index Duration
Oct 2010
Jan 2011
Mar 2010
1.82
1.74
Month-End
Month-Start
DurationSlide24
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1-3 YR Govt
Callable Index
Duration
Oct 2010
Jan 2011
Mar 2010
DurationSlide25
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*Book Return= 12 Mon Moving Avg of Index Month-End YieldSlide26
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1-3 Yr Govt Index Components of ReturnSlide27
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1-3 Govt Index:
Price* vs Coupon Return
1991 to 2010
Price Return*: .4% = .02%
Coupon Return: 99.6% = 5.25%
Total Return: 100.0% = 5.27%
Price Return=Mark-to-Market Change
Year
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
Avg
Price
3.2
-0.9
-0.9
-5.4
4.1
-1.2
0.2
0.6
-2.8
1.7
2.6
1.2
-1.7
-2.2
-1.8
0.0
2.5
2.6
-1.6
0.2
0.02
Coupon
8.5
7.2
6.4
6.0
6.9
6.2
6.4
6.4
5.9
6.4
5.8
4.7
3.7
3.2
3.5
4.2
4.6
4.1
2.8
2.2
5.25
Total
11.7
6.3
5.4
0.6
11.0
5.0
6.7
7.0
3.1
8.1
8.4
5.9
2.0
1.0
1.7
4.1
7.1
6.7
1.2
2.3
5.27
Book Return (Coupon) and Total Return are basically the same over the long run Slide28
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Total Return Implications
“The
total rate of return implies that a dollar of wealth is equally meaningful to the
investor,
whether that wealth is generated by the secure income from a 90-day Treasury bill or by the unrealized appreciation in the price of a share of common stock
(or bond).”
(
CFA Institute curriculum) Slide29
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Conclusions
To Adhere To the 3
rd
Object of Your Investment Policy-You Need to Benchmark Your Portfolio to See if
i
t’s Earning a
“Market Rate of Return”
It’s Okay to Use All Three Measures
Book Return and Total Return Are More Sophisticated Measures and Capture More Information
Book Return Is Generally More Congruent With Most Municipalities’ Budgeting Programs
Total Return Captures the Mark-to-Market Volatility of a Portfolio