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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED JUNE 30, 2024
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended June 30, 2024.
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Summary
Pursuant to California Government Code section 53646 and the City’s Investment Policy (Policy No. 17.01.030), the City Treasurer (Chief Financial Officer) is required to provide a quarterly report and certification to the City Council, City Manager, and City Auditor.
Starting July 1, 2022, the City moved to having two portfolio managers managing separate portions of the City’s Reserve portfolio. Both Quarterly Investment Reports and Certification for the quarter ending June 30, 2024, are provided as required (Attachments A and B). This report is presented as required and fulfils the City’s reporting requirements. The City’s consolidated investment portfolio was approximately $1.03 billion as of June 30, 2024, which represents an increase of $90.4 million from the prior market value reported on March 31, 2024. This consolidated investment portfolio includes the City’s liquidity position, short-term investments, and the reserve portfolios (as shown on page 13 of Attachment A). The total market value-based earnings for the managed portfolio for the most recent quarter was a combined $7.4 million, as shown on page 21 for PFM Asset Management (PFMAM) and page 84 for Chandler Asset Management (Chandler) of Attachment A.
Additionally, the City’s liquidity holding in both California Asset Management Program (CAMP) and Local Agency Investment Fund (LAIF)had combined holdings of $62.3 million, with interest earnings of $831,975 for the quarter ended June 30, 2024.
DISCUSSION
Background
To comply with state law and City policy, the City is required to present a quarterly certification and investment reports detailing the City’s investment portfolio to the City Council, City Manager, and City Auditor. The City also posts monthly transaction reports to the City’s website. The Quarterly Investment Report shall include a complete description of the portfolio, the types of investments, the issuers, maturity dates, par value, and dollar amounts invested in all securities, investments, or programs that are under the management of contracted parties, including lending programs. The certification must provide assurances that investments were made consistent with the City’s Investment Policy and that the City will meet its expenditure obligations for the next six months. The authority of the Council to invest, reinvest funds, sell, or exchange securities is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution No. 2023-06-20-1601). Pursuant to the Investment Policy, the City Treasurer may and does delegate some fiduciary responsibility to outside investment management firms. An investment manager’s fiduciary responsibility is a legal requirement related to registration with the Securities and Exchange Commission under the Investment Advisor Act of 1940.
Due to the specialized services and expertise required to assist the City in the varied investment options available, the City contracts with two experienced investment managers, PFMAM and Chandler.
Present Situation
The attached report (Attachment A) details the activities of the quarter ended June 30, 2024, and includes detailed information on the holdings of the City’s portfolio on that date, as aggregated in the first page of Attachment A, followed by portfolio reports from both investment managers. Incorporated by reference is a certification (Attachment B) that the assets comply with the requirements of State law and City policy and that there is sufficient liquidity to cover the subsequent six months of budgeted activities.
The attached quarterly investment report has been published online along with monthly reports: Quarterly Investment Report 06-30-2024_.pdf (revize.com) <https://cms3.revize.com/revize/stockton/Documents/Government/Budget%20And%20Financial%20Reports/Debt%20and%20Investments/Quarterly/Quarterly%20Investment%20Report%2006-30-2024_.pdf>
Portfolio Balances and Performance
The second quarter of 2024 was characterized by moderating economic growth, inflation resuming its slowing trend as it inched closer to the Fed’s 2% target, signs of consumer activity beginning to taper, and a labor market that continued to come into better balance. As expected, the Fed kept the overnight rate at its current target range of 5.25% to 5.50% at its June 12 meeting, marking the seventh consecutive meeting since July 2023 keeping rates at this level. Furthermore, the Fed’s updated “dot plot” showed just one rate cut in 2024, a notable drop from the March projections of three cuts. This more closely aligned with market expectations, which generally assumed one or two cuts in the back half of this year. U.S. Treasury yields rose modestly as the yield on the 2-, 5-, and 10-year U.S. Treasuries rose 13, 16, and 20 basis points (0.13%, 0.16%, and 0.20%), respectively. Despite the relatively modest increase in yields, Treasuries traded over a 40 to 50 bps (0.40% to 0.50%) range over the quarter. U.S. Treasury indices less than 10 years posted positive performance. The ICE BofA 2- and 5-year Treasury indices returned +0.85% and +0.42% respectively, while higher yields and the longer duration of the 10-year U.S. Treasury index produced negative performance, resulting in a return of -0.30% for the quarter.
The City divides its investment portfolio into Reserve and Liquid portions with a consolidated market value of approximately $1 billion as of June 30, 2024. The Reserve portion represents the long-term assets managed by PFMAM and Chandler, and the Liquid portion represents funds invested in several short-term investment vehicles including State of California Local Agency Investment Fund, California Asset Management Program, and Dreyfus Treasury Money Market, to maintain adequate liquidity and optimize returns. The total returns on the consolidated portfolio for the fourth quarter of the fiscal year were positive, as higher income more than offset the negative price effects from modestly higher yields.
The performance of the reserve portion of the portfolio is managed against a benchmark. The PFMAM portfolio benchmark is made up of 80% of the ICE Bank of America (BofA) 1-5 Year AAA-A U.S. Corporate and Government Index and 20% the ICE BofA 5-10 Year U.S. Treasury Index. The Chandler portfolio benchmark is the ICE BofA U.S. Issuers 1-5 Year AAA-A U.S. Corporate/Government Index. The benchmarks generally reflect each portfolio’s strategy and composition. City staff works closely with both PFMAM and Chandler to monitor the status of the City’s investment portfolios and their returns. For the quarter, the total return performance of the portfolios was positive, as interest income offset the negative impact of higher yields. Additionally, both portfolios outperformed their respective benchmark. These returns are detailed on page 24 for PFMAM and page 94 for Chandler in Attachment A. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses).
The City’s investment portfolio complies with California Government Code section 53601. It is invested solely in fixed-income securities (no stock holdings) that, while earning certain rates of interest, gain in market value when interest rates fall and lose market value when interest rates rise.
Looking ahead, Fed guidance from their June meeting indicated one rate cut in 2024 and the market was closely aligned with that expectation. At of the beginning of August, however, recent economic data and market volatility has resulted in expectations that the Fed may have to increase the number of rate cuts in 2024.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report for Quarter Ended June 30, 2024
Attachment B - Certification of Quarterly Investment Report