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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED SEPTEMBER 30, 2018
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended September 30, 2018.
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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. The Quarterly Investment Report shall include a complete description of the portfolio, the type of investments, the issuers, maturity dates, par value and dollar amounts invested in all securities. 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 Quarterly Investment Report and Certification for the quarter ending September 30, 2018, are provided as required (Attachments A and B). The report has also been posted to the City’s website and may be accessed at:
<http://www.stocktongov.com/government/departments/adminServices/finInv.html>
This report is presented as required and will bring the City current on its reporting requirements.
The City’s total investment portfolio (market value) was approximately $481 million as of September 30, 2018. Returns for the most recent quarter were $1,866,369 or 0.39% percent. This total is comprised of the City’s investment (reserve) portfolio gains of $1,565,696, which includes changes in fair market value (unrealized gains/losses) listed on Attachment A page 12, and the City’s liquid portfolio earnings of $300,673. The moderation in interest rates during the quarter ended September 30, 2018, resulted in positive total return performance for most fixed-income sectors as unrealized market gains added to realized earnings.
DISCUSSION
Background
To comply with state law and city policy, the City is required to present quarterly 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 authority of the Council to invest or to reinvest funds, or to sell or exchange securities, is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution #2018-06-05-1501-01). Pursuant to the Investment Policy, the City Treasurer may and does delegate some fiduciary responsibility to an outside investment management firm. 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 has contracted with an experienced investment manager, PFM Asset Management LLC (PFM).
Present Situation
The attached report (Attachment A) details the activities of the quarter ended September 30, 2018, and includes detailed information on the holdings of the City’s portfolio on that date. It includes a certification (Attachment B) that the holdings 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:
<http://www.stocktongov.com/government/departments/adminServices/finInv.html>
Portfolio Balances and Performance
The City’s investment portfolio (market value) totaled approximately $481 million as of September 30, 2018. The current portfolio value is $53.6 million less than the prior quarter value of $534.6 million due to expenditures above cash receipts primarily due to the City prepaying its annual unfunded accrued liability payment to CalPERS and debt service payments.
The City divides its investment portfolio into Reserve and Liquid portions. The Reserve portion represents the long-term assets managed by PFM through September 30, 2018. The Liquid portion represents funds invested in the State of California’s Local Agency Investment Fund and funds held in the City’s main account at Bank of the West that are swept in and out of money market fund accounts each night to optimize returns. Total unrealized gains on the consolidated portfolio for the fourth quarter of the fiscal year were $1,866,369 or 0.39%, which is comprised of Reserve portion unrealized gains of $1,565,696, which includes changes in fair market value (unrealized gains/losses) listed on Attachment A page 12 and Liquid portfolio earnings of $300,673. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses), but is not netted with the expenses of the pool.
Total consolidated portfolio returns over the past 12 months are in line with the benchmark and portfolio composition, which includes liquid and reserve portions. The performance of the Reserve portion of the portfolio managed by PFM through September 30, 2018, is benchmarked against the Bank of America Merrill Lynch index of 1-5 year government and U.S. issued corporate securities rated A- or better. The benchmark reflects the portfolio’s strategy and composition. City staff works closely with PFM to monitor the status of the City’s investment portfolio and its returns. Over the last quarter, the Reserve portion of the City's portfolio outperformed the benchmark by 0.23%. The result was a quarterly return of 0.37% versus the 0.14% achieved by the benchmark (Attachment A page 11).
The City’s investment portfolio complies with California Government Code 53601 and 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. The moderation in interest rates during the quarter ended September 30, 2018, resulted in positive total return performance for most fixed-income sectors as unrealized market value gains added to realized earnings. Both the City's Reserve portfolio and its benchmark produced positive total returns for the quarter, and the City’s Reserve portfolio outperformed the benchmark by 0.23%. The portfolio’s earnings on a market value basis were positive, reflecting realized and unrealized market value gains, and the Reserve portfolio yield at cost is 2.30% (Attachment A, page 9) and realized $1,926,750 of earnings during the quarter (Attachment A, page 12), on an amortized cost basis (this excludes unrealized gains/losses).
Although rising interest rates anticipated over the next couple of years are likely to keep total return performance of the portfolio and the benchmark low, realized earnings should continue to increase as the City adds new securities to the portfolio at higher interest rates. In the quarter ended September 30, 2018, PFMs analysis favored Treasuries and supranationals (highly rated debt of foreign nations traded in U.S. dollars) over federal agencies as the yield difference (or spread) between Treasuries and agencies remained narrow. Given the limited value in agencies, PFM sold some agency holdings during the quarter and added high-quality asset-backed securities, commercial paper, and negotiable CDs. These transactions contributed to the portfolio’s outperformance of the benchmark and helped to increase the City’s earnings. PFM is managing the duration (similar to average length to maturity) conservatively relative to the benchmark duration to protect the portfolio’s market values in the rising interest rate environment. PFM’s management of the City’s portfolio continues to help the City achieve its investment objectives of safety, liquidity, and return.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report - 09-30-2018
Attachment B - Certification of Quarterly Investment Report - 09-30-2018