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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED DECEMBER 31, 2018
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended December 31, 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 December 31, 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 $514.9 million as of December 31, 2018. Returns for the most recent quarter were $6,224,399 or 1.21% percent. This total is comprised of the City’s investment (reserve) portfolio gains of $6,038,423, which includes changes in fair market value (unrealized gains/losses) listed on Attachment A page 13, and the City’s liquid portfolio earnings of $185,975. The flight to safety late in December led to a moderation in interest rates for the quarter ended December 31, 2018, resulting in positive total return performance for 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 December 31, 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 $514.9 million as of December 31, 2018. The current portfolio value is $33.9 million more than the prior quarter value of $481 million due to cash receipts exceeding expenditures, primarily due to the City’s receipt of the first installment of property taxes.
The City divides its investment portfolio into Reserve and Liquid portions. The Reserve portion represents the long-term assets managed by PFM through December 31, 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 $6,224,399 or 1.21%, which is comprised of Reserve portion unrealized gains of $6,038,423, which includes changes in fair market value (unrealized gains/losses) listed on Attachment A page 13 and Liquid portfolio earnings of $185,975. The quarterly return valuation includes funds from all activities, restricted and unrestricted, and includes changes in fair market value (unrealized gains/losses). The return 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 December 31, 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 underperformed the benchmark by -0.19%. The result was a quarterly return of 1.42% versus the 1.61% achieved by the benchmark (Attachment A page 12).
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 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 2.34% (Attachment A, page 10) and realized $2,532,530 of earnings during the quarter (Attachment A, page 13), on an amortized cost basis (this excludes unrealized gains/losses).
Investors gravitated toward lower-risk assets through the final months of 2018. U.S. Treasury yields, which had been on a steady climb since mid-2016, reversed course during the quarter as maturities beyond one year declined 30 - 40 basis points (0.30% to 0.40%). The sharp decline in interest rates during the quarter resulted in strong positive total return performance from all fixed-income sectors as well as from the City’s Reserve Portfolio and its benchmark. The sectors that benefited the most during the quarter were in the government space, Treasuries and Federal Agencies. The Reserve Portfolio had strong absolute performance of 1.42% for the quarter but underperformed the benchmark due to the Portfolio’s shorter average maturity and higher allocation to credit instruments, relative to the benchmark. Historically, the diversification of the Reserve Portfolio had been a key contributor to the Portfolio’s strong performance but proved to be a headwind in the fourth quarter due to the sharp moves lower in yields and wider in yield spreads.
The Reserve Portfolio’s strategy of broad diversification among permitted investments, a drag in the fourth quarter where longer term US Treasuries outperformed most fixed income asset classes, has benefited the Portfolio over the longer-term and should continue to produce strong returns and benchmark outperformance going forward as well.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report - 12-31-2018
Attachment B - Certification of Quarterly Investment Report - 12-31-2018