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ACCEPT THE QUARTERLY INVESTMENT REPORT FOR QUARTER ENDED MARCH 31, 2021
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RECOMMENDATION
It is recommended that the City Council accept by motion the Quarterly Investment Report for the quarter ended March 31, 2021.
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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, 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 Quarterly Investment Report and Certification for the quarter ending March 31, 2021, are provided as required (Attachments A and B). This report is presented as required and will bring the City current on its reporting requirements. The report has also been posted to the City’s website: <http://www.stocktongov.com/government/departments/adminServices/finInv.html>
The City’s total investment portfolio (market value) was approximately $718.4 million as of March 31, 2021. The current portfolio value is $35.3 million more than the prior quarter value of $683.1 million due to cash receipts exceeding expenditures. Returns for the most recent quarter were ($2,266,504), or -0.32 percent. This total is comprised of the City’s investment (reserve) portfolio losses of ($2,348,487), which includes changes in fair market value (unrealized gains/losses) listed on (Attachment A page 16), and the City’s liquid portfolio earnings of $81,983. The U.S. Treasury yield curve steepened dramatically during the quarter with longer term yields rising considerably while shorter term yields remained near all-time low levels, anchored by the Fed’s near-zero rate policy. Rising interest rates caused unrealized market values losses in the portfolio because when interest rates move higher, prices fall.
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, reinvest funds, sell or exchange securities is delegated to the City’s Chief Financial Officer, who also serves as City Treasurer (Resolution #2020-06-23-1503). 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 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 March 31, 2021, and includes detailed information on the holdings of the City’s portfolio on that date. It consists of 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: <http://www.stocktongov.com/government/departments/adminServices/finInv.html>
Portfolio Balances and Performance
The City’s investment portfolio (market value) totaled approximately $718.4 million as of March 31, 2021. The current portfolio value is $35.3 million more than the prior quarter value of $683.1 million due to cash receipts exceeding expenditures.
The City divides its investment portfolio into Reserve and Liquid portions. The Reserve portion represents the long-term assets managed by PFM through March 31, 2021. The Liquid part represents funds invested in several accounts (State of California Local Agency Investment Fund, California Asset Management Program, Dreyfus Treasury Money Market) to maintain adequate liquidity and optimize returns. Total gains on the consolidated portfolio for the third quarter of the fiscal year were ($2,266,504) or -0.32%. The decrease is a combination of the reserve portfolio’s unrealized losses of ($2,348,487), which includes changes in fair market value (unrealized gains/losses) listed on (Attachment A, page 16), and the liquid portfolio’s earnings of $81,983. 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.
The performance of the reserve portion of the portfolio managed by PFM through March 31, 2021, 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 generally 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 0.11%. The result was a quarterly return of -0.43% versus the
-0.54% achieved by the benchmark. For the year, the City’s portfolio returned 1.54%, but with the differing composition (described above), outperformed the benchmark by 1.05% (Attachment A, page 15).
The portfolio’s modestly conservative and shorter-duration (similar to average maturity) posture in the quarter added notable value to performance relative to the benchmark as the steeper curve resulted in significant underperformance of securities with maturities beyond three years. The portfolio’s broad diversification by sector also helped to contribute to the strong relative performance for the quarter and the past year. The portfolio’s allocation to the municipal sector added value to portfolio performance as municipals were one of the best investment-grade performers for the quarter. Investment-grade corporates and asset-backed security allocations also added to portfolio performance relative to the benchmark, as the sectors had small excess returns relative to Treasuries, as higher income offset the negative effects of modestly wider yield spreads.
The City’s investment portfolio complies with California Government Code 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. The portfolio’s earnings on a market value basis were positive, reflecting realized and unrealized market value gains. The reserve portfolio yield at cost is 1.44% (Attachment A, page 14) while realizing $2,014,230 of earnings during the quarter (Attachment A, page 16) on an amortized cost basis (this excludes unrealized gains/losses).
The relative value of Federal Agency securities compared to Treasuries has waned due to their strong demand and limited new issuances. While the portfolio currently has larger allocations to Agency securities than in previous years, the strategy in 2021 will likely see reductions in shorter maturities while continuing to invest in longer Agency securities that still offer valuable spreads. The taxable municipal bond sector continues to offer value, and investment in high quality issues will continue, as long as they are available. With further anticipated federal spending to stimulate the economy, the corporate sector will remain a core long-term holding in the Reserve portfolio.
As the vaccine rollout continues in 2021, the Federal Reserve remains strongly committed to providing unprecedented support, and interest rates are expected to remain low for the foreseeable future.
FINANCIAL SUMMARY
There is no financial impact related to the presentation of these reports.
Attachment A - Quarterly Investment Report - 3-31-2021
Attachment B - Certification of Quarterly Investment Report - 3-31-2021