LGIP Q4 FY 2012

LGIP QUARTERLY MEETING & CONFERENCE CALL

OFFICE OF THE ARIZONA STATE TREASURER

7.26.2012

CONFERENCE CALL

AGENDA

� LGIP Performance

� Endowment Performance

� Endowment Distribution Formula

State Cash Flow

ARIZONA STATE TREASURER DOUG DUCEY

� State Cash Flow

� Guest Presentation: Jim Palmer, CFA, Head of Investments for U.S. Bancorp Asset Management

� Q & A

INVESTMENT PHILOSOPHY

SAFETYbefore

LIQUIDITY


LIQUIDITYbefore

YIELD

EARNINGS FOR FY 2012 YTD

$134,833,364


$134,833,364

LGIP PERFORMANCEQ4 FY2012Q4 FY2012

POOL 5


POOL 7


POOL 500


POOL 700


Separately Managed Accounts (SMAs)

�Designed for those seeking a customized investing solution based on your risk tolerance, liquidity needs and duration target.

�Monthly Liquidity

�Requires $100 million minimum deposit

�


�Pre-Meeting with Portfolio Manager to set up Account and determine investing needs.

�Costs: Standard 6 basis points, plus yearly accounting charges of $20,000 out of earnings (equivalent to 2 basis points.)

�Contact Deputy Treasurer Mark Swenson

OPERATING UPDATES

Starting Monday, July 30, 2012 newkey phone numbers:

� Main number 602-542-7800


� LGIP Line 602-542-7834� Mark Swenson 602-542-7877� Dale Stomberg 602-542-7833

ENDOWMENT PERFORMANCE


PERFORMANCEQ4 FY2012

$2.00

$2.50

$3.00

$3.50

$4.00

Bil

lio

ns

Endowment Market Value

ENDOWMENT MARKET VALUE $3.52 Billion


$0.00

$0.50

$1.00

$1.50

$2.00

De

cem

be

r 2

00

6

Feb

rua

ry 2

00

7

Ap

ril 2

00

7

Jun

e 2

00

7

Au

gu

st 2

00

7

Oct

ob

er

20

07

De

cem

be

r 2

00

7

Feb

rua

ry 2

00

8

Ap

ril 2

00

8

Jun

e 2

00

8

Au

gu

st 2

00

8

Oct

ob

er

20

08

De

cem

be

r 2

00

8

Feb

rua

ry 2

00

9

Ap

ril 2

00

9

Jun

e 2

00

9

Au

gu

st 2

00

9

Oct

ob

er

20

09

De

cem

be

r 2

00

9

Feb

rua

ry 2

01

0

Ap

ril 2

01

0

Jun

e 2

01

0

Au

gu

st 2

01

0

Oct

ob

er

20

10

De

cem

be

r 2

01

0

Feb

rua

ry 2

01

1

Ap

ril 2

01

1

Jun

e 2

01

1

Au

gu

st 2

01

1

Oct

ob

er

20

11

De

cem

be

r 2

01

1

Feb

rua

ry 2

01

2

Ap

ril 2

01

2

Jun

e 2

01

2

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

Mil

lio

ns

ENDOWMENT UNREALIZED GAINS

$911 million


-$200.00

$0.00

$200.00

$400.00

De

cem

be

r 2

00

6

Ma

rch

20

07

Jun

e 2

00

7

Se

pte

mb

er

20

07

De

cem

be

r 2

00

7

Ma

rch

20

08

Jun

e 2

00

8

Se

pte

mb

er

20

08

De

cem

be

r 2

00

8

Ma

rch

20

09

Jun

e 2

00

9

Se

pte

mb

er

20

09

De

cem

be

r 2

00

9

Ma

rch

20

10

Jun

e 2

01

0

Se

pte

mb

er

20

10

De

cem

be

r 2

01

0

Ma

rch

20

11

Jun

e 2

01

1

Se

pte

mb

er

20

11

De

cem

be

r 2

01

1

Ma

rch

20

12

Jun

e 2

01

2

ENDOWMENT ASSET ALLOCATION

$1,600.04M $502.79M$1,549.4 million

$542.2 million

41.5%14.7%

8.6%Fixed Income

S&P 500

$3.52 Billion


$1,052.42M$1,122.1 million

41.5%

35.2%

14.7% S&P 500

S&P 400

S&P 600

As of 6/30/2012

PROPOSED ENDOWMENT DISTRIBUTION


DISTRIBUTION FORMULA

SMOOTHER, CONSISTENT DISTRIBUTIONS

5-YearAverage

Market Value

X

2.5%


Takes 2.5% of the average monthly market value from each of the previous five years

Annual Distribution

STATE CASH FLOW


$2,000

$2,500

$3,000Jul '90-Mar '91

Recession

Mar'01-Nov '01

Recession

Dec'07-June '09

Recession

STATE CASH FLOWTOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE

Up 58% YOY in FY 2012

$2.3 billion in

June


-$1,000

-$500

$0

$500

$1,000

$1,500

Millio

ns

STATE CASH FLOW

$1,000

$1,500

$2,000

$2,500

$3,000State Operating Balance FY 2007 - FY 2012


-$1,000

-$500

$0

$500

$1,000

Ju

l-06

Oct-

06

Jan

-07

Ap

r-07

Ju

l-07

Oct-

07

Jan

-08

Ap

r-08

Ju

l-08

Oct-

08

Jan

-09

Ap

r-09

Ju

l-09

Oct-

09

Jan

-10

Ap

r-10

Ju

l-10

Oct-

10

Jan

-11

Ap

r-11

Ju

l-11

Oct-

11

Jan

-12

Ap

r-12

STATE CASH FLOW

$1,500,000

$2,000,000

$2,500,000

$3,000,000

YTD FY 2012 Cash Flow vs. FY 2011


$-

$500,000

$1,000,000

$1,500,000

1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb1-Mar 1-Apr 1-May 1-Jun

FY 2011 FY 2012 Actual

AZ NON-FARM EMPLOYMENT

1750

2000

2250

2500

2750

3000

Jul '81-Nov '82

Jul '90-Mar '91

Recession

Mar'01-Nov '01

Recession

Dec '07-Jun 09

Recession

AZ Job growth returning


750

1000

1250

1500

1750

Fe

b-8

2

Fe

b-8

3

Fe

b-8

4

Fe

b-8

5

Fe

b-8

6

Fe

b-8

7

Fe

b-8

8

Fe

b-8

9

Fe

b-9

0

Fe

b-9

1

Fe

b-9

2

Fe

b-9

3

Fe

b-9

4

Fe

b-9

5

Fe

b-9

6

Fe

b-9

7

Fe

b-9

8

Fe

b-9

9

Fe

b-0

0

Fe

b-0

1

Fe

b-0

2

Fe

b-0

3

Fe

b-0

4

Fe

b-0

5

Fe

b-0

6

Fe

b-0

7

Fe

b-0

8

Fe

b-0

9

Fe

b-1

0

Fe

b-1

1

Fe

b-1

2

Source:

Bloomberg

2012 L.P.

Jul '81-Nov '82

Recession

AZ UNEMPLOYMENT AT 8.2%

7%

8%

9%

10%

11%

12%

Jan '80-Jul '80

Recession

Jul '81-Nov '82

RecessionJul '90-Mar '91

Recession

Mar'01-Nov '01

Recession

Dec'07-June 09

Recession

National rate of 8.2%

AZ Rate at 8.2%


2%

3%

4%

5%

6%

Fe

b-7

6F

eb

-77

Fe

b-7

8F

eb

-79

Fe

b-8

0F

eb

-81

Fe

b-8

2F

eb

-83

Fe

b-8

4F

eb

-85

Fe

b-8

6F

eb

-87

Fe

b-8

8F

eb

-89

Fe

b-9

0F

eb

-91

Fe

b-9

2F

eb

-93

Fe

b-9

4F

eb

-95

Fe

b-9

6F

eb

-97

Fe

b-9

8F

eb

-99

Fe

b-0

0F

eb

-01

Fe

b-0

2F

eb

-03

Fe

b-0

4F

eb

-05

Fe

b-0

6F

eb

-07

Fe

b-0

8F

eb

-09

Fe

b-1

0F

eb

-11

Fe

b-1

2

Source:Bloomberg2012 L.P.

AZ HOUSING PRICES

150

200

250

S & P/Case Schiller Housing Price Index for Phoenix


0

50

100

Source: Bloomberg 2012 L.P.

Guest Presentation:

James Palmer, CFA: Head of Investments for


James Palmer, CFA: Head of Investments for U.S. Bancorp Asset Management

Arizona State Treasurer’s Office

LGIP Quarterly Meeting and

Q4 2012 Conference Call


Presentation By:

Jim Palmer, CFAHead of Investments612.303.3434

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public.

Q4 2012 Conference Call

Market Conditions

Fed/Central Bank Policy• Current policy indication is to keep the federal funds rate “exceptionally low” at

least through late 2014

• Operation Twist – supportive of short-term yields

• Risk is skewed toward implementing additional monetary stimulus. All would be negative for short-term yields

For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.

be negative for short-term yields

− Additional Asset Purchases, aka: Quantitative Easing 3

− Extending language to keep Federal Funds Rate “exceptionally low”

− Reducing the “Interest on Excess Reserves” rate

• ECB has taken aggressive actions

− 3-year LTROs

− Reduced key refinancing rate to 0.75%

− Reduced interest rate on overnight deposits to 0.00%

27

Market Conditions

Economic Growth

• Recent U.S. economic data has been disappointing

− Employment, manufacturing, retail sales

• Global growth is slowing


• Policymakers view inflation as relatively contained

Market Conditions

Credit Market Challenges

• European sovereign and bank debt crisis continues and represents the largest tail risk to the financial markets

• Rating agency risk remains, but has diminished after Moody’s completed its reviews of global financial institutions in the second


quarter

• U.S. has significant policy making uncertainties

− “Fiscal Cliff”

− U.S. fiscal debt ceiling

Strategies

Yield Curve

• Fed policy supports 2- to-3-year and under bond prices

• Risk is skewed toward steeper yield curve, favoring a bullet strategy

• LIBOR remains attractive in the mid-40 bps range


Duration Management

• Fed policy argues for extending portfolio duration to maximize yield for shorter portfolios

• Long-run view suggests risks are skewed toward higher interest rates

30

Strategies

Sectors • Treasuries – current yield curve relatively low

• Agencies

− Spreads have tightened

− Callable spreads have tightened but select securities can still offer value

• Corporates

− Industrial companies have built strong balance sheets and cash positions

−


− U.S. banks have built strong capital and liquidity positions

− Spreads have tightened in past six months

• Asset-Backed Securities (ABS)

− At current spreads, ABS offer more value as a portfolio diversifier than as a yield enhancement strategy

• Agency MBS

− Favor CMOs with tighter pre-pay speed bands over pass-throughs

− Recent bump in pre-pay speeds has limited opportunities

− Additional Fed policy actions could increase risk of faster pre-payments

QUESTIONS?


QUESTIONS?

LGIP Q4 FY 2012

Documents