Presented by Nancy Jones, Managing Director Sarah Meacham, Consultant PFM Asset Management LLC Pam Milliron, LAIF Administrator California State Treasurer’s.

POOLSAFETYDo Not Dive In

Without

Reading theRules

CAMP CODE 110 Presented byNancy Jones, Managing Director

Sarah Meacham, ConsultantPFM Asset Management LLC

Pam Milliron, LAIF AdministratorCalifornia State Treasurer’s Office

PFM

Investment Advisors to the Public Sector© 2010 PFM Asset Management LLC 2

Advantages and Disadvantages of Pools

Advantages/Purpose• Efficiency

• Liquidity

• Diversification

• Simplified accounting for investors

• No out-of-pocket fees

• Minimal transactions costs

Disadvantages/ Risks• Inability to customize

investment strategy

• Little control over investment approach

• Actions by other investors can be detrimental

• Varying credit risk

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Why thinking about which

investment pool you are

going to invest in is

important?

PFM


Swim At Your Own RiskState of Arizona LGIP

City of Bullhead

Town of Chino Valley

City of Douglas

City of El Mirage

City of Flagstaff

City of Florence

City of Glendale

City of Goodyear

City of Kingman

Lake Havasu City

City of Maricopa

City of Sedona

City of Sahuarita

City of Tempe

County of Mohave

County of Pima

County of Santa Cruz

Florida SBA Pool

City of Port St. Lucie

State of Minnesota Board of Investment

State of Oregon Investment Pool

Washington State Investment Board

Reserve Primary Fund

County of San Mateo, CACity of Daly CityCity of Redwood CityCity of San BrunoBay Area Air Quality Management DistrictPeninsula Corridor Joint Powers BoardSan Mateo County Transportation AuthoritySan Mateo CCCDSequoia Union High SD

County Alameda, CA

County of Madera, CA

County of Monterey, CA

County of Placer, CA

County of Plumas, CA

County of Sacramento, CA

County of Santa Clara, CA

County of San Diego, CA

County of Tehama, CA

County of Toulomne, CA

County of Mohave, AZ

County of Sarasota, FL

Sources:“Lehman Bros. bust hit San Mateo County hard,” SFGate.com, October 18, 2008Website of Congresswoman Jackie Speier (http://speier.house.gov/uploads/Lehman%20Work%20Group%20Loss%20Exposure%20listing1.doc)

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Investment Advisors to the Public Sector 5© 2010 PFM Asset Management LLC

Do Your Own Due Diligence

• Investment policy

• Permitted investments

• Credit quality

• Liquidity

• Management

• Market price exposure

• Sensitivity analysis

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Association of Public TreasurersDue Diligence Standards for Use of Pools

• List of eligible investments

– Maximum percentage allowed for each type of security

– Credit requirements

– Maximum allowable dollar-weighted average maturity

– Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives

– Does the pool contain only the types of securities that are permitted by your investment policy?

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– Treasuries?

– Federal Agencies?

– Commercial paper?

– CDs?

– Asset-backed securities?

– Corporate notes?

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• 2%

• 5%

• 10%

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– Credit requirements for securities in the pool

• A-1+

• A-1

• AAA

• AA

• A

• One rating agency or two

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– Credit requirements for securities in the pool

– Maximum allowable dollar-weighted average maturity (WAM)

• 60 days

• 90 days

• 180 days

• 1 year

• 2 years

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• Interest calculations

– Methodology used to calculate interest

– Frequency of interest payments

– Options for payment of interest

– How gains and losses are reported

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• Amortized cost vs. mark-to-market

• Daily interest factor vs. average monthly yield

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• Monthly

• Quarterly

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• Reinvest into shares

• Cash payment

• Transfer to another account

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– How gains and losses are reported

• Day of trade

• At the discretion of pool manager

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• Safeguarding securities

– How often are securities priced?

– Source of prices?

– Who monitors the treasurer or investment advisor?

– How often do they get together to review?

– Who conducts the audit?

– What are the safekeeping arrangements?

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– How often are securities priced?• Daily• Weekly• Monthly• Before every deposit or withdrawal

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– Source of prices?• Pricing service• Bank• Broker

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– Who monitors the treasurer or investment advisor?• City Council• Treasury Oversight Committee• Finance Director• Auditor

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– How often do they get together to review?• Monthly• Quarterly• Annually• Ad hoc

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– Who conducts the audit?• Internal auditor• Independent firm

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– Who conducts the audit?

– What are the safekeeping arrangements?• Third party-custodial bank• Broker

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• Deposits and withdrawals

– Is there a minimum or maximum account size?

– Does the pool limit the number of transactions each month?

– Is there a limit on transaction amounts for deposits and withdrawals?

– Are the funds 100% withdrawable at any time?

– Notice of withdrawal requirement?

– Are voluntary investors allowed?

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• Statements

– Do statements show transactions and yields in addition to balances?

– Are month-end holdings reports available?

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• Fees

– What are the fees?

– How often are they assessed?

– How are they paid?

– Are expenses deducted before quoting the yield?

– Are there additional expenses for wire transfers?

– Are fees paid to a sponsoring organization?

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Additional Due Diligence

• Experience of the pool manager

– Experience of the treasurer or investment advisor

– Track record• Preservation of principal• Performance

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Types of Investment Risks

• Interest rate risk

• Credit/default risk

• Liquidity risk

• Volatility risk

• Reinvestment risk

• Call/prepayment risk

• Inflation risk

• Exchange-rate risk

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Types of Investment Pools

• Local Government Investment Pools (LGIPs)

– State pool (LAIF)

– County pools

– JPAs (CAMP, CalTrust)

• Money market funds

• Mutual funds

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Investment Advisors to the Public Sector

Money Market Funds and Mutual Funds

• Mutual Funds

– Value of shares fluctuates

– WAM: greater than 90 days

– 20% maximum portfolio allocation, 10% per fund maximum

– Loss of principal is acceptable

– NOT generally recommended for public entities

• Money Market Funds

– Seeks to maintain a constant NAV of $1.00

– WAM: 90 days or less

– 20% maximum portfolio allocation

© 2010 PFM Asset Management LLC 33

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Money Market Funds and Mutual Funds

• Variable NAV Funds

– Fidelity Government Bond Fund

– JP Morgan Government Bond Fund

– Wells Fargo Advantage Municipal Bond Fund

– Federated U.S. Government Bond Fund

– CalTRUST Short-Term Fund

– CalTRUST Medium-Term Fund

– CalTRUST Long-Term Fund

• Stable $1 NAV Funds*

– Dreyfus Institutional Reserves Treasury Money Market Fund

– Federated Government Obligations Money Market Fund

– Fidelity Institutional Treasury Money Market Fund

– HighMark U.S. Government Money Market Fund

– CAMP Pool

– Wells Fargo Advantage Heritage Money Market Fund (CalTRUST)


*These funds strive to keep a constant net asset value of $1.

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Money Market Funds and Pools

2a-7 2a-7 like

Pool manager registered under Investment Advisers Act of 1940

Yes Yes

Registered under the Investment Company Act of 1940

Yes No

Follows SEC rule 2a-7 Yes Yes

Section of CGC 53601 (l)(2) 53601 (p)

Maximum portfolio allocation by CGC

20% 100%

ExampleDreyfus Institutional Reserves Treasury Money Market Fund

CAMP Pool

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Amendments to 2a-7 Rules Effective January 2010

• Rules are intended to increase a money market fund's ability to withstand economic stresses and reduce the risk of runs on a fund.

• Highlights of the new rules include– Maturity restrictions – Liquidity requirements– Credit quality– "Know your investor" procedures– Periodic stress tests – Rating agencies– Repurchase agreements– Disclosure enhancements– Processing of transactions– Suspensions of redemptions– Purchases by affiliates

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Importance of Weighted Average Maturity


0.980

0.985

0.990

0.995

1.000

1.005

1.010

1.015

1.020

1 30 60 90 120 150 190 220 250 280 310 340 365Days

Net

Ass

et V

alu

e at

Mar

ket Change in Net Asset Value

+ 2.00%

- 2.00%

+ 1.00%

- 1.00%

+ .50%

- .50%

0.980

0.985

0.990

0.995

1.000

1.005

1.010

1.015

1.020

1 30 60 90 120 150 190 220 250 280 310 340 365Days

Net

Ass

et V

alu

e at

Mar

ket Change in Net Asset Value

+ 2.00%

- 2.00%

+ 1.00%

- 1.00%

+ .50%

- .50%

Money market fundshave maximumWAM of 90 days

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Breaking the Buck

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0.9950

Importance of Weighted Average Maturity (WAM)

Weighted Average Maturity

If Rates Rise 3%

If Rates Rise 2%

If Rates Rise 1%

If Rates Rise 0.5%

If Rates Unchanged

If Rates Fall 0.5%

If Rates Fall 1%

If Rates Fall 2%

If Rates Fall 3%

30 Days 60 Days 90 Days 180 Days 1 Year 1.5 Years

0.9975 0.9925 0.9850 0.9700 0.9550

0.9983 0.9967 0.9950 0.9900 0.9800 0.9700

0.9992 0.9983 0.9975 0.9950 0.9900 0.9850

0.9996 0.9992 0.9988 0.9975 0.9950 0.9925

1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

1.0004 1.0008 1.0013 1.0025 1.0050 1.0075

1.0008 1.0017 1.0025 1.0050 1.0100 1.0150

1.0017 1.0033 1.0050 1.0100 1.0200 1.0300

1.0025 1.0050 1.0075 1.0150 1.0300 1.0450

Value of a $1.00 Investment


Money Market Fund Mutual Fund

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Changing Market Conditions

October 1998 – December 1998 (+0.86%)

Oct-98 Nov-98 Dec-983.80%

4.00%

4.20%

4.40%

4.60%

4.80%

Jan-94 Feb-94 Mar-94 Apr-943.40%

3.80%

4.20%

4.60%

5.00%

5.40%January 1994 – May 1994 (+2.07%)

Sep-94 Sep-94 Oct-94 Oct-94 Nov-94 Nov-94 Dec-945.40%

5.80%

6.20%

6.60%

7.00%

7.40%September 1994 – December 1994 (+1.74%)

Feb-96 Mar-96 Apr-96 May-96 Jun-964.75%

5.00%

5.25%

5.50%

5.75%

6.00%February 1996 – July 1996 (+1.17%)


1-Year United States Treasury Bill Yields

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Changing Market Conditions

1-Year United States Treasury Bill Yields

Jan-99 Feb-994.40%

4.50%

4.60%

4.70%

4.80%

4.90%January 1999 – March 1999 (+0.50%)

Jul-99 Aug-994.80%

4.95%

5.10%

5.25%

5.40%July 1999 – August 1999 (+0.40%)

Apr-99 May-99 Jun-994.60%

4.75%

4.90%

5.05%

5.20%April 1999 – June 1999 (+0.52%)

Sep-99 Oct-99 Nov-99 Dec-995.00%

5.25%

5.50%

5.75%

6.00%

6.25%September 1999 – January 2000 (+0.96%)


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Standard & Poor’s Money Market Fund Ratings

Rating Definitions

AAAmExtremely strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks

AAmVery strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks.

AmStrong capacity to maintain principal value and limit exposure to principal losses due to credit, market and/or liquidity risks.

BBBmAdequate capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks.

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Proposed Changes to Standard & Poor’s Fund Rating Credit Criteria

43

*Investments rated A-1 maturing in 7 days or less can be counted toward the A-1+ percentage.

RatingMin*A-1+

MaxA-1

MaxA-2

Current Proposed Current Proposed Current Proposed

AAAm 50% 50% 50% 50% 0% 0%

AAm 20% 20% 80% 80% 5%overnight 0%

Am 0% 0% 100% 100% 10% overnight 0%

BBBm 0% 0% 100% 100% 25% overnight 0%

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Proposed Changes to Standard & Poor’s Fund Rating Maturity Criteria

44

1. Max WAM is now “WAM to reset” or “WAM (R)”2. May be adjusted upward by 30 days (e.g. AAAm 120 days) if a fund invests only in government floating rate notes.3. “Spread to final” or “WAM (F)” will be introduce

RatingMax WAM (R)1

(days)Max WAM (F) 2,3

(days)

Current Proposed Current Proposed

AAAm 60 60 N/A 90

AAm 75 70 N/A 100

Am 90 80 N/A 110

BBBm 90 90 N/A 120

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Pools in California

PoolType ofFund NAV Rating WAM

SponsorshipFees

WithdrawalRestrictions

LAIF Hybrid Hybrid: Withdrawals at $1, market value factor

Notrated

120 days to1.5 years

No 15 transactionsper month

CountyPools

Varies Varies Varies 47 days to2.9 years

No Varies

CAMP Money marketpool (2a-7 like)

Stable NAV of $1 AAAm 90 days No None

CalTRUSTShort TermMedium TermLong Term

Mutual fund structure

VariableVariableVariable

AafNot ratedNot rated

0 to 2 years1.5 to 3.5 yrs5 to 7 years

YesYesYes

1-day notice5-day notice,monthly

CalTRUSTMoneyMarketFund

Wells FargoAdvantageHeritageMoney MarketFund

Stable NAV of $1 AAAm/Aaa

90 days Yes None

Sources:“LAIF website, Standard & Poor’s 2009 County Pool Survey, CalTRUST website

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Tips for Staying Afloat• Diversify

• Read

• Understand

• Monitor

• Select funds that meet your investment objectives

2009

California Municipal Treasurer's AssociationApril 21, 2010

Sacramento, California

LAIF – An Alternative Investment Pool

Presented by

Pam MillironLAIF Administrator

California State Treasurer’s Office

54 Counties2%

474 Cities17%

1,797 Districts65%

291 Trustees10%

175 Bonds6%

LOCAL AGENCY INVESTMENT FUNDParticipation as of 03/31/10

2,791 Agencies

LAIF36.70

%

Gen-eral

Fund11.68

%

Other0.53%

*SMIF51.09

%

SOURCE OF FUNDSPooled Money Investment Account

Average Quarterly Balance03/31/10

$66.3 Billion

Treasuries44.23%

Mortgages1.19%

Agencies14.29%

Certificates of Deposit/

Bank Notes10.93%

Time Deposits5.86%

Commercial Paper6.98%

Corporate Bonds0.18%

Loans16.34%

Pooled Money Investment AccountPortfolio Composition

$69.1 billion03/31/10

Portfolio as of 03-31-10 Pooled Money Investment Account

PAR VALUES MATURING BY DATE AND TYPEMaturities in Millions of Dollars

1 day 31 days 61 days 91 days 121 days 151 days 181 days 211 days 271 days 1 year 2 years 3 years 4 years to to to to to to to to to to to to to

ITEM 30 days 60 days 90 days 120 days 150 days 180 days 210 days 270 days 1 year 2 years 3 years 4 years 5 year/out

TREASURY 200$ 4,800$ 2,445$ 3,000$ 1,850$ 950$ 4,600$ 7,050$ 2,500$ 3,250$

REPO

TDs 2,274$ 866$ 913$

AGENCY 1,531$ 2,050$ 3,381$ 1,700$ 700$ 185$ 375$ 264$ 1,125$ 633$ 0$

BAs

CP 2,747$ 2,075$

CDs + BNs 2,300$ 4,100$ 1,150$

CORP BND 25$ 100$

TOTAL

59,139$ 8,852$ 9,291$ 10,243$ 4,145$ 3,725$ 2,135$ 950$ 4,975$ 7,314$ 3,625$ 3,883$ 0$

PERCENT 15.0% 15.7% 17.3% 7.0% 6.3% 3.6% 1.6% 8.4% 12.4% 6.1% 6.6% 0.0% 0.0%

Notes: 1. SBA Floating Rate Securities are represented at coupon change date.2. Mortgages are represented at current book value.3. Figures are rounded to the nearest million.4. Does not include AB55 and General Fund loans.

6/0

58

/05

10

/05

12

/05

2/0

64

/06

6/0

68

/06

10

/06

12

/06

2/0

74

/07

6/0

78

/07

10

/07

12

/07

2/0

84

/08

6/0

88

/08

10

/08

12

/08

2/0

94

/09

6/0

98

/09

10

/09

12

/09

2/1

00.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

STATE OF CALIFORNIAPOOLED MONEY INVESTMENT ACCOUNT

03/31/10Average Monthly Yield Comparison - 06/05 through 03/10

PMIA

FED FUNDS

MARCH YIELDS

PMIA 0.547%Fed Funds 0.159%

Pam MillironLAIF Administrator

916-653-3001

[email protected]

www.Treasurer.ca.gov/PMIA-LAIF

Benefits of Using Pools and PortfoliosTogether

PFM


Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 100%

1%

2%

3%

4%

5%

6%

7%

LAIF2-Year Treasury

When Interest Rates Are Rising . . .

Monthly YieldsMarch 2000 – March 2010

Source: Bloomberg


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. . . Pools Outperform

• December 31, 2004

– LAIF: 1.50%– 2-Year Treasury: 3.07% (1.57% more than LAIF)

• December 31, 2006

– LAIF yield had risen to 5.13%

• December 31, 2004 to December 31, 2006

– Average yield for LAIF: 3.83%– 2-Year Treasury yield: 3.07%

• Advantage: LAIF +0.76%


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Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 100%

1%

2%

3%

4%

5%

6%

7%

LAIF2-Year Treasury

When Interest Rates Are Falling . . .

Monthly YieldsMarch 2000 – March 2010

Source: Bloomberg


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. . . Treasuries Outperform

• September 30, 2007

– LAIF: 5.23%– 2-Year Treasury: 3.29% (1.24% less than LAIF)

• September 30, 2009

– LAIF yield had fallen to 0.75%

• September 30, 2007 to September 30, 2009

– Average yield for LAIF: 2.73%– 2-Year Treasury: 3.29%

• Advantage: Treasury +1.26%


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Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Return Dif-ferenceLAIF2-Year Treasury

Understanding the Pool Performance Cycle

2-Year U.S. Treasury Yields and LAIF Monthly YieldsCompared to 24-Month of Difference in Returns

Source: Bloomberg*Difference in return calculated as purchase yield of 2-year U.S. Treasury less LAIF’s average yield over next 24 months.


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Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10$25,000,000.0

$27,500,000.0

$30,000,000.0

$32,500,000.0

$35,000,000.0

$37,500,000.0

$40,000,000.0 2-Year TreasuryLAIF

$38.6 Million

Source: Bloomberg

$34.6 Million

Cumulative Value

Growth of $25 MillionOver Past 10 Years Ended March 31, 2010

Portfolios Perform Better than Pools Over an Interest Rate Cycle

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Portfolios Perform Better than Pools Over an Interest Rate Cycle

Difference in AnnualizedPast 10 Year Return 1.14%

Difference in Investment IncomePer Year(on $25 Million)

$402,000

Difference in Investment Income Over Past 10 Years(on $25 Million)

$4.02 million

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Longer-Duration Portfolios Generally Perform Better than Shorter-Duration Portfolios and Pools

Total Returns Periods Ended March 31, 2010

SectorDuration(years)

Past 5 Years

Past 10 Years

LAIF 0.58* 3.34% 3.40%

1-3 Year Treasury 1.84 4.24% 4.56%

1-5 Year Treasury 2.60 4.72% 5.10%

3-5 Year Treasury 3.82 5.54% 5.96%

Source: Bloomberg and LAIF website* Weighted average maturity

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Conclusion

• Not all pools are the same

• Know what you are investing in

• Diversify your investments

– Use more than one pool– Consider buying specific securities– Combine a pool, for liquidity, with a portfolio to stabilize earnings

PFM


Online Resources

• LAIFwww.treasurer.ca.gov/pmia-laif/

• CAMPwww.camponline.com

• CalTRUSTwww.caltrust.org

• GFOAwww.gfoa.org/downloads/cashlgip.pdf

• APT US&Cwww.aptusc.org/includes/getpdf.php?f=Investment_Application.pdf

• Standard & PoorsCalifornia County Pools: www2.standardandpoors.com/portal/site/sp/en/eu/page.article/2,1,6,4,1204847189739.htmlLGIPs: www2.standardandpoors.com/portal/site/sp/en/eu/page.topic/ratings_fr_gip/2,1,6,4,0,0,0,0,0,0,0,0,0,0,0,0.html

PFM


Thank you!

Presented by Nancy Jones, Managing Director Sarah Meacham, Consultant PFM Asset Management LLC Pam Milliron, LAIF Administrator California State Treasurer’s.

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