INV 210: Investing for Small Governmentstreasurer.ohio.gov/Documents/CMS/CPIM/PowerPoints/INV 210...
Transcript of INV 210: Investing for Small Governmentstreasurer.ohio.gov/Documents/CMS/CPIM/PowerPoints/INV 210...
INV 210:
Investing for Small Governments
2015
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2 INV 210: Investing for Small Governments
Agenda for Today
๏ Investment Policy Statement
๏ Permissible Investments
๏ Developing Your Strategy
๏ Executing Your Strategy
๏ Opportunities To Invest
Investment Policy Statement
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• Scope
• Objectives
• Permissible Investments
• Maturities
• Diversification
• Authorized Dealers
• Reporting
Investment Policy
The investment policy provides GUIDELINES for investing and PROTECTION for you!
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Create, adopt, and file with Auditor of State
• Service providers must sign off
• Review IPS annually
• As the economic environment continuously changes, your investment perspective should evolve
• Stay up to date on Ohio Revised Code amendments – SB 287 changes
Investment Policy
Permissible Investments
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• Sections 135.14, 135.142, 135.143 and 135.35.
• Introduced in Senate on 2/25/2014 by primary sponsor Senator Jim Hughes
• Unanimously passed by Senate on 5/14/2014
• Unanimously passed by House of Representatives on 5/28/2014
• Signed by the Governor on 6/5/2014
• Effective on 9/3/2014
Senate Bill 287
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• Savings and money market savings accounts
• CDs
• Know the requirements for protection
• FDIC insurance
• Collateral
Bank Deposits
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• Full faith and credit of the U.S. government
• Most liquid type of security
• Purchase directly from U.S. Treasury or through a broker/dealer
Treasury Securities
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• Full faith and credit or implied backing by U.S. government
• Customized structures – call types and steps
• Things to Consider
• Compare bond with other dealers
• Know the difference between the yield and
coupon rate!
Government Securities
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• Need additional training approved by TOS
• Max of 25% (ORC 135.35) or 40% (ORC 135.14) portfolio allocation
• Max maturity restriction of 270 days
• Highest rating category from two rating agencies (Moody’s, S&P, Fitch)
• Maximum of 5% of total portfolio in any issuer at time of purchase (ORC 135.14)
Commercial Paper
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• ORC 135.35 permits up to 15% of interim funds in corporate securities.
• Must be rated AA or better and have a two year maturity.
• Know what you are buying and the risk associated.
• Credit risk
• Liquidity risk
Corporate Securities
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• Permits entities to purchase general obligations of the State or political subdivisions of the State (20% max under ORC 135.14)
• Must be rated in three highest categories (ORC 135.14)
• Cannot be the sole owner of an entire issue (ORC 135.14)
• Charter Cities could have specific language for purchasing municipals
• Must complete training with TOS
Municipal Securities
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• Term loan with collateral in the form of securities
• Master Repurchase Agreement outlines procedures
• Reverse repo enables investment officer to leverage the portfolio – PROHIBITED
Repurchase Agreements
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• Need additional training approved by TOS
• Less than 25% portfolio allocation
• Maturity restriction of 180 days
Bankers Acceptances
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• AAAm rated by Standard and Poor’s (highest)
• Similar to money market fund
• Daily interest income
• Daily liquidity (within guidelines)
• State administered
STAR Ohio
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• Convenience of one account and one statement
• All deposits are demand deposits and are 100% FDIC-
insured
• Up to $25 million in deposits per legal entity
• Twice weekly withdrawal and daily deposit capability
• Daily transparency with 24/7 online access
to account information
STAR Plus
Developing Your Investment Program
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• Part of your daily tasks
• Look at both current and historic cash flows
Review Cash Flows
• How much to keep liquid?
• How much to invest longer term?
Questions
to Ask • Better align investments for improved investment returns
• Keeping too much liquidity is an opportunity cost
Establish Investment
Horizons for Funds
Cash Forecast & Investment Horizon
Identify Your Core Portfolio
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Identify Your Core Portfolio
Cash vs. Core
Cash Management – “Cash” Portfolio
• Operating needs for current year
• Funds with uncertain time horizon
Investment Management – “Core” Portfolio
• Cash balance with time horizon greater than once a year
• Apply investment strategy to maximize earnings
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• Identify major forces and factors that influence the markets • What is the macroeconomic situation?
• Understand current economic status and trends
• Economic indicators
• Market commentaries
• Identify future scenarios and their investment implications • What are the economists saying?
• Identify factors that signal a change in the current economic environment
• Become an economist
Establish Investment Outlook
Performing basic economic analysis will
produce prudent investment
results
Executing Your Investment Program
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Who Will Help You?
STAR Ohio/Plus
• STAR Ohio
• Know the investments of STAR Ohio
• Look over the annual report
• Plus
• Understand how program works
• Monitor deposit Banks
Banks
• Make sure they understand nuances of public entities
• Work with banks you know and trust
Investment Advisors
• Acts as a fiduciary in the client’s best interest
• Who do they work with?
• What are their credentials?
• Check them out: www.advisor.sec.gov
Brokers
• Recommends suitable investments
• Who do they work with?
• What do they do and how much do they charge?
• Check them out: www.finra.org
Perform the Due Diligence
Before Investing
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External Managers – Advisor
• Provides investment advice
• Fiduciary responsibility
• May or may not have direct control (discretionary vs. non-discretionary)
• Executes purchases/sales
• Manages or provides advice on overall portfolio
• May coordinate safekeeping (3rd party custodian)
Definition of “Fiduciary” - fi·du·cia·ry - noun
• In law, a person in a position of authority whom the law obligates to act solely on behalf of the
person he or she represents and in good faith.
Source: Merriam-Webster
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External Managers – Broker/Dealer
• Provides investment advice
• No fiduciary responsibility
• Does not have direct control
• Acts as a broker when executing orders on behalf of clients
• Acts as a dealer when trading from its own account
• May provide safekeeping
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Benefits of Using External Managers
• Professional manager – that is their business
• Greater access to investment markets/information
• Broker network – potentially more sources to receive best price execution of trades
• Enhanced credit research available for unsecured investments (i.e., commercial paper)
• Can complement internal resources or personnel
• Could increase internal control and “separation of duties”
• Be careful and know what role the provider is playing
Economic Environment
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Market Environment
• The Federal Open Market Committee (FOMC) reaffirmed its current 0% to .25% target range for the federal funds rate. Members have opposing views as to how quickly rate increases should begin.
• The European Central Bank continued purchasing asset-back securities in its attempt to provide stability to the struggling European economies. Overnight rates remain at 0% to .05%.
• Oil prices have hit 5 year lows sinking below $50 per barrel from their highs of over $105 this summer.
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Gross Domestic Product (GDP)
-6
-4
-2
0
2
4
6
De
c-1
4
Ju
n-1
4
De
c-1
3
Ju
n-1
3
De
c-1
2
Ju
n-1
2
De
c-1
1
Ju
n-1
1
De
c-1
0
Ju
n-1
0
De
c-0
9
Ju
n-0
9
De
c-0
8
Ju
n-0
8
De
c-0
7
Ju
n-0
7
De
c-0
6
Ju
n-0
6
De
c-0
5
Ju
n-0
5
De
c-0
4
Ju
n-0
4
De
c-0
3
Ju
n-0
3
De
c-0
2
Ju
n-0
2
De
c-0
1
Ju
n-0
1
De
c-0
0
Ju
n-0
0
De
c-9
9
Ju
n-9
9
De
c-9
8
Ju
n-9
8
De
c-9
7
Ju
n-9
7
De
c-9
6
Ju
n-9
6
De
c-9
5
Ju
n-9
5
De
c-9
4
Ju
n-9
4
De
c-9
3
Ju
n-9
3
De
c-9
2
Ju
n-9
2
De
c-9
1
Ju
n-9
1
De
c-9
0
GDP for the 4th Quarter was 2.4% YOY
Figu
res in
%
Source: Bloomberg
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Inflation
0
0.5
1
1.5
2
2.5
3
1/1
/20
04
7/1
/20
04
1/1
/20
05
7/1
/20
05
1/1
/20
06
7/1
/20
06
1/1
/20
07
7/1
/20
07
1/1
/20
08
7/1
/20
08
1/1
/20
09
7/1
/20
09
1/1
/20
10
7/1
/20
10
1/1
/20
11
7/1
/20
11
1/1
/20
12
7/1
/20
12
1/1
/20
13
7/1
/20
13
1/1
/20
14
7/1
/20
14
1/1
/20
15
Personal Consumption Expenditures - PCE
Fig
ure
s in
%
Cru
de
Oil
Pri
ce
(U
SD
/bb
l)
Source: Bloomberg
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56
58
60
62
64
66
68
2
3
4
5
6
7
8
9
10
11
12
10
/1/1
951
4/1
/19
53
10
/1/1
954
4/1
/19
56
10
/1/1
957
4/1
/19
59
10
/1/1
960
4/1
/19
62
10
/1/1
963
4/1
/19
65
10
/1/1
966
4/1
/19
68
10
/1/1
969
4/1
/19
71
10
/1/1
972
4/1
/19
74
10
/1/1
975
4/1
/19
77
10
/1/1
978
4/1
/19
80
10
/1/1
981
4/1
/19
83
10
/1/1
984
4/1
/19
86
10
/1/1
987
4/1
/19
89
10
/1/1
990
4/1
/19
92
10
/1/1
993
4/1
/19
95
10
/1/1
996
4/1
/19
98
10
/1/1
999
4/1
/20
01
10
/1/2
002
4/1
/20
04
10
/1/2
005
4/1
/20
07
10
/1/2
008
4/1
/20
10
10
/1/2
011
4/1
/20
13
10
/1/2
014
Unemployment
Unemployment Rate
Participation Rate
Un
em
plo
yme
nt
Fig
ure
s in
%
Particip
ation
Figu
res in
%
US Unemployment Rate decreased to 5.5% as of 2/28/15
Source: Bloomberg
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0.00
0.50
1.00
1.50
2.00
2.50
3.00
3 MONTH 6 MONTH 12 MONTH 2 YEAR 3 YEAR 5 YEAR 7 YEAR 10 YEAR
Yie
ld (
%)
3/31/2015
3/31/2014
U.S. Treasury Yield Curve
Source: Bloomberg
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Summary
๏ Ask questions
๏ Know the details
๏ Protect yourself – follow the law
๏ Seek help when appropriate
๏ ULTIMATELY IT IS YOUR RESPONSIBILITY!
Questions?
Thank you.
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