Oregon Short-Term Fund

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Oregon Short-Term Fund

2008 OMFOA Spring Conference

March 11, 2008

Linda Haglund – Deputy State TreasurerPerrin Lim – Sr. Fixed Income Investment Officer

Office of the State Treasurer

22008 OMFOA Spring Conference March 11, 2008 OSTFB

Oregon Short Term Fund – Management structure and implementation

1. Role of Oregon Investment Council (OIC)

2. Investment Process of OSTF Sources of information Forecasting Research Market analysis – pricing


Role of OIC

Oversight of state financial assets and local government deposits in OSTF

Treasurer & staff implement directions of OIC

PERS, SAIF, Common School Fund, State Agency accounts and the OSTF

Current Assets under management: over $78 Billion

Establishes unique investment policy for each account

Total Portfolio Asset Class Allocation Asset Class Specific Manager or Fund Specific (OSTF)


First step in policy development – Know your client

Purpose of funds Volatility/Risk tolerance Return objective Liquidity Requirements

For the OSTF, the OIC looks for input from the Oregon Short Term Fund Board.


Common elements for all include:1. Type of Securities

Governments, corporate, stocks, real estate, private equity, commercial paper, private placements.

Large cap vs. small cap Domestic vs. International

2. Risk “of” the security’s characteristics Emerging vs. Developed Market Maturity limits and Duration target for Bonds Security rating minimum/maximum

3. Prohibited Investments

4. Compliance/monitoring/reporting

5. Benchmark Expected return over the benchmark

6. Time frame for evaluation Longer term assets – market cycle 3-5 years Short term assets –90 days, rolling, over time


Total Portfolio Asset Class Allocation Policy Example – OPERF

Asset Class

Target Allocation

(%)

Re-

balancing Range

(%)

Expected Annual

Policy Return1

(%)

Expected Annual Active Management

Return (net of fees)

(%)

Expected Annual Total

Return (%)

Public Equities 46 41-51 9.0 0.75 9.7 Private Equity 16 12-20 10.7 1.3 12.0 Total Equity 62 57-67 Fixed Income 27 22-32 5.7 0.75 6.4 Real Estate 11 5-11 6.3 0.75 7.0 Total Fund 100 8.1 0.8 8.9

Policy Mix and Return Expectations for OPERF Regular Account

1 Based on capital market forecasts developed by the Council’s investment consultant, SIS, for the next two to three market cycles.2 Total Fund expected returns are simply the weighted averages of the asset class returns.

Sample


Manager or Fund Specific Policy Example - OSTF

SAMPLE ELEMENTS......

Maturity Distribution of PortfolioA. 50% of the portfolio must mature within 93 days.

B. A maximum of 25% of the portfolio may mature over one year.

C. No investment may mature in over 3 years as measured from settlement date.


Sample OSTF Policy Elements… continued

Diversification and Limitations of Portfolio

A. Eligible Securities:

1) U.S. Treasury Securitiesa. 100% of the portfolio may be in U.S. Treasury securities.

2) U.S. Government Agency Securitiesa. 100% of the portfolio may be in U.S. Government Agency securities.b. 33% maximum of portfolio per agency issuer.

Additional Securities include: Corporate Indebtedness Negotiable Certificates of Deposit (NCD’s)

B. All portfolio investments will be denominated in US$ only.

C. 10% maximum of portfolio per issuer on all securities and support commitments with the exception of U.S. Treasury (100% maximum) and Government Agency securities (33% per issuer).

Bankers' Acceptances (BA’s) etc, etc…


Sample OSTF Policy Elements… continued

CREDIT QUALITY

Total weighted average credit quality of the portfolio shall be a minimum of AA or Aa2.

PORTFOLIO LIMITATION

No commitments to buy or sell securities may be made more than 14 business days prior to the…


For OSTF, OIC hands this investment road map to Perrin’s team

Next step, develop a “process” to implement.

Many with solid policies in place, still stumbled.

How did we miss the recent landmines?


The Oregon Short-Term Fund (OSTF)…

Employs an active team managed strategy that incorporates a top-down economic and interest rate outlook combined with bottom-up security selection, seeking to add value while adhering to a disciplined risk control process.


Staff’s Investment Objectives

Preservation of Principal Liquidity A Market Rate of Return


Portfolio Construction

As detailed in OSTF Portfolio Rules, generally consists of:

High Quality, Top-Tier Commercial Paper High Quality Corporate and Bank Obligations US Agencies US Treasuries


Value can be added through three main strategies:

1. Sector Allocation

Ongoing research, analysis, and evaluation of market sectors with respect to current market prices, i.e. spread or risk premium



2. Issue SelectionPrimarily a bottom-up process to uncover mispriced or undervalued credits and/or securities



3. Weighted Average Maturity (WAM) Exposure

Target WAM based on domestic (and international) macro-economic factors as well as the general political environment

Staff weighs its views vs. market expectations, increasing WAM as views diverge and vice versa as views converge

Goal is to add value based on the longer term trend and positioning the fund’s WAM accordingly, not timing the market


OSTF Investment Process

Investment Outlook

OSTF Portfolio Rules

Sector Allocation

OSTF

Implementation

Monitoring & Controls

Interest Rate

Exposure

Issue Selection

External Manager Resources

Internal Research

Third Party Research Ratings Agencies Street Research


How Did OST Staff Avoid Recent Landmines?

Investment Policy – Dictates all portfolio decisions Always keep in mind investment objectives

1. Preservation of Principal

2. Liquidity

3. Yield


How Did OST Staff Avoid Recent Landmines?

Staff Outlook – Results in general portfolio structure

Experience over past market cycles is a huge benefit!

Better to be lucky than good… Learn from past mistakes…to help prevent them in the

future Not a “Black and White Science”


Overview of Security Selection Process1

Short Term or Long Term? US Treasuries, Agencies or Credit?

Always consider worst case scenario

1 The OSTF Investment and Security Selection Processes are appropriate for the OSTF only.


Overview of Security Selection Process

Relative Value in CreditWhy not buy all issues that fit portfolio guidelines?

Citigroup Inc. (C) versus CIT Group Inc. (CIT) Credit Curves are an important indicator (fixed vs. float, 2 yr vs. 10 yr) Balance Sheet Analysis Debt Ratio Trends Cash Flow Analysis Near Term Maturities Credit Facilities Current Credit Profile, Ratings 10-K Reports: Management’s Discussion and Analysis Event Risk: LBO’s, Share Repurchases


Credit Curves (spread versus Libor)2

2 year 5 year Issuer

Fixed Floating Fixed Floating C (Aa3/AA-/AA) +120/+110 +65/+55 +155/+140 +130/+115 CIT (A2/A/A) +360/+335 +750/+660 +370/+320 +660/+615

2 Approximate spreads as of February 29, 2008


Balance Sheet Analysis

Liquidity – Cash & Near Cash Amounts


Debt Ratio Trends


Cash Flow Analysis


Near Term Maturities


Related Securities, Credit Facilities (e.g. see Bank Loans)


Credit Profile


Summary: Take Aways

Investment Policy dictates investment of assets

Mistakes happen…Goal is to learn and minimize in the future

Know what one buys…Don’t rely only on ratings

Always consider Worst Case Scenario/Reaching for Yield – Sleep Factor

If 2-year US Treasuries bought and 2-year Treasuries increase 200 b.p.?

If credit bought and issuer experiences negative headlines


OSTF Statistics & Compliance

OSTF Statistics & Compliance, as of February 29, 2008: Compliance Policy Actual Par Value

Maturity Distribution Portfolio maturities less than 93 days > 50% 77.451% $8,883,471,000 Portfolio maturities between 94 days & 1 year 6.800% 779,945,000 Portfolio maturities greater than 1 year < 25% 15.749% 1,806,344,000 Maturities greater than 3 years 0% 0.000% 0

Total Maturity Distribution 100.000% $11,469,760,000 Diversification

Treasury and/or Agency Securities 0-100% 53.757% $6,165,751,000 Commercial Paper (minimum A-1/P-1) < 50% 22.930% 2,549,909,000 Commercial Paper (< A-1/P-1) 0% 0.00% 0 Corporate Bonds < 25% 22.232% 2,549,909,000

Total Corporate Indebtedness < 50% 45.162% 5,179,959,000 Repurchase Agreements 0-100% 0.000% 0 Reverse Repurchase Agreements 0-100% 0.000% 0 Time Certificate of Deposit’s < 20% 1.082 % 124,050,000

Total Diversification 100.000% $11,469,760,000 Total Average Credit Quality

Moody’s or Standard & Poor’s Minimum Aa2 or AA

Aa1/AA+

Corporate Bonds Downgraded after purchase: Merrill Lynch & Co. Inc. Current: A1/A+/A+

Interest Rate Exposure (adjusted for variable rate securities) WAM, exposure in days 157 days

Fixed versus Floating Weights: Fixed Rate 80.664% $9,251,967,000 Variable Rate 19.336% $2,217,793,000

Total Return Performance, ending January 31, 2008: January 3 mos. YTD 1 yr 2 yrs 3 yrs 4 yrs 5 yrs OSTF 0.57 1.36 0.57 5.55 5.35 5.35 4.66 3.87 91 Day T-Bills 0.50 1.26 0.50 5.10 5.03 4.42 3.66 3.15

Oregon Short-Term Fund

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