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Home My WebLink AboutPresentation 04/21/2008r Carlos M. Oblates, Senior Managing Consultant FFM Asset Management LLC 50 California Street, Suite 2300 San Francisco, CA 94111 ®' 415-982-5544 ok litesc@ptm.com EM ° Investors' "flight to quality" during the fourth quarter drove the yield on U.S. Treasury notes to their lowest level in more than two years. 2 -Year U.S. Treasury Yields December 1997 — December 2007 0% i Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 97 98 99 00 01 02 03 04 05 06 07 Source Bloomberg PFM As: et Management LLC I I 7.50 7.00 �• i` i 1► rt In December, purchases of new homes fell unexpectedly to a 12 -year low. New homes sales fell 26% in 2007, which is the largest decline since record keeping began in 1963. The median price of an existing single-family home dropped 1.8 percent in 2007, the first decline since records began four decades ago, Existing Home Sales December 2002 — December 2007 5.50 �8141 4.50 Dec 02 Dec 03 Source: Bloomberg 1,500 1,300- N 1,100- c m 0 0 L � 900- 700 00- 700 New Home Sales December 2002 — December 2007 500 Dec 04 Dec 05 Dec 06 Dec 07 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 PFM .Asset Maraagenaent LLC 1 2 3 WIN ►►IM 1 1Olillm -IM iJ Investors flee sub -prime exposure Market reprices risk r PFM Asset Managemew LLL Investors Fled to r Safety ',,. Treasuries k The "flight to quality" caused Treasury prices to sky -rocket and Treasury yields to plummet. m Yields of Federal Agencies did not decline nearly as much as yields of U.S. Treasuries. 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 2 -Year U.S. Treasury Note vs. 2 -Year Federal Agency Note Yields March 1, 2007 — February 29, 2008 1.50% Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 07 07 07 07 07 07 07 07 07 07 08 08 Source. Bloomberg PFNI Asset Management LLC 1 4 Wary investors shied away from corporate securities in recent months. In response, corporate issuers, even those with strong financials, needed to offer elevated rates to attract investors. Yields of AA corporate notes did not decline nearly as much as yields of U.S. Treasuries, so the market value of Treasuries increased by a much wider margin than corporates. 2 -Year U.S. Treasury Yields vs. 2 -Year AA Corporate Notes March 1, 2007 — February 29, 2008 6.00% 5,50%- 5.00% .50%•5.00°l0 ..rry .. aq ma 4.50% v, 4.00%��r�'q{ t�i14�1'�49�s9,, ..:,,.: 9ai� l ilr ,Ry n 4 rt 3.50% - 3.00%- 2,50%-2-year .00%- 2.50%-2-year U.S. Treasury 2.00% - 2 -year AA corporate 1.50% Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 07 07 07 07 07 07 07 07 07 07 08 08 Source. Bloomberg W R U.S. Treasury securities, which usually achieve lower returns than Federal Agency securities and corporate obligations, had higher returns than all other bond market sectors during the third and fourth quarters due to the high demand from investors seeking safety. The unprecedented widening of spreads over the past two quarters caused investments in Federal Agency securities to under -perform investments in Treasuries by the widest margin in more than 20 years. Returns for Merrill Lynch 1-3 Year Indices Period Ending December 31, 2007 Past Quarter Past Five Years Past Ten Years Sector (Unannualized) (Annualized) (Annualized) U.S. Treasuries 2.36% 3.12% 4.75% Federal Agencies 2.10% 126% 4.97% LO t at . • - 1F f lxlf Y.� 1 .Y I f f 5.31% t X ..•'w.M—II.wCYkw.aprofiLNn. a .ES,,e '6AWWM' .y4MNwd'MF .hT+Ww-,. %Mh "e1WArvwn4w_r—wK.wWM.IM—,r:MmRaMYa.. xwi,C,,, KM'.,v,Nx-u.^n<:rvf:AxwJSNY..: s[_i.^:e='. a1.AT 1 Source: Bloomberg -Merrill Lynch Global Bond Indices PFM Asset Maivageniew L.L C 1 6 A—d— For the first and second quarters of 2007, 1-3 year Federal Agency and corporate securities had higher returns than 1-3 year U.S. Treasuries. During the third and fourth quarters, U.S, Treasuries had such dramatically higher returns that their performance for the past year was higher as well. Returns for Merrill Lynch 1-3 Year Indices December 31, 2006 — December 31,2007 AA -Rated 1151% 0.74% 1.92% 1.87% 6.17% Corporate Notes Source: Bloomberg -Merrill Lynch Global Bond Indices 13FNI Assct Nfami,�ement LLC 1 7 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Past Year Sector 2007 2007 2007 2007 (Annualized) U.S, Treasuries 1 A0% 0,70% 2.67% 2.36% 7.32% Federal Agencies 1.43% 0.77% 2.28% 2,10% 6.74% AA -Rated 1151% 0.74% 1.92% 1.87% 6.17% Corporate Notes Source: Bloomberg -Merrill Lynch Global Bond Indices 13FNI Assct Nfami,�ement LLC 1 7 . The portfolio complies with the California Government Code and the City's investment policy. The portfolio contains no asset-backed commercial paper and has no direct exposure to the subprime mortgage market, .i Callable Total $44,548,000 100% PFM Asset Mata<ag;enwm LLC 1 8 December 31, 2008 Permitted I Market Value Percent by Policy Compliance $3,682,000 8% 100%Q 1' $9,561,000 22% 100%Q ✓ $2,808,000 6%n 100%fl $8,908,000 20% 30%U � $19,589,000 44% $40 million $44,548,000 100% PFM Asset Mata<ag;enwm LLC 1 8 CAMP Cash Reserve Portfol 44% Issuer Distribution FNMA U.S. Treasury 1:i/� As of December 31 2007 Ratings by standard & Poor's C FHLB 4% FFCB 2% uoroorate Notes Bank of America GECC Merrill Lynch Wells Fargo Morgan Stanley Wachovia Citigroup HSBC 5% 3% 2% 2% 2% 2% 2% 2% AAAm (CAMP Cas Reserve Portfc 44% Credit Quality U.S. Treasury/AAA A 2% !o PFM Ai qet ibl anageincm LLC 1 9 Distribution We extended the duration of the portfolio whenever possible, increasing allocations to the 2- to 3 -year maturity range to lock in attractive yields before rates fell to their current levels. The portfolio maintains ample liquidity to meet expected cash flows. 50%- 44% 0%- 44% o 40% 0% Under6 Months 3% 6-12 Months 27% 26% 1-2 Years 0% 0% 2-3 3-4 4-5 Years Years Years Callable securities are included in the maturity distribution analysis to their staled maturity dale, although they may be called prior to maturity. PF NI Asset Mail gerncvn LLC; 10 0 IL 0 30%- l2 CAMP o Cash 5 20%- Reserve Portfolio a a 10% 0% Under6 Months 3% 6-12 Months 27% 26% 1-2 Years 0% 0% 2-3 3-4 4-5 Years Years Years Callable securities are included in the maturity distribution analysis to their staled maturity dale, although they may be called prior to maturity. PF NI Asset Mail gerncvn LLC; 10 Portfolio Performance The portfolio has performed well since inception. Investor demand for the safety of U.S. Treasuries drove the difference in yield between U.S. Treasury securities and Federal Agency obligations to historically -wide levels, causing Treasury -only indices to achieve higher returns than well -diversified portfolios. Market Value Returns Period ending December 31, 2007 ..... .. ...... .. ... _...Jb'A: m,.: �di41'ted:MmeALlY'WVSiFxTY...'CIY:4::,U:S:.:m's'.:4Rn�.m...e.�.....e....mn........w�...�..:eFY.iS%.»:aAR�F+.n„v:wv':.:.:A,[:'XS.wctin.:YN.AM"..%m:✓sddFsa.".•rw.'ttiY:o^.imnnaM�.-.n.aNndR-s..:ainTaR.GF..: se"'ti-.ti.SGw..A.v:.r:&Gx Effective Past Past Past Past Since Duration 3 Months 1 Year 3 Years 5 Years Inception City of Petaluma 1.62 years 2.06% 6.63% 429% 3.23% 3.77% Merrill Lynch 1-3 Year 1.65 years 2.36% 7.32% 4.29% 3.12% 3.56% U.S. Treasury Index • Performance on trade date basis, gross (i.e., before fees), in accordance with the CFA Institute's Global Investment Performance Standards (GIPS). • Merrill lynch Indices provided by Bloomberg Financial Markets. • CAMP Cash Reserve Pool holdings excluded from performance, yield and duration calculations. • Quarterly returns are presented on an unannualized basis. Performance numbers for periods greater than one year are presented on an annualized basis, • Inception is 12/31/01. PFM A,c set Nlatiage[taeiit LLC I 11 Portfolio Performance .*a • The City's CAMP accounts have generated returns that produced earnings of approximately $213,000 more than the Merrill Lynch benchmark and $395,000 more than LAIF. $7 million City of Petaluma CAMP Accounts $6 million Merrill Lynch 1-3 Year U.S. Treasury $5,840 LAIF $5 million - $4 million - c W"3 $3 million - $2 million° $1 million - $0 million Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 01 02 02 03 03 04 04 05 05 06 06 07 07 Source. Bloomberg and LAIF website PFM Avaer Managertiew LIX 1 12 WF (3"ornparison of Strategies endedRisk/Return of Various Benchmarks 10 Years March 31, 2008 Merrill Lynch index Duration Overall Return Cumulative Value of 45 million Ouarters with Negative Return LAIF 0,50 Years 14,10% $67,280,639 0 out of 40 1 -Year Treasury Index 0,89 Years 4,31% $68,669;192 1 out'of 40 1-c3 Year Treasury Index 1.55 Years 4,9011/o $11654,576 2 out of 40 1-5 Year Treasury index 2,38 years 5,30% $75,420,499 6 out of 40 3-5 Year Treasury Index 3,62 years 6A2% $81,559,123 14 out of 4Q Source: Bloomberg -Merrill Lynch Global Bond Indices and LAIF website PPM Asset M:uiagcment LLC 1 13 EI • Yields rebounded from a cyclical low of 1.24%. The "flight to quality" continues to affect the U.S. Treasury market. 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 2 -Year U.S. Treasury Yields January 1, 2008—April 10, 2008 Jan Feb Mar 08 08 08 Source Bloomberg PFM tT.s:;et Management L.L,C I W At the beginning of 2008, the market anticipated major interest rate cuts by the Fed that led to an inversion in the short part of the yield curve. Anticipated Fed Funds target rate reductions have been priced into the market and have steepened the formerly inverted section of the yield curve. PPM Asset Matnaaennent LLC 1 15 U.S. Treasury Yield Curve January 1, 2008 versus April 10, 2008 5°l0 3 month 3.25% 1.27% 6month 3.42% 1.4$°l0 3010 r :'...... . ...._............. y :.. 2 year 3,06% 1.84% 5 year 3.44% 2.68% 10 year 4.03% 3.54°1° 1% January 1, 2008 - April 10, 2008 30 year 4.46% 4.35% 3 6 2 5 10 30 mm yr yr yr yr Maturity Source: Bloomberg PPM Asset Matnaaennent LLC 1 15 0 The gross domestic product annualized rate was 0.6% in the fourth quarter. Major economists estimate around 1% economic growth rate in 2008. This is slightly less than the Fed's revised GDP growth forecast of 1.3-2.0%. 3% - 2% 1% 0% Gross Domestic Product January 2003 — December 2007 S orv,y G1�1; �'.5�IC7;3 it't 4 1Q03 3Q03 1Q04 3004 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 Source U.S. Department of Commerce — Bureau of Economic Analysis and Bloomberg Survey PFNi Asset Management LLC: 1 16 During its March meeting, the Federal Open Market Committee (FOMC) lowered the Fed Funds target rate 75 basis points (0.75%), from 3.00% to 2.25°/x. Fed Funds Target Rate January 2000 — March 2008 0% 1 1 1 1 1 Jan Jan Jan Jan Jan Jan Jan Jan Jan 00 01 02 03 04 05 06 07 08 Source- Bloomberg PFM Asset Management LLC 1 17 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% —+-- Federal Funds Futures 0.75% I I I I Apr May Jun Jul Aug 08 08 08 08 08 Source Bloomberg Federal Funds Forecasts as of April 2008 J Barclays Capital ar" ac;ha, k:a Goldman Sachs Lehman HSBC Merrill Lynch 1 I 1 I I 1 Sep Oct Nov Dec Jan Feb Mar 08 08 08 08 09 09 09 PFM Asset Management LLL I is