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!


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


• Savings and money market savings accounts

• CDs

• Know the requirements for protection

• FDIC insurance

• Collateral

Bank Deposits


• 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


• 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


• 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


• 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


• 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


• 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


• Need additional training approved by TOS

• Less than 25% portfolio allocation

• Maturity restriction of 180 days

Bankers Acceptances


• AAAm rated by Standard and Poor’s (highest)

• Similar to money market fund

• Daily interest income

• Daily liquidity (within guidelines)

• State administered

STAR Ohio


• 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


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


• 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

http://www.advisor.sec.gov/

http://www.finra.org/


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


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


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.


Gross Domestic Product (GDP)

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GDP for the 4th Quarter was 2.4% YOY

Figu

res in

%

Source: Bloomberg


Inflation

0

0.5

1

1.5

2

2.5

3

1/1

/20

04

7/1

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15

Personal Consumption Expenditures - PCE

Fig

ure

s in

%

Cru

de

Oil

Pri

ce

(U

SD

/bb

l)

Source: Bloomberg


56

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68

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71

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74

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80

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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


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


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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