Investment Policies - Florida Government Finance Officers

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					INVESTMENT POLICIES: MAKE SURE
        THEY ARE SLY

SEAN POLLAND
TREASURY MANAGER
ORANGE COUNTY COMPTROLLER’S OFFICE
                           Agenda
 Investment Policies
    Statutory Requirement
       Objectives
       Required Elements
    Other Recommendations
 Basic Fixed-Income Investments
      SBA
      Money market mutual funds
      Treasuries
      Federal agencies
      Non-negotiable CDs
      Bankers’ acceptances
      Commercial paper
      Asset-backed securities
      Municipal securities

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      Orange County, Florida
•   Territory of 1,000 square miles
•   Population of 1.1 million
•   Orlando is the principal city
•   Annual revenues of $1.8 billion
•   Expense budget of $2.1 billion
•   Investment portfolio of $1.4 billion




                                           3
Orange County Portfolio




                          4
            Statutory Requirement
 Florida Statute 218.415
   Written investment plan
   No written investment policy
      Local Govt. Surplus Funds Trust Fund (SBA) or other
       authorized intergovernmental investment pool
      Money market mutual funds
      Time deposits or savings accounts in QPDs
      U.S. Treasury securities




                                                         5
Investment Objectives
•Safety

•Liquidity

•Yield



                        6
        REQUIRED ELEMENTS
•Scope
•Performance measures
•Investment objectives (SLY)
•Prudence & ethical standards
•Listing of authorized investments
•Portfolio composition
•Risk and diversification
•Maturity & liquidity requirements
•Authorized investment institutions and dealers
•Third-party custodial agreements
•Master repurchase agreement
•(Offer and) bid requirement
•Internal controls
•Continuing education
•Reporting


                                                  7
                      SCOPE
 Identify funds covered by the policy
   Examples: Governmental funds, proprietary
    funds and agency funds

 Shall not apply to the following:
   Pension funds
   Debt proceeds subject to other policies or
    indentures




                                                 8
           Performance Measures
 Benchmarks
 Specify in advance
 Appropriate for risk and return characteristics
  of the portfolio
 Examples
   SBA
   Treasuries
   Merrill Lynch 1-3 Year Treasury Index



                                               9
  Prudence & Ethical Standards
Statutory Requirement
Prudent Person Rule: “Investments should be made with judgment
and care, under circumstances then prevailing, which persons of
prudence, discretion, and intelligence exercise in the management
of their own affairs, not for speculation, but for investment,
considering the probable safety of their capital as well as the
probable income to be derived from the investment.”


Fiduciary Trend
Prudent Investor Rule: Modern portfolio management approach
where investments are evaluated in the context of the entire
portfolio. Investment types are typically not listed in the policy. The
driving determinant of investment suitability is the purpose and
needs of the portfolio.




                                                                          10
    Listing of Authorized Investments
•   List investments authorized by local
    government
    –   Approve by resolution
        • SBA, money market funds, interest
            bearing time deposits in QPDs,
            Treasuries, federal agencies and closed-
            end management-type investment
            company comprised of Treasury and
            agency securities, as well as repos
            collateralized by Treasuries and
            agencies.
    –   Other investments can be authorized by law
        or local ordinance

                                                       11
       Portfolio Composition
 Limits
   Issues
   Issuers
   Maturities
 Guidelines for Investments
   Credit ratings
   Unique circumstances (e.g., tax-exempt
    issues)
   Collateral requirements



                                             12
       Risk & Diversification
 Investments should be diversified
  to control losses due to
  overconcentration in assets
 Diversification strategies must be
  reviewed periodically



                                       13
     Maturity & Liquidity Requirements
 Portfolio liquidity must be sufficient to pay obligations
  when due
 Maturities should be matched to known and anticipated
  cash needs
 Set maturity limits by fund class
    Current operating funds (e.g., 13 months)
    Noncurrent operating funds (e.g., five years)
    Bond reserves, construction funds, and other nonoperating
     funds (e.g., term to coincide with expected use but not to
     exceed ten years)




                                                                  14
Authorized Investment Institutions
            & Dealers

 Specify which institutions can sell
  your entity securities:
   Dealers
   Issuers
   Banks



                                        15
  Third-Party Custodial Agreement

 Provide for suitable agreements for
  safekeeping assets
   Securities should be designated as assets
    of government entity
   Transactions only by authorized staff of
    government entity
   Delivery versus payment




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            Master Repo Agreement
 Executed Master Repurchase Agreement
     Securities Industry and Financial Markets Association
      (SIFMA) standard agreement
     SIFMA agreement customized in annex
   Authorized issuers
   Eligible collateral
   Issuer credit rating
   Custodian of collateral
   Frequency of collateral valuation
   Conditions for liquidation of collateral

                                                              17
          (Offer &) Bid Requirement
 Determine maturity based on cash flow needs and
  market conditions
 If feasible and appropriate, procure competitive offers
  when purchasing/selling a security
 Accept offer that best matches needs in terms of
  objectives (SLY)
 Orange County Policy
    Three offers
    Offers undisclosed until best offer determined and awarded
    Exceptions must be approved by a member of Finance or
     Comptroller Administration




                                                                  18
                  Internal Controls
 Establish internal controls
 Reviewed by independent auditor as part of
  periodic financial audit
 Designed to prevent loss due to following:
     Fraud
     Employee error
     Misrepresentation by third-parties
     Imprudent actions by employees




                                               19
     Continuing Education

 Applies to all employees responsible for
  investment decisions
 8 hours of continuing education
  annually
 Topics related to investment practices
  and products



                                             20
                   Reporting
 Annually or more frequently
 Report to legislative body
     Securities by class or type
     Book value
     Income earned
     Market value
 Available to public


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     Other Recommendations
 Delegation of authority
 Due diligence review of investment
  pools and money markets
 Policy review and amendment
 Certification




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     Delegation of Authority
 Official vested with responsibility for
  investment program
 Delegation to manager
 Expectations of manager
   Maintain internal controls
   Monitor internal controls and activities of
    staff



                                                  23
    Due Diligence Review of Investment Pools and
                   Money Markets
   Objectives
   Eligible investments
   Interest calculations and distributions
   Safeguarding securities
   Eligible investors
   Transaction size limits
   Statement schedule and portfolio listings
   Fee schedule
   Eligible for bond proceeds


                                                   24
   Policy Review and Amendment

 Periodic review
 Orange County
   Annual review
   Comptroller’s Investment Committee
   Changes presented to Board of County
    Commissioners for adoption




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               Certification

 Association of Public
  Treasurers of the
  United States and
  Canada
 Submit policy to
  refresh certification
  periodically



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       Basic Fixed-Income Investments
   SBA
   Money market mutual funds
   Treasuries
   Federal agencies
   Non-negotiable CDs
   Bankers’ acceptances
   Commercial paper
   Asset-backed securities
   Municipal securities


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                  SBA Overview
 Objective to preserve capital and provide liquidity
 Evaluate relative to S&P Rated GIP 30-Day Yield
  Index
 SEC Rule “2a-7 like”
    Constant NAV
    Weighted-average maturity of 90 days or less
    Maximum maturity of 397 days on money market
     securities
    Government securities maximum maturity of 762 days




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              SBA Investments
 First tier securities
    A1/P1 minimum
    Minimum long-term rating A- and A3 for S&P and
     Moody’s, respectively.
 Holdings on December 31st
      Treasuries 2%
      Agencies 6%
      Commercial Paper 48%
      Floating & Variable Rate Notes 44%



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           SBA Interest Calculation
Monthly
1. Sum individual account’s daily balances
2. Divide by sum of total daily balances invested in
   SBA LGIP
3. Multiply by pool’s total earnings

Administrative expense
[{(.00015/365) X days in month} X (Avg. daily balance)]




                                                          30
             SBA Calculation Example

Orange County – SBA Balance     State Board of Administration
         Date        Balance    Sum of all daily investments in SBA:
                                $130,000,000
         2/1/07      400,000
         2/2/07      400,000    Total Pool earnings: $6,900,000

         2/3/07      400,000
                                Orange County’s Earnings
         …                 …
                                (12,000,000/130,000,000) X
         …                 …
                                6,900,000 = $636,923
         …                 …
         …                 …
         2/27/07     350,000    Administrative Expense
         2/28/07     350,000    [{(.00015/365) X 28} X
Total              12,000,000   (12,000,000/28)] = $4.93




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         Money Market Mutual Funds

   Safety depends on underlying assets
   Typically have constant NAV
   Very low default rates
   Excellent liquidity
   Provides alternative when SBA funds are not
    available



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              Treasuries

 Treasury Bills – 4 week, 3 & 6 month
   Cash Management Bills

 Treasury Notes & Bonds – 2, 3, 5, 10 &
  30 years
 Treasury Inflation-Protected Securities
  (TIPS) - Typically 5 to 20 years


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                Federal Agencies
 Government Sponsored Enterprises
     Fannie Mae
     Freddie Mac
     Federal Home Loan Banks
     Federal Farm Credit Bank
 Federally related institutions
   Ginnie Mae
   Tennessee Valley Authority


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        Types of Agency Issues

   Discount notes
   Bullets
   Callables
   Mortgage pass throughs
   Collateralized mortgage obligations
    (CMOs)



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           Agency Discount Notes
 Discount rate = (1 - price)(360/days)
 Price = 1 - discount rate(days/360)
 Purchase proceeds = price x par value
 Example: $20mm par, 5.09% discount yield for 148
  days
    Price: 1 - .0509(148/360) = .979074444
    Proceeds $20mm X .979074444 = $19,581,488.89
 Note: Same discount formula applies to T-bills, commercial paper
  and bankers’ acceptances




                                                                     36
              Agency Bullets
 Outstanding issues typically quoted by dealers
  as bond-equivalent yield (BEY) spread from a
  benchmark Treasury security
 BEY = 2[(1 + yield on annual-pay bond).5 -1)]
 Example: BEY on 5% annual-pay bond
   2[(1 + .05).5 -1)] = 4.94%
 Make sure yield comparisons are made on an
  equal basis



                                                   37
                    Valuing Callables




Source: Bloomberg
                                        38
    Mortgage Pass Throughs

Pool of Mortgages   Monthly Cash Flow
Loan 1              Interest
Loan 2
Loan 3              Scheduled Principal
….                  Payment
….
Loan 1,000          Prepayments




                    Distribute cash flow
                    on pro rata basis




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                        CMOs
Pool of Pass Throughs      Monthly Cash Flow
Loan 1                     Interest
Loan 2
Loan 3                     Schedule Principal
….                         Payment
….
Loan 10,000                Prepayments


                               Example

Distribute cash flow           Tranche   Interest   Principal
based on tranche               A $90mm   Monthly    All until paid
                                                    off
structure
                               B $75mm   Monthly    After A, all
                                                    until paid off

                               C $55mm   Monthly    After B, all




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            Non-negotiable CDs
 Deposits must be secured in accordance with
  Chapter 280, Florida Statutes
 Qualified public depositories
   Pledge collateral
   Participating QPDs are contingently liable should
    the issuing bank fail
   Physical CD must be held in secured vault



                                                   41
            Bankers’ Acceptances
 Time draft drawn on bank
   Not bank obligation until “accepted”
   BA is created once stamped “accepted”
   Exporter/importer may discount BA and sell it to an
    investor
   If discounted, exporter/importer would remain
    secondarily liable should issuing bank default
   Two-name paper
   Maturities typically six months or less.
 Dwindling number of issuers

                                                          42
             Commercial Paper
 Short-term unsecured promissory note
 Maturities typically 270 days or less
 Purchase through dealer or directly from issuer
 Roll-over risk
 Issuers normally back program with a bank line of
  credit
 Emergence of asset-backed CP



                                                  43
                Asset-backed Securities
 Securities backed by credit card receivables, auto loans,
  home equity loans, manufactured housing loans, student
  loans etc.
 Credit enhancements
      Internal
      External
      Overcollateralization
      Senior/subordinated structure

 Passthrough (pro-rata) or pay through (tranches)




                                                              44
              Municipal Securities
 Tax-exempt debt
   Generally suitable for individuals in the highest tax
    bracket
   Governments may utilize for arbitrage compliance
 Taxable
   Limited issues
   Issued for financing that does not provide sufficient
    public benefit:
      Sports stadiums
      Fund pension obligations
      Certain housing projects




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Sean Polland, Treasury Manager
Orange County Comptroller’s Office
201 S. Rosalind Avenue, 4th Floor
Orlando, Florida 32801
Phone: 407-836-5755
Fax: 407-836-5753
E-mail: sean.polland@occompt.com



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