8d 2017 Investment Portfolio Report
Item No. 8d_attach_4 Meeting Date: May 8, 2018 Page 2 of 2 Select Investment Policy Highlights: > The Port's CFO is the appointed Treasurer, and is responsible for managing the Port's investment program. The day to day duties and responsibilities may be delegated. > Authorized investments are made in accordance with and subject to restrictions of the Revised Code of Washington (RCW) 3629020. VV The Port's Statement of Investment Policy further supplements and supports the Code. The emphasis is on preservation of principal and the primary investment objectives, in order of priority are: safety, liquidity and yield. > The portfolio primarily consists of conservative investments, typically US. Government Treasuries and Agencies bills, notes and bonds. > Further details on permitted investments are in the attached Statement of Investment Policy. To meet the Port's investment objectives, the investment policy includes additional risk controls that impose further restrictions on the types of securities permitted under statute. These include limiting the maturity date of securities purchased to be no more than 10 years from the settlement date, and a total portfolio target (modified) duration of 2.0, plus or minus 50 basis points. The investment policy has been amended periodically to address changes in law or market conditions. Staff has been evaluating potential additional investment options including the State's Local Government Investment Pool (LGlP). Any change in the investment policy will require Commission action, and in April 2018, Staff is planning to request authorization to add the LGlP to the investment policy's list of authorized investments. Previous Commission Briefings March 13, 2017 The Investment Portfolio performance report for year-end 2016 was provided to the Commission. CC: Steve Metruck, Executive Director Dave Soike, Chief Operating Officer Dan Thomas, Chief Financial Officer Elizabeth Morrison, Director Corporate Finance Executive Team C:\Users\dtc\AppData\Loca/\Microsoft\Windows\INetCache\Content.0utlaok\MHGRYOYX\201 7 Annual Investment Report to Commission.docx. Annual Investment Portfolio Report for 2017 March 12, 2018 Background Authorized investments are made in accordance with and subject to restrictions of the Revised Code of Washington (RCW) 36.29.020. Commission resolution approved Port investment policy, adopted as of June 11, 2002. State laws limits the types of investments the portfolio can invest in. Highlights of the Port's investment policy in appendix; full policy attached. 2 Investment Policy Overview Emphasis on preservation of principal Priority of policy objectives 1) Safety 2) Liquidity 3) Yield Covers all capital and operating funds Limits the types and maturities of investments and establishes management parameters Establishes performance standards and independent review Does not cover funds held separately in trust, e.g. deferred compensation plans and pension trusts 3 Investment Policy Changes The investment policy is reviewed periodically, and amended as appropriate to address changes in law, market conditions or follow best practices. Last amendment: June 5, 2012. Staff recommends adding the State's Local Government Investment Pool (LGIP), and plans to request Commission approval in April 2018. 4 Portfolio Composition 12/31/2017 MORTGAGE- REPURCHASE BACKED AGREEMENTS SECURITIES - HIGH 5.1% GRADE 6.4% TREASURY NOTES FEDERAL 38.3% AGENCIES 44.3% FEDERAL AGENCIES DISCOUNT NOTES 6.0% High quality and diversified portfolio. 5 Interest Rates Trends By year-end 2017 interest rates across most (e.g. short/medium) of the yield curve were higher than the previous year. Rates at the long end were lower; the yield curve flattened. The Federal Reserve had three 0.25% increases in the federal funds target rate range, 0.75% in total, to 1.25% - 1.50% by December 2017, and may make additional increases during 2018. Rising interest rate environment: higher short to medium terms but lower in longer term; resulting in flattened yield curve. 6 Effect of Interest Rate Trends Staff monitors market conditions but does not time the market. Following the portfolio parameters established in the Port's investment policy results in the portfolio outperforming the market when short-term rates are declining and underperforming when rates are rising 7 Treasury Yield Curve 12/31/2017 12/31/2016 3.5% 3.06% 3.0% 2.45% 2.5% 2.33% 2.20% 2.74% 1.89% 1.98% 2.40% 2.0% 1.76% 2.25% 1.53% 1.93% 1.39% 1.47% 1.5% 1.28% 1.20% 1.0% 0.85% 0.62% 0.44% 0.51% 0.5% 0.0% 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years 30 Years Source: U.S. Department of the Treasury Interest rates mostly higher, and the curve is flatter than the previous year end 8 2017 Select Interest Rates 2-Yr Agencies 5-Yr Agencies 10-Yr Agencies Fed Funds Target Rate maximum 3.00 2.75 2.50 2.25 2.00 Yield (%) 1.75 1.50 1.25 1.00 0.75 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Sources: Bloomberg; Federal Reserve Interest rates (short/medium term) trended upwards; longer term rates lower. Spreads narrowed, yield curve flattened. 9 2017 Yield Comparison Benchmark Port's Pool Q1 2017 1.28% 1.34% Q2 2017 1.41% 1.42% Q3 2017 1.49% 1.43% Q4 2017 1.90% 1.51% Annual 1.52% 1.42% Port's Pool underperformed the Benchmark by 0.10%, as anticipated, in a rising interest rate environment 10 Yield History Year(s) Benchmark Port's Pool 2002 - 2006 3.13% 3.69% 2007 - 2011 1.73% 3.08% 2012 - 2016 0.56% 0.89% 2012 0.31% 1.02% 2013 0.35% 0.69% 2014 0.55% 0.86% 2015 0.73% 0.94% 2016 0.84% 1.17% 2017 1.50% 1.42% 16 years 1.79% 2.50% Port's Pool has outperformed the Benchmark by 0.71% over the long term. During certain time periods, e.g., a rising interest rate environment, the Port's Pool may underperform. 11 Yield History Benchmark Port's Pool 5.00% 5.0% 4.78% 4.45% 4.08% 4.07% 4.04% 4.0% 3.72% 4.33% 2.76% 2.64% 3.0% 3.57% 2.50% 2.17% 2.50% 2.0% 1.67% 1.52% 2.01% 1.17% 1.58% 1.02% 0.86% 0.94% 1.42% 1.0% 0.69% 1.12% 0.84% 0.72% 0.48% 0.73% 0.55% 0.0% 0.31% 0.35% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Port's Pool outperforms, on aggregate , over the long term, but may underperform during a rising interest rate environment. 12 Portfolio Earnings 2011 2017 2017 1.42% $18,253,665 2016 1.17% $14,232,834 2015 0.94% $9,995,976 Y 2014 0.86% e $8,241,675 a 2013 r 0.69% $6,555,606 2012 1.02% $9,547,173 2011 1.67% $15,069,955 Interest Earnings - % Yield and $ The annual earnings rate is increasing. 13 Investment Portfolio Size Fluctuates $1.45 billion as of 12/31/2017 versus $1.06 billion at prior year's end Over the most recent 5 years, the size has ranged from $900 million to $1.57 billion Fluctuations are mostly tied to capital funding and spending: bond issues to fund projects increase the portfolio capital project spending reduces the portfolio size More than half of the portfolio represents funds for special and restricted uses. 14 Investment Pool Participating Funds as of 12/31/2017 Reserves & Minimum Security Operating 12% Fund Balance Special Use 23% 16% Operating Cash Programmed for Capital 22% Bond Funds 27% Examples: Minimum Operating Fund Balance: General & Airport Development Funds = 9 months O&M expense Operating Funds for Capital: General, Airport, Tax Levy funds programmed to be spent over the next few years. Bond Funds: Capital projects Reserves & Security: Bond reserves, customer lease security Special Use (primarily for capital projects): Passenger & Customer Facility Charges, Transportation & Infrastructure More than half of the pool's funds are for special and restricted uses. 15 Appendix: Investment Policy Highlights The complete Investment Policy is attached. 16 Investment Policy Highlights Port's CFO and appointed Treasurer is responsible for managing the Port's investment program Authorizes Treasurer to delegate day-to-day duties and responsibilities related to investment program Establishes prudence, ethics, conflict of interest and disclosure requirements for investment officials Provides for safekeeping and custody of portfolio securities 17 Investment Policy Highlights To meet the policy's primary investment objectives, additional risk controls are included that impose further restrictions on the types of securities. These include: limit maturity date - no more than 10 years from settlement date, and portfolio target modified duration of 2.0 plus or minus 0.5% Benchmark Bank of America Merrill Lynch Treasury/Agency 1-3 Years Index Long term strategy: do not forecast interest rates; balance RETURN and RISK over cycles this strategy outperforms the market when rates are falling and underperforms when rates are rising 18 Investment Policy Highlights Establishes criteria for eligible depositories and broker/dealers Sets out allowed investment instruments; subject to State law Establishes portfolio diversification parameters Establishes maturity restrictions 19 Investment Policy Highlights Sets portfolio performance standards Allows for independent review of the investment program State Auditor External Auditors Internal Auditor Establishes reporting standards 20 RESOLUTION NO. 3663 ARESOLUTION of the Port Commission of the Port of Seattle restating the Port of Seattle Statement of Investment Policy; authorizing its implementation by the Treasurer of the Port and repealing Resolutions No. 3569 and No. 3589 in their entirety. WHEREAS, on December 11, 2001, the Port Commission adopted Resolution No. 3476 appointing the Chief Financial Ofcer of the Port as the Treasurer of the Port ("Treasurer") pursuant to RCW 53.36.010; and WHEREAS, the Treasurer developed a Port of Seattle Statement of Investment Policy ("Policy") in order to facilitate the exercise ofthe Treasurer's responsibilities; and WHEREAS, pursuant to Resolution No. 3487, the Port Commission adopted the Policy effective June 11, 2002; and WHEREAS, consistent with the Association of Public Treasurers of the United States and Canada and the Government Finance Ofcers' Association best practices, the Chief Financial Ofcer completed a review of the Policy resulting in the Port Commission's adoption of Resolution No. 3569 on December 12, 2006; and WHEREAS, on October 23, 2007 the Port Commission adopted Resolution No. 3589 that amended section ten of the Port of Seattle Statement of Investment Policy; and WHEREAS, the investment objectives ofthe Policy are to ensure the safety of the principal, maintain liquidity of the Port's investment portfolio and seek a yield reecting a market rate of return; and WHEREAS, Port of Seattle staff (Port staff) recommend that the requirements concerning Repurchase Agreements be amended to allow Port staff to enter into Agreements with Port-approved brokers and nancial institutions; and WHEREAS, Port staffrecommends that the Repurchase Agreement Collateral be extended to the overall maturity limits of the current policy, which is ten years; and WHEREAS, Port staff also recommends a number ofhousekeeping edits to the current investment policy that are depicted in Exhibit A to clarify and correct language. NOW, THEREFORE, BE IT RESOLVED by the Port Commission ofthe Port of Seattle that: Section 1. Resolutions No. 3569 and 3589 are repealed. Section 2. The restated Port of Seattle Statement of Investment Policy is adopted as provided in Exhibit A. ADOPTED by the Port Commission ofthe Port of Seattle at a regular meeting thereof, held this 6% day of 5; 3n 2 , 2012, and duly authenticated in open session by the signatures of the Commissioners voting in favor thereof and the seal of the Commission. Mia/Z g" GAEL mmemm JOHN CREIGHTON . W ( BILL BRYANT {,_ ROB HOLLAHD (K J 6) I D TOM ALBRO Port Commission PORT OF SEATTLE STATEMENT OF INVESTMENT POLICY Exhibit A To Resolution No. 3663 POLICY It shall be the policy of the Port of Seattle (the "Port") to manage its investments in order to preserve principal while maximizing income and maintaining liquidity to meet anticipated cash needs and to conform to all statutes governing the investment of public funds. INVESTMENT OBJECTIVES The primary investment objectives of the Port, in priority order, are as follows: 1. Safety - Safety of principal is the foremost objective of the Port's investment program. Investments shall be selected in a manner that seeks to insure the preservation of capital in the portfolio. This will be accomplished through security selection, portfolio diversication, and maturity limitations, as more fully described below. 2. Liquidity The Port's investment portfolio shall remain sufciently liquid to meet all cash ow requirements that may be reasonably anticipated. 3. Yield The portfolio shall be managed with the objective of attaining a market rate of return throughout economic cycles, taking into account investment risk constraints and liquidity needs. Return on investment is of least importance compared to the objectives of safety and liquidity. SCOPE This policy covers all funds managed by the Port as reported in the Port's Annual Financial Report unless specifically excluded by this policy. This policy does not apply to the Port's deferred compensation funds, employee pension, health and welfare inds, or other funds managed by third party administrators. This investment policy does not cover any moneys collected and held by King County or the State of Washington until such time as those moneys are remitted to the Port of Seattle. All investments shall comply with federal and state laws and this policy. Funds related to the issuance of tax-exempt debt shall at all times be invested and otherwise treated in accordance with Internal Revenue Service rules and regulations. STANDARDS OF CARE Prudence - The standard of prudence to be used by investment personnel shall be the "Prudent Investor Rule," and shall be applied in the context of managing the overall portfolio at all times: Investments shall 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, in priority order, the probable safety and liquidity of their capital as well as the probable income to be derived. Investment personnel acting in accordance with this policy and exercising due diligence shall be relieved of personal liability for an individual security's credit risk or market price changes, provided deviations from expectations are promptly reported and appropriate action is taken to control adverse consequences. Ethics and Conict of Interest - Ofcers and employees involved in the investment process shall refrain from personal business activity that could conict with proper execution of the investment program or that could impair their ability to make impartial decisions. Investment ofcials and personnel shall disclose to the Port's General Counsel any material nancial interests in nancial institutions that conduct business with the Port, and shall further disclose any personal nancial/investment positions that could be related to the performance of the Port's portfolio. DELEGATION OF AUTHORITY Authority to manage the Port's investment program shall reside with the Chief Financial Ofcer, appointed Port Treasurer pursuant to Resolution No. 3476. The Treasurer shall be accountable for all investment transactions and shall establish written procedures and internal controls designed to insure that the Port's assets are protected from loss, theft or misuse. The Treasurer may delegate the day-to-day duties and responsibilities related to the Port's investment program. SAFEKEEPING AND CUSTODY All transactions involving authorized investments shall be settled on a delivery versus payment (DVP) basis. All securities shall be held at the Port's safekeeping agent, or that agent's representative in New York City, or the agent's account at the Federal Reserve Bank. SECURITIES LENDING The Treasurer may enter into one or more contracts with the custodial banks or nancial institutions, or any one of them, holding the Port's securities for the lending of all or part of these securities to reputable brokers and nancial institutions to earn additional investment revenue or fees from such loans, provided that collateral equal to at least 102% of the market value of loaned securities shall be continuously maintained. FINANCIAL INSTITUTIONS AND SECURITIES DEALERS The Treasurer shall maintain a list of nancial institutions and security broker/dealers authorized to provide investment services to the Port. Firms eligible to provide such services must meet the following criteria: Financial Institutions Banks: The Port may make deposits and purchase CDs only from banks that are qualied public depositories as determined by the Washington Public Deposit Protection Commission (PDPC). The Treasurer shall monitor the net worth and nancial condition of these institutions on an ongoing basis, and may restrict and/or exclude any institution based on such evaluation. Approved Securities Dealers Primary Dealers: Security Dealers that can buy and sell Government Securities and deal directly with the Federal Reserve Bank of New York. Secondary Dealers: The Port will transact securities with Secondary Dealers having an ofce in the State of Washington, doing investment business with other public entities in the State, that have a minimum capitalization of $10 million and retained earnings of $1 million. Security broker/dealers engaged in investment transactions with the Port must have demonstrated knowledge and expertise in public sector investing and shall certify, in writing, that the dealer has read, understands, and agrees to comply with this investment policy. Dealers shall also provide the Port with annual audited 2 nancial statements. Should concerns arise regarding a dealer's nancial condition, business practices, or compliance with the Port's investment policy, the rm may be restricted from conducting business with the Port at the sole discretion of the Treasurer. AUTHORIZED INVESTMENTS In accordance with and subject to restrictions embodied in Revised Code of Washington (RCW) 36.29.020, the following investments are authorized by this policy: A. Certicates of Deposit (CDs) with qualied public depositories as dened in RCW 39.58. B. Certicates, notes, bonds, bills, or other obligations of the US. government or its agencies, or of any corporation wholly owned by the US. government, all of which are secured by the full faith and credit of the United States for the repayment of principal and interest. Obligations ofUS. govemmentsponsored corporations eligible as collateral for advances to member banks as determined by the Board of Governors of the Federal Reserve System. These include, but are not limited to, Federal Home Loan Bank bonds or notes, Federal Farm Credit Bank consolidated notes and bonds, Federal National Mortgage Association notes, debentures and bonds, Federal Home Loan Mortgage Corporation bonds or notes. In addition, the following mortgage backed securities of these agencies are allowed for purchase including: (1) collateralized mortgage pools having a stated nal maturity not exceeding the maturity limits of this policy and (2) planned amortization and sequential pay classes of collateralized mortgage obligations collateralized by 15-year agency-issued pooled mortgage securities and having a stated nal maturity not exceeding the maturity limits of this policy. Bankers' Acceptances purchased in the secondary market. Bankers' Acceptance purchases are limited to the largest 50 world banks as listed each July in the American Banker. The banks must meet Tier one and Tier two capital standards. Commercial Paper authorized by RCW 43.84.080(7) purchased from the secondary market, consistent with policy of the State Investment Board. Any changes to the State Investment Board Guidelines will be communicated in writing to the Commission as soon as possible. Repurchase Agreements structured with securities eligible for purchase (as dened in B through E above), provided that a Master Repurchase Agreement and Annex(es) have been executed with the contra-party. 1) All securities used in a repurchase agreement shall be priced to reect current market conditions. 2) Repurchase Agreements ("Repos") will not exceed 60 days in duration and will be collateralized in excess of 102% if under 30 days and 105% from 30 60 days. The collateral must be marked to market no less frequently than daily, and additional collateral posted if necessary. Pricing shall be rendered at a price the Port could reasonably expect to receive ifthose securities were sold on the open market (bid side of the market). The maturity ofthe underlying collateral cannot exceed ten years. 3) Collateral on Repurchase Agreements shall be delivered to the Port's Safekeeping Agent as described in Section 6. Any excess collateral requirement will be determined at the time of the transaction, as specied in the Master Repurchase Agreement. Reverse Repurchase Agreements ("Reverse Repos") not exceeding 60 days in duration. When used for yield enhancement rather than cash management purposes, only "matched book" transactions will be utilized, meaning that the maturity date of the security furnished as collateral is identical to the end date of the reverse repo transaction. Reverse Repos will only be executed with Approved Security Dealers or Financial Institutions. Municipal Bonds of the State of Washington and any local government of the State of Washington or general obligation bonds of a state other than the State of Washington and general obligation bonds of a local government of a state other than the State of Washington. RCW 39.59.020 prohibits purchase of municipal revenue bonds ofjurisdictions outside the State of Washington. At the time of purchase, 3 these bonds must have one of the three highest credit ratings of a nationally recognized rating agency (i.e. "A" or better). Investments shall not be made in the following securities: Corporate stocks *"EQWWDOW? Corporate bonds Foreign Government Obligations Futures Contracts Investments in Commodities Real Estate Limited Partnerships Negotiable Certicates of Deposit Inverse Floaters "Interest Only" and "Principal Only" Mortgage Backed Securities DIVERSIFICATION Portfolio risk shall be mitigated by diversication with respect to security class and issuer. The following limitations shall apply: Type of Securities Maximum Holding US. Treasury Bills, Certicates, 100% of portfolio Notes and Bonds US. Government Agency 60% of portfolio Securities (*) Agency Mortgage-Backed Securities 10% of portfolio Certicates of Deposit 15% of portfolio 5% per Issuer Bankers' Acceptances 20% of portfolio 5% per bank Commercial Paper 20% of portfolio 3% per issuer Repurchase Agreements Overnight 15% of portfolio Term Only 25% of portfolio Reverse Repurchase Agreements 5% of portfolio Municipal Securities 20% of portfolio 5% per issuer C") U. S. Government Agency Discount Notes shall not apply toward maximum Agency limitations. In addition, Discount Notes cannot exceed 20% of the Portfolio. ll. MATURITY RESTRICTIONS The investment program shall be administered in a manner that will ensure adequate liquidity to meet reasonably anticipated cash needs. Purchases shall attempt to match, but should not exceed, the anticipated need for the funds. To thher ensure the satisfaction of these needs, securities purchased shall have a maximum maturity not longer than ten (10) years from settlement date. 12. PORTFOLIO STRATEGY STANDARD The portfolio shall maintain a 2.0 target (modied) duration standard plus or minus 50 basis points. 13. POLICY EXCEPTIONS No immediate transaction is required if any policy exception or a sudden unexpected change in portfolio size causes the category holdings to exceed their limits, or the portfolio duration to fall outside of target. Subsequent investment transactions will work towards bringing the portfolio into compliance with the above guidelines within a reasonable amount of time. Within fteen (15) days of an exception, staff will notify the audit committee and identify a plan and estimated time for returning the portfolio to its policy parameters. Weekly reports will be submitted to the audit committee until the portfolio is within its established policy parameters. 14. PERFORMANCE STANDARDS The portfolio shall be managed to obtain a market rate of return through economic cycles and consistent with the Port's investment objectives. Portfolio performance shall be benchmarked against the Merrill Lynch Treasury/Agency 3 Year Index for the period oftime being evaluated. 15. INDEPENDENT REVIEW Annually, the Washington State Auditor's Ofce and external auditors will review the Port's investments and investment controls to ensure effective and appropriate controls exist. A periodic review of investments and controls, by the Port's internal auditor, will also occur. 16. REPORTING At least annually, the Treasurer will provide an investment report to the Port Commission.
Limitations of Translatable Documents
PDF files are created with text and images are placed at an exact position on a page of a fixed size.
Web pages are fluid in nature, and the exact positioning of PDF text creates presentation problems.
PDFs that are full page graphics, or scanned pages are generally unable to be made accessible, In these cases, viewing whatever plain text could be extracted is the only alternative.