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.
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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
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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.
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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
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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.
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