fgfoa gulf coast chapter - wild apricot - investing... · longer duration and credit based...

FGFOA Gulf Coast Chapter

Winter Conference 2019

February 8, 2019

Public Trust Advisors 2019 ©

Where are we?

Cash is king… 3 month Treasury Index returned 1.87% in 2018

Longer duration and credit based strategies were flat to down for the year

Fixed Income sectors hurt be Fed rate hiking and credit spread widening

A slowing global economy (Europe and China) and the prospect of escalating trade wars have injected a new level of uncertainty about the path of short- and longterm U.S. Treasury rates in 2019

The bottom line is that fixed-income investors are facing a higher level of uncertainty for the interest-rate and credit environment compared with a year ago

Opportunities exist to add income to your investment program


Federal Funds Rate Hike Current Cycle

Source: Bloomberg. See additional footnotes at the end of the presentation.

The FOMC voted to increase the Federal Funds overnight rate to a range of 2.25% - 2.50% during the December 2018 meeting. This is was the ninth 0.25% rate hike during the current cycle.


Fed Funds Futures Contracts

Fed Futures contracts indicate market expectations of no rate hikes in 2019.



Federal Funds Rate Hike Scenarios


The first 36 months of the current rate hike cycle has nine 0.25% increases compared to the 2004-2006 cycle which had 17 0.25% in the same time frame.


The difference between longer term and short term yields continues to decline, and in fact is negative past 2 year maturities, is expected to continue based on current market expectations.


Yields Remain Higher – Curve is Flatter


FOMC Members are undecided on the path of long term rates.

7


FOMC Dot Plot – September 2018


FOMC Rate Projections – December 2018 Meeting


FOMC members appear conflicted regarding the direction of the Federal Funds rate as indicated by the Dot Plot and the Market currently expects decreases during 2020.


3 Month/2 Year U.S. Treasury Note



2 Year/10 Year U.S. Treasury Note

Yield Spreads narrow for longer term maturities.



Yields for maturities longer than one year plummeted in November and December, although have rebounded in the first few weeks of January.


The Yield Curve Inverted in December


The difference between longer term and short term yields continues to decline, and in fact is negative past 2 year maturities, is expected to continue based on current market expectations.


Forward Yields Suggest Continued Flattening Trend


Interest rates continued the increasing, yet flattening trend, as shorter term maturities experienced larger increases in rates as compared to long term maturities.


Yields Declined in November 2018


Flat Yield Curve Environment

déjà vu?

Source: Bloomberg ICE Index information See additional disclosures


Declining Interest Rate Environment

Interest rates fell as much as 500 basis points (5.00%) in the short end of the yield curve during the Great Recession.

Source: Bloomberg ICE Index information See additional disclosures


Spreads Narrow as the Yield Curve Continues to Flatten

Spreads between maturities greater than two years continue to narrow approaching levels seen last seen in 2006 - 2007.


Recession


Long Term/Liquidity Strategies


Tailored Investment StrategiesInvestment policy statementState StatutesCash flow analysisRevenue type (ad valorem, bond proceeds, sales tax)Expense timing (payroll, debt service, self insurance)

Fixed Income Investment Strategies

ENHANCED CASH

CORE 1-3 YRCORE 1-5 YR

RESERVE FUNDS

Revenue/Expense Driven Investment Program

18

MMF/LGIP

Source: Bloomberg – The charts above represent Bank of America Merrill Lynch index data available from Bloomberg and are intended for informational purposes only and not a recommendation. Past performance is not indicative of future performance.


Considerations for Investment Strategies

*Not a recommendation. All investments have a risk of loss. Only invest in permitted investments according to all applicable laws and as permitted by investment policy.

Market Timing: Shifting investment strategies may result in loss of interest income, increase in market risk volatility, or both.

Multiple Duration Strategies: Utilizing short and longer term maturity strategies may provide reduced overall risk during several interest rate cycles.

Liquidity options including DDA, LGIP, MMF, CP, Discount Notes*

Maturities between one and five years for reserves*

Consider Investment Risks: All investments have risks

Market Risk

Liquidity Risk

Reinvestment Rate Risk


Market Risk: the price volatility associated with an investment determined

primarily by remaining time to maturity.

Credit Risk: Risk of default or decline in security value due to Issuer

financial conditions

Reinvestment Risk: Interest and/or Principal will be reinvested at a lower

rate of return than the current interest rate

Risks Defined


Ten Year Historical Performance

Longer duration strategies have historically provided higher returns, although with higher volatility.

Source: Bloomberg ICE Index information. Amounts are estimated. See additional disclosures.


Historical Total Return

Historically, longer duration investment programs have provided higher returns compared to shorter duration investment strategies, although with higher volatility.


Duration and Volatility

Longer duration strategies have historically provided higher returns, although with higher volatility.



One Year Historical Performance

Shorter strategies outperformed in 2018.



Historical Performance and Yield Curve Analysis


Historical Performance Rising Interest Rate Environment

In a rising interest rate environment, short duration strategies may outperform long duration strategies as a result of the impact on the price return component of total return.

Source: Bloomberg ICE Index information See additional disclosures.


Historical Performance Declining Interest Rate Environment

In a declining interest rate environment, long duration strategies may outperform short duration strategies as a result of the impact on the price return component of total return.



Historical Performance Rising Interest Rate Environment




Historical Total Return – 10 Year Analysis




20 Year Historical Total Return: Price vs. Income Return

Total return comprises income return and price return.

Source: Bloomberg ICE Index information. Amounts are estimated.


Longer Term strategies have underperformed from a total return perspective for the last two years.

Annual Total Return Comparison

Short Term Strategies Outperform (6 out of 20 years)





Long Term Strategies Outperform (14 out of 20 years)



15 Year Historical Performance

Historical growth of by duration.



Rising Rate Performance

Historical growth by duration.



Rising Rate Performance




Declining Rate Performance






Short Term Strategies Outperform (6 out of 20 years)





Long Term Strategies Outperform (14 out of 20 years)



Considerations for Investment Strategies

*Not a recommendation. All investments have a risk of loss. Only invest in permitted investments according to all applicable laws and as permitted by investment policy.

Market Timing: Shifting investment strategies may result in loss of interest income, increase in market risk volatility, or both.

Multiple Duration Strategies: Utilizing short and longer term maturity strategies may provide reduced overall risk during several interest rate cycles.

Liquidity options including DDA, LGIP, MMF, CP, Discount Notes*

Maturities between one and five years for reserves*

Consider Investment Risks: All investments have risks

Market Risk

Liquidity Risk

Reinvestment Rate Risk


Disclosures

This presentation is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions and is not a recommendation to buy, sell, implement or change any securities or investment strategy, function or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented are for discussion purposes only and should not be used for making calculations and/or decisions. The data in this presentation is unaudited.

Performance comparisons will be affected by changes in interest rates. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political or financial developments.. Investment involves risk, including the possible loss of principal. No assurance can be given that the performance objectives of a given strategy will be achieved. Past performance is not an indicator of future performance or results. Any financial and/or investment decision may incur losses.

The investment advisor providing these services is Public Trust Advisors, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940, as amended. Registration with the SEC does not imply a certain level of skill or training. Public Trust is required to maintain a written disclosure brochure of our background and business experience. If you would like to receive a copy of our current disclosure brochure, privacy policy, or code of ethics please contact us.

Benchmarks are provided for illustrative purposes only. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the portfolio. Performance results for benchmarks do not reflect payment of investment management/incentive fees and other fund expenses. Because of these differences, benchmarks should not be relied upon as an accurate measure of comparison.

fgfoa gulf coast chapter - wild apricot - investing... · longer duration and credit based...

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