presentation to the city of los angeles i t t ad i c ... report february 2011.pdfduring february,...

CHANDLER ASSET MANAGEMENT

Presentation to the City of Los Angeles I t t Ad i C ittInvestment Advisory Committee

6225 Lusk Blvd | San Diego, CA 92121 | Phone 800.317.4747 | Fax 858.546.3741 | www.chandlerasset.com

For the Month of February 2011

Economic Outlook

2

Impact on LA

Treasury yields were mostly higher in February as better economic data led to a bond sell-off andhigher rates mid-month However unrest in North Africa and the Middle East and sharply higher oilhigher rates mid month. However, unrest in North Africa and the Middle East, and sharply higher oilprices, resulted in a Treasury rally during the second half of the month with yields settling moderatelyhigher across most of the yield curve. Economic growth remains moderate, and many economistshave begun revising their economic forecasts higher. The unemployment rate declined to 8.9% inFebruary, and many other economic indicators reflected positive, though not robust, economic activity.Th i h h ik i il i if i i ld d il hThere is some concern that the recent spike in oil prices, if it were to continue, could derail theeconomic recovery.

The Federal Reserve maintains its exceptionally easy monetary policy and continues to purchase longer dated Treasury securities in an effort to promote economic growth The next Fed meeting is longer-dated Treasury securities in an effort to promote economic growth. The next Fed meeting is March 15, and most market participants expect no change in Fed policy at least through mid-2011.

The City’s Reserve Portfolio slightly underperformed on a total return basis relative to its benchmarkindex for the month With this month’s rising rate environment the portfolio had a negative totalindex for the month. With this month s rising rate environment, the portfolio had a negative totalreturn of -0.17%, which was less than the benchmark index return of -0.12%.

EMPLOYMENT

10

12Unemployment Rate

200

400

600

Non-farm Payroll (000's)

4

6

8

Perc

ent (

%)

600

-400

-200

0

200

(000

's)

0

2

2/09

4/09

6/09

8/09

10/0

9

12/0

9

2/10

4/10

6/10

8/10

10/1

0

12/1

0

2/11

P

-1000

-800

-600

2/09

4/09

6/09

8/09

10/0

9

12/0

9

2/10

4/10

6/10

8/10

10/1

0

12/1

0

2/11

Source: U.S. Department of Labor

The February employment report showed that the economy added 192,000 jobs which was in line with expectations. Meanwhile, the unemployment rate dropped to 8.9%. Changes in the average work week and average hourly earnings were slightly weaker than expected. All in all, this was a good, but not great, employment report which demonstrates that the labor market is slowly improving.

4

CONSUMER

5.0

10.0

Retail Sales Y-O-Y % Change

0

5

10

ons

Consumer Credit

-10.0

-5.0

0.0

Perc

ent (

%)

-15

-10

-5

0

Dol

lar (

$) B

illio

Source: U.S. Department of Commerce

-15.0

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

-20

12/0

8

2/09

4/09

6/09

8/09

10/0

9

12/0

9

2/10

4/10

6/10

8/10

10/1

0

12/1

0

In January, Retail Sales rose 7.8% on a year-over-year basis. Consumer spending has rebounded from the depths of the recession and recent activity has been promising; however activity is still far short of the heights of the previous economic expansion. Consumer credit increased by $6.1 billion in December. This is the first time since July 2008 that consumer credit has increased for three consecutive months. The report suggests that banks are making more credit available to consumersthat banks are making more credit available to consumers.

5

BROAD MEASURES

500

600

Starts - Single Family Housing

1

1.2

1.4

Leading Economic Indicators

200

300

400

(000

's)

0 2

0

0.2

0.4

0.6

0.8

Perc

ent (

%)

Source: US Department of Commerce Source: The Conference Board

0

100

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

-0.6

-0.4

-0.2

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

Source: US Department of Commerce Source: The Conference Board

Single-family housing declined -1.0% in January to 413,000, the lowest level since May 2009. This report indicates that the housing market remains relatively weak. The LEI increased only 0.1% in January. This report was below expectations but it is expected that economic activity will continue to increase in the months ahead.

6

MANUFACTURING

60

65

Institute of Supply Management Purchasing Manager Index

74

76

78

Capacity Utilization

40

45

50

55 Expanding

Contracting

66

68

70

72

74

Perc

ent (

%)

Source: Institute for Supply Management Source: Federal Reserve

30

35

2/09

4/09

6/09

8/09

10/0

9

12/0

9

2/10

4/10

6/10

8/10

10/1

0

12/1

0

2/11

64

66

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

During February, the ISM Manufacturing Index rose to 61.4, compared to 60.8 in January, suggesting th t f t i ti t t h lth ISM di b l 50 i di t th t ththat manufacturing continues to grow at a healthy pace. ISM readings below 50 indicate that the manufacturing sector of the economy is contracting; readings above 50 indicate that the manufacturing sector is in an expansionary phase. With the ISM index consistently above 50, the manufacturing sector is in an expansionary phase. Capacity Utilization, which is production divided by capacity, increased to 76.1% in January. Despite increases over the past year, current capacity utilization readings are relatively low and are one factor cited by economists who believe inflation willutilization readings are relatively low and are one factor cited by economists who believe inflation will not significantly increase in the near future.

7

INFLATION

2.0

3.0

CPI Y-O-Y % Change

1 4

1.6

1.8

2.0

Core CPI Y-O-Y % Change

-2 0

-1.0

0.0

1.0

Perc

ent (

%)

0.4

0.6

0.8

1.0

1.2

1.4

Perc

ent (

%)

Source: US Department of Labor

-3.0

2.0

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

0.0

0.2

1/09

3/09

5/09

7/09

9/09

11/0

9

1/10

3/10

5/10

7/10

9/10

11/1

0

1/11

In January, the CPI showed that consumer prices increased 1.6% on a year-over-year basis. The year-over-year Core CPI (CPI less food and energy) increased at a 1.0% rate. Although some producer prices have begun to increase, prices on consumer goods are not expected to increase sharply in the months ahead. Many economists believe that inflation will remain moderate over the next 12 months, although inflation levels may pick up somewhat from here.

8

GDP

4.0

6.0

GDP Qtrly % Change

-4.0

-2.0

0.0

2.0

Perc

ent (

%)

-8.0

-6.06/

07

9/07

12/0

7

3/08

6/08

9/08

12/0

8

3/09

6/09

9/09

12/0

9

3/10

6/10

9/10

12/1

0

Source: U.S. Department of Commerce

The second reading of the Gross Domestic Product (GDP) for Q4 2010 indicated that the economy grew at an annualized rate of 2.8%. This was revised lower from the advanced reading of 3.2%. The downward revision was somewhat disappointing, but GDP readings are backward looking and are not always a good indicator of future economic growth. Many market participants believe that economic growth will continue, but uncertainty remains as to the durability of the economic recoveryremains as to the durability of the economic recovery.

9

INTEREST RATES

Yi ld th T Y N tYield on the Two-Year NoteFebruary 2009 through February 2011

1 00%

1.20%

0.60%

0.80%

1.00%

0.00%

0.20%

0.40%9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 1 1

Source: Bloomberg

Feb-

09M

ar-0

9Ap

r-09

May

-09

Jun-

09Ju

l-09

Aug-

09Se

p-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11

The yield on the two-year note rose in February. Economic data was generally good, and continued to point toward moderate economic growth; however, events in North Africa and the Middle East bear monitoring for their effect on yields. Market participants currently expect the Fed to maintain an exceptionally easy monetary policy for the foreseeable future, but longer term interest rates could continue to rise.

10

YIELD CURVES

N b 30 2010 d F b 28 2011November 30, 2010 and February 28, 2011

4.50

5.00

11/30/10 2/28/11

1 50

2.00

2.50

3.00

3.50

4.00

Perc

ent (

%)

0.00

0.50

1.00

1.503

Mo

6 M

o

2 Yr

5 Yr

10 Y

r

30 Y

r

Source: Bloomberg

The yield curve remains relatively steep as the yield on longer-term Treasuries is higher than the yield on shorter-term Treasuries. Over the last three months, the belly of the yield curve (5-10 years) has experienced greater yield increases than the other maturities on the yield curve.

11

Overview of Monthly Activities

12

Summary of Portfolio Characteristics

Core Benchmark Los AngelesReserve

Benchmark Los Angeles

February 28, 2011

Los Angeles CoreCore Benchmark

(3-Month Tbill)Los Angeles

ReserveBenchmark (ML1-5 C/G)

Los Angeles Consolidated

Portfolio cost 1,635,565,581$ -- 4,535,469,686$ -- 6,709,831,231$ Market value (with accrued) 1,636,982,048$ -- 4,599,210,409$ -- 6,774,990,620$

% of Consolidated Market Value 24% -- 68% -- 100%Average Maturity (yrs) 0.14 0.16 2.72 2.58 1.88

Modified duration 0.14 0.16 2.49 2.45 1.72Average Yield (Purchase) 0.39% -- 2.01% -- 1.46%

Average Yield (Market) 0.19% 0.13% 1.17% 1.23% 0.85%Average credit quality AAA Treasury AAA AAA AAA

13

Consolidated

MATURITY DISTRIBUTION

35%

20%

25%

30%

10%

15%

20%

0%

5%

0.0-0.25 0.25-.05 0.5-1.0 1.0-2.0 2.0-3.0 3.0-4.0 4.0-5.0 5+

0.0-0.25 0.25-.05 0.5-1.0 1.0-2.0 2.0-3.0 3.0-4.0 4.0-5.0 5+

2/28/2011 30.4% 0.5% 1.3% 19.4% 23.5% 15.2% 9.8% 0.0%

2/28/2011 1/31/2011

1/31/2011 32.3% 0.4% 0.9% 19.5% 21.5% 14.6% 10.8% 0.0%

14

SECTOR DISTRIBUTION

City of Los Angeles Consolidated

February 28, 2011 January 31, 2011

15

Portfolio Compliance with Policy & Guidelines

Portfolio Compliance with Policy and G id li F b 28 2011 Standard ComplianceGuidelines - February 28, 2011 Standard Compliance

Government Securities Five Years Complies

Banker’s Acceptances 180 Days Complies – none in portfolio

Commercial Paper 270 Days Complies

Negotiable Certificates of Deposits/Time Deposits 180 Days Complies – none in portfolio

CRA Certificates of Deposit One Year Complies – none in portfolio

Repurchase Agreements 32 Days Complies

Reverse Repo/Securities Lending 92 Days Complies none in portfolioReverse Repo/Securities Lending 92 Days Complies - none in portfolio

Corporate Notes Five Years Complies

Mortgage and Asset Backed Securities / CMOs Five Years Complies

16


Portfolio Compliance with Policy and Guidelines - February 28, 2011

Standard Compliance

Government Securities 100% Complies

State/Local Agency Securities 10% Complies – none in portfolio

Banker’s Acceptances 30% Complies – none in portfolio

Commercial Paper 40% Complies

Negotiable Certificates of Deposit/Time Deposits(+CRA) 30% Complies – none in portfolio( )

Repurchase Agreements 15% Complies

Reverse Repo/Securities Lending5% for Reverse Repo; 20% Reverse Repo+

Securities Lending Complies

Diversified mutual funds 20% Complies – none in portfolio

Corporate Notes 30% Complies

Mortgage and Asset Backed Securities / CMOs 20% Combined Complies

LAIF State Limit ($50 million per account) Complies

17


Portfolio Compliance withPortfolio Compliance with Policy and Guidelines - February 28, 2011

Standard Compliance

Federal Agenc Iss er 30% CompliesFederal Agency Issuer 30% Complies

Non-Governmental Issuer 5% Complies

Single Transaction $200 million without Treasurer’s written approval

Complies

Dealers from Approved List Complies

Commercial Paper from Approved List Complies

Corporate Notes from Approved List CompliesCorporate Notes from Approved List Complies

18


Portfolio Compliance with Policy and Guidelines Standard CompliancePolicy and Guidelines - February 28, 2011

Standard Compliance

Core

Maturity Limitation One Year Complies

M difi d D ti L th / l t 0 50 C li 0 14Modified Duration Less than/equal to 0.50 Complies – 0.14

Reserve

Modified Duration =ML 1-5 Year Government/A-rated Corporate Index (+/- 10%)

Complies – 2.49 vs. 2.45 (1.02%)

19

SECTOR DISTRIBUTION

City of Los Angeles Core Fund


20

SECTOR DISTRIBUTION

City of Los Angeles Reserve Fund


21

Portfolio Transactions

February 2011

AcquisitionsDesc Maturity Action Date Principal Interest Total

UST Note 1/31/2016 Buy 2/1/2011 37,059,257.81 2,044.20 37,061,302.01 MSFT Note 2/8/2016 Buy 2/8/2011 4,987,650.00 - 4,987,650.00 FHLB Note 2/26/2016 Buy 2/28/2011 25,034,750.00 18,402.78 25,053,152.78

DispositionsDesc Maturity Action Date Principal Interest Total

UST Note 2/15/2012 Sell 2/1/2011 75,832,031.25 476,392.66 76,308,423.91 FFCB Note 2/13/2012 Sell 2/2/2011 25,764,750.00 387,291.67 26,152,041.67 C Note 2/21/2012 Sell 2/3/2011 13,251,381.06 340,254.00 13,591,635.06

22

Credit Quality — CP and NCDs

Commercial Paper% of

C dit G I P V l R ti O tl k R ti O tl k P t


Moody's S&PCredit Group Issuer Par Value Rating Outlook Rating Outlook Port.

BNP Paribas BNP Paribas 54,000,000 P-1 A-1+ 0.80%General Electric Capital Corp General Electric Capital Corp 51,932,000 P-1 STABLE A-1+ STABLE 0.77%GE Capital Services GE Capital Services 70,027,000 P-1 STABLE A-1+ 1.03%JP Morgan Chase JP Morgan Chase 30,022,000 P-1 NEG A-1 STABLE 0.44%Nestle Capital Corp Nestle Capital Corp 20,014,000 P-1 NEG A-1+ 0.30%Procter & Gamble Procter & Gamble 70,028,000 P-1 STABLE A-1+ STABLE 1.03%Toyota Motor Credit Toyota Motor Credit 135,070,000 P-1 NEG A-1+ STABLE 1.99%

Total 431,093,000 6.36%

Negotiable CDs

% fM d ' S&P % ofCredit Group Issuer Par Value Rating Outlook Rating Outlook Port.

Total 0.00%

Moody's S&P

23

Credit Quality — Corporate NotesPortfolio Compliance with Policy and Guidelines - February 28, 2011

% ofCredit Group Issuer Par Value Rating Outlook Rating Outlook Port.MICROSOFT CORP Microsoft 32,000,000 Aaa STABLE AAA STABLE 0.47%WAL-MART STORES INC Wal-Mart Stores 40,000,000 Aa2 STABLE AA STABLE 0.60%GENERAL ELECTRIC CO General Electric Capital Corp 56,000,000 Aa2 STABLE AA+ STABLE 0.85%

Corporate NotesMoody's S&P

GENERAL ELECTRIC CO General Electric Capital Corp 56,000,000 Aa2 STABLE AA STABLE 0.85%CHEVRON CORP ChevronTexaco Corp 10,000,000 Aa1 STABLE AA STABLE 0.16%BERKSHIRE HATHAWAY INC Berkshire Hathaway 22,750,000 Aa2 STABLE AA+ 0.36%WELLS FARGO & CO Wells Fargo Bank 15,000,000 Aa3 STABLE AA- NEG 0.23%TOYOTA MOTOR CORP Toyota Motor Credit Corp 45,000,000 Aa2 NEG AA- STABLE 0.68%PROCTER & GAMBLE CO/THE Procter & Gamble Co 5,000,000 Aa3 STABLE AA- STABLE 0.07%3M CO 3M C 10 300 000 A 2 STABLE AA STABLE 0 17%3M CO 3M Company 10,300,000 Aa2 STABLE AA- STABLE 0.17%CME GROUP INC CME Group Inc. 10,000,000 Aa3 STABLE AA /*- 0.16%COLGATE-PALMOLIVE CO Colgate-Palmolive Company 10,000,000 Aa3 STABLE AA- STABLE 0.14%BANK OF NEW YORK MELLON CORP Bank of New York 29,462,000 Aa2 STABLE AA- STABLE 0.47%US BANCORP US Bank NA 10,000,000 Aa3 NEG A+ STABLE 0.16%US BANCORP US Bancorp 15,000,000 Aa3 NEG A+ STABLE 0.22%PROGRESSIVE CORP Progressive Corp 12,125,000 A1 STABLE A+ STABLE 0.19%PACCAR INC Paccar Financial Corp 4,000,000 A1 NEG A+ STABLE 0.06%COCA-COLA CO/THE Coca Cola Company 20,000,000 Aa3 STABLE A+ STABLE 0.29%JPMORGAN CHASE & CO JP Morgan Chase 10,000,000 Aa3 NEG A+ STABLE 0.16%PRUDENTIAL FINANCIAL Jackson National Life 11,500,000 A1 NEG AA 0.19%INTL BUSINESS MACHINES CORP IBM Corp 14,370,000 Aa3 STABLE A+ 0.23%p , ,HONDA CORP American Honda Finance 5,000,000 A1 A+ STABLE 0.07%BLACKROCK INC Blackrock Inc 24,550,000 A1 STABLE A+ STABLE 0.38%WALGREEN CO Walgreen Company 11,935,000 A2 STABLE A STABLE 0.19%UNITED TECHNOLOGIES CORP United Tech Corp 8,105,000 A2 STABLE A STABLE 0.13%SOUTHERN CO Alabama Power Company 10,000,000 A2 STABLE A STABLE 0.16%SCHWAB (CHARLES) CORP Charles Schwab Corp 15 000 000 A2 STABLE A STABLE 0 24%SCHWAB (CHARLES) CORP Charles Schwab Corp 15,000,000 A2 STABLE A STABLE 0.24%PRAXAIR INC Praxair 20,000,000 A2 STABLE A STABLE 0.30%OCCIDENTAL PETROLEUM CORP Occidental Petroleum 10,000,000 A2 STABLE A STABLE 0.15%NUCOR CORP Nucor Corp 11,625,000 A2 NEG A STABLE 0.19%

24

Credit Quality — Corporate Notes Continued


% ofCredit Group Issuer Par Value Rating Outlook Rating Outlook Port.LOWE'S COS INC Lowe's Companies Inc 10,000,000 A1 STABLE A STABLE 0.16%ELI LILLY & CO Eli Lilly & Co 10,000,000 A2 STABLE AA- STABLE 0.16%

Moody's S&P

Portfolio Compliance with Policy and Guidelines February 28, 2011Corporate Notes

KIMBERLY-CLARK CORP Kimberly-Clark 5,000,000 A2 STABLE A STABLE 0.08%JPMORGAN CHASE & CO Bank One Corp 12,000,000 A1 NEG A 0.19%HERSHEY CO/THE Hershey Foods Corp 10,000,000 A2 STABLE A STABLE 0.16%HEWLETT-PACKARD CO Hewlett Packard Company 39,500,000 A2 STABLE A STABLE 0.60%HONEYWELL INTERNATIONAL INC Honeywell Intl 5,000,000 A2 STABLE A STABLE 0.08%GOLDMAN SACHS GROUP INC Goldman Sachs Group Inc 20,000,000 A1 NEG A NEG 0.32%p , ,EBAY INC Ebay Inc 5,000,000 A2 STABLE A STABLE 0.07%WALT DISNEY CO/THE Walt Disney Corp 10,000,000 A2 STABLE A STABLE 0.16%DEERE & CO John Deere Cap Corp 9,350,000 A2 STABLE A STABLE 0.15%DEERE & CO John Deere Capital Corp 30,000,000 A2 STABLE A STABLE 0.46%CATERPILLAR INC Caterpillar Finance Serv Corp 11,000,000 A2 STABLE A STABLE 0.18%BANK OF AMERICA CORP Bank of America Corp 30 310 000 A1 NEG A NEG 0 48%BANK OF AMERICA CORP Bank of America Corp 30,310,000 A1 NEG A NEG 0.48%DU PONT (E.I.) DE NEMOURS EI Dupont Nemour 8,900,000 A2 /*- A /*- 0.14%AT&T INC AT&T Corporation 16,140,000 A2 STABLE A- 0.25%AT&T INC Bellsouth Corp 10,000,000 A2 STABLE A- 0.16%AT&T INC AT&T 5,000,000 A2 STABLE A- STABLE 0.07%SOUTHERN CO Georgia Power Company 9,150,000 A3 STABLE A STABLE 0.15%PNC FINANCIAL SERVICES GROUP PNC Funding Corp 9,449,000 A3 POS A STABLE 0.15%PEPSICO INC Pepsico Inc. 10,000,000 Aa3 STABLE A- STABLE 0.16%DELL INC Dell Inc. 21,000,000 A2 STABLE A- STABLE 0.32%CITIGROUP INC Citigroup Inc 17,155,000 A3 NEG A NEG 0.27%BB&T CORP BB&T Corp 7,925,000 A3 STABLE A- STABLE 0.13%PITNEY BOWES INC Pitney Bowes Credit Corp 6,000,000 A2 NEG BBB+ STABLE 0.09%

Total 826,601,000 12.84%

25

Portfolio Performance: Total Rate of Return

TOTAL RATE OF RETURN

Since Inception

TOTAL RATE OF RETURNFebruary 28, 2011

3.0%

4.0%

2.0%

0.0%

1.0%

Annualized Since Inception Latest

Core Portfolio Three Month T-Bill

1 Month 3 Months 12 MonthsCore Portfolio 0.02% 0.05% 0.15% 2.57%

Three Month T-Bill 0.02% 0.04% 0.14% 2.23%

(4/30/2001)

26

Portfolio Performance: Total Rate of Return

TOTAL RATE OF RETURNTOTAL RATE OF RETURNFebruary 28, 2011

Since Inception

4.0%

5.0%

2.0%

3.0%

0.0%

1.0%

Annualized Since Inception Latest

Reserve Portfolio 1-5 Yr. Corp/Gov Index

1 Month 3 Months 12 MonthsReserve Portfolio -0.17% -0.44% 2.73% 4.38%

1-5 Yr. Corp/Gov Index -0.12% -0.36% 2.69% 4.12%

(11/30/2001)

27

presentation to the city of los angeles i t t ad i c ... report february 2011.pdfduring february,...

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