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HomeMy WebLinkAbout11-09-2023 IOC Agenda PacketCity of San Luis Obispo, Agenda, Planning Commission Agenda INVESTMENT OVERSIGHT COMMITTEE Thursday, November 9, 2023 3:00 p.m. REGULAR MEETING Conference Room 6 990 Palm Street San Luis Obispo CALL TO ORDER: Chair Emily Jackson ROLL CALL: Committee Members Natalie Harnett, Derek Johnson, Debbie Malicoat, Erica A. Stewart, Anni Wang, and Chair Emily Jackson OTHERS PRESENT: Monique S. Spkye, PFM Asset Management LLC, Sarah Walsh, PFM Asset Management LLC, and Teresa Purrington, Recording Secretary PUBLIC COMMENT: At this time, people may address the Committee about items not on the agenda. Persons wishing to speak should come forward and state their name and address. Comments are limited to three minutes per person. Items raised at this time are generally referred to staff and, if action by the Committee is necessary, may be scheduled for a future meeting. CONSIDERATION OF MINUTES 1. Minutes of the Investment Oversight Committee of August 10, 2023. BUSINESS ITEMS 2. Presentation of the Quarterly Investment Report on Portfolio Performance & Economic Recommendation: Receive and confirm investment policy compliance. Investment Oversight Committee Agenda for Thursday, November 9, 2023 Page 2 COMMENT AND DISCUSSION 3. Staff Updates and agenda forecast ADJOURNMENT The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, February 15, 2024, at 3:00 p.m., in Conference Room 6, 990 Palm Street, San Luis Obispo, California. The City of San Luis Obispo wishes to make all of its public meetings accessible to the public. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities. Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the Finance Department at (805) 781-7125 at least 48 hours before the meeting, if possible. Telecommunications Device for the Deaf (805) 781-7107. Meeting audio recordings can be found at the following web address: http://opengov.slocity.org/WebLink/1/fol/61037/Row1.aspx   Minutes - Draft Investment Oversight Committee Thursday, August 10, 2023 Regular Meeting of the Investment Oversight Committee CALL TO ORDER A Regular meeting of the Investment Oversight Committee was called to order on Thursday, August 10, 2023, at 3:00 p.m. in the Council Hearing Room at City Hall, 990 Palm Street, San Luis Obispo, by Chair Jackson. ROLL CALL Present: Committee Members Natalie Harnett, Erica A. Stewart, Debbie Malicoat, Anni Wang and Chair Emily Jackson. Absent: Committee Member Derek Johnson Others Present: Sarah Walsh, and Monique Spyke, PFM Asset Management LLC. PUBLIC COMMENT ITEMS NOT ON THE AGENDA None --End of Public Comment-- APPROVAL OF MINUTES 1. Review of Minutes of the Investment Oversight Committee Meeting of May 11, 2023 PUBLIC COMMENT None --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER WANG SECONDED BY COMMITTEE MEMBER HARNETT CARRIED 5-0-1 (COMMITTEE MEMBER JOHNSON ABSENT), to approve the May 11, 2023, minutes, as presented. City of San Luis Obispo, Title, Subtitle    Minutes - Investment Oversight Committee Minutes of Thursday August 10, 2023 Page 2   BUSINESS ITEMS 2. Presentation of the Quarterly Investment Report on Portfolio Performance & Economic Outlook Monique Spyke, and Sarah Walsh, for PFM Asset Management LLC, provided an update via PowerPoint presentation and responded to Committee inquiries. Public Comment None --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER MALICOAT, SECONDED BY COMMITTEE MEMBER WANG, 5-0-1 (WITH COMMITTEE MEMBER JOHNSON ABSENT), to approve the recommendation to accept the report. COMMENT AND DISCUSSION None ADJOURNMENT The meeting was adjourned at 3:53 p.m. The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, November 9, 2023, at 3:00 p.m. APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/XXXX Quarterly Investment Report AS OF September 30, 2023 This report presents the City’s investment portfolio for the quarter ending September 30, 2023. It has been prepared to comply with regulations contained in California Government Code Section 53646. The report includes all investments managed by the City on its own behalf as well as for other third-party agencies on a fiduciary basis such as the Whale Rock Commission. It also includes all City related investments held by trustees for bond debt service obligations. As required, the report provides information on the investment type, issuer, maturity date, cost, and current market value for each security. Market Considerations U.S. economic conditions were characterized by: •Strong than expected growth, supported by a resilient consumer •Inflation that remains stubbornly above the Federal Reserve’s (“Fed”) target range •Continued creation of new jobs by the labor market, albeit at a moderating pace The Fed held rates steady at the September FOMC meeting as expected. The Fed’s most recent “dot plot” indicated one more rate hike for 2023 and set the stage for interest rates to remain “higher-for- longer.” The U.S. government rating downgrade by Fitch had little impact, although it highlighted growing worry about the erosion of governance standards and fiscal irresponsibility. Source: Bloomberg as of September 30, 2023. 5.45% 5.04% 4.61%4.57%4.70% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%YieldMaturity U.S. Treasury Yield Curve September 30, 2023 June 30, 2023 3-Month 2-Year 5-Year 10-Year 30-Year 0.23% 0.52% 1.07% 0.30% 0.57% 0.00% 0.25% 0.50% 0.75% 1.00% 1.25%U.S. TreasuryAgencyABSCorp A-AAACorp BBB1-5 Year Indices Quarterly Returns 5.6%5.1% 3.9% 2.9%2.5% 0% 2% 4% 6% 8% 2023 2024 2025 2026 Longer Run Federal Funds Rate June Projections September Projections 3.3% 2.5%2.2%2.0%2.0% 0% 1% 2% 3% 4% 5% 2023 2024 2025 2026 Longer Run PCE Inflation June Projections September Projections What we are watching… Headline inflation numbers continued trending lower, but the Fed’s preferred measure of “supercore inflation” has shown little sign of slowing. The labor market continues to appear as strong as ever. The Fed reached a pausing point in their rate hike cycle after the most aggressive series of rate hikes in recent history. There is potential for another additional rate hike by the end of the year according to the Fed’s most recent dot plot. As a result, both the U.S. Treasury yield curve and fed funds futures have indicated that investors have become more accepting of a “higher for longer” overnight rate environment. We will likely continue to maintain a defensive duration bias as the curve remains near historically extreme levels of inversion, while remaining nimble to extend as yields reach opportunistic levels. Source: Federal Reserve, latest economic projections as of September 2023. 2.1% 1.5% 1.8%1.8%1.8% 0% 1% 2% 3% 2023 2024 2025 2026 Longer Run Change in Real GDP June Projections September Projections 3.8%4.1%4.1%4.0%4.0% 0% 1% 2% 3% 4% 5% 6% 2023 2024 2025 2026 Longer Run Unemployment Rate June Projections September Projections Current Cash and Investment Summary The following is a summary of the City’s cash and investments based on market value, as of September 30, 2023, compared to the prior quarter. Investment Entity September 30, 2023 Percent of Total June 30, 2023 City Held Cash & Investments $12,096,882.69 5.8%$36,417,467.39 JPMorgan Money Market Account $50,000,000.00 24.0%$50,000,000.00 LAIF Held Investments $45,616,465.55 21.9%$45,261,270.26 PFMAM Managed Investments*$100,906,981.38 48.4%$100,412,987.45 TOTAL**$208,620,329.62 100%$232,091,725.10 *Figures shown exclude accrued interest. **Details may not add up to total due to rounding. Current Cash and Investment Summary There are several factors which result in changes in cash and investment balances from month-to- month and quarter-to- quarter, dependent on the receipt of revenues or a large disbursement. •Some major City revenues are received on a periodic rather than a monthly basis. Property Tax is received in December, January, April, and May of each year. Transient Occupancy Tax is received monthly but varies considerably due to seasonality. •Payments for bonded indebtedness or large capital projects can reduce the portfolio substantially in the quarter in which they occur. •The City pays its CalPERS obligation in a lump sum at the beginning of the fiscal year to achieve interest savings. Factors Securities Securities in the City’s portfolio are priced by Refinitiv, an independent pricing service, at the end of every month. In some cases, the City may have investments with a current market value that is greater or less than the recorded value. These changes in market value are due to fluctuations in the marketplace, having no effect on yield, as the City does not intend to sell securities prior to maturity. Nevertheless, these market changes can impact the total value of the portfolio. Security Type Market Value % of Portfolio % Change vs. 6/30/23 Permitted by Policy U.S. Treasury 56,126,076 55.4%-8.8%100% Federal Agency 17,594,806 17.4%-13.9%100% Municipal Obligations 1,707,663 1.7%-18.2%30% Negotiable CDs 1,958,678 1.9%100.0%30% Corporate Notes 17,146,091 16.9%14.9%30% Asset-Backed Securities 4,144,901 4.1%857.9%15% Securities Sub-Total 98,678,216 -1.7% Money Market Fund 2,228,766 2.2%15,132.9%20% Accrued Interest 414,752 0.4% Securities Total 101,321,733 100.0%0.9% PFMAM Managed 9/30/2023 6/30/2023 Average Maturity (Years)2.37 2.17 Effective Duration1 2.07 2.00 Average Market Yield 5.13%4.80% Total Return Total return is calculated based on interest and both realized and unrealized changes in market value; this is expressed as a rate of return over a specified period of time based on cost and is backward- looking. •Focused on long-term performance and growth •Affected by both yield and market value fluctuations •Reflects “true value” of the portfolio •Recommended approach by the Government Finance Officers Association Total Rate of Return 3 Months 1 Year 3 Years Since Inception City of SLO 0.52%2.84%-0.82%1.14% 0-5 Treasury Index 0.50%2.67%-1.04%0.94% Variance +0.02%+0.17%+0.22%+0.20% 1Effective duration is the approximate percentage change in price for each 1 % change in interest rates. Investment Objectives The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. The City follows the practice of pooling cash and investments for all funds under its direct control. Funds held by outside fiscal agents under provisions of bond indentures are maintained separately. Interest earned on pooled cash and investments is allocated quarterly to the various Quarterly Investment Report funds based on the respective fund’s average quarterly cash balance. Interest earned from cash and investments with fiscal agents is credited directly to the related accounts. It is common for governments to pool the cash and investments of various funds to improve investment performance. By pooling funds, the City can benefit from economies of scale, diversification, liquidity, and ease of administration. The City uses the services of an investment advisor, PFM Asset Management, to manage a portion of the City’s portfolio. The City’s strategy is to retain approximately 25% of the portfolio to manage its day-to-day cash flow needs, while PFM’s focus is on longer-term investment management. In addition, the City has retained direct control of several investments that had been acquired before the City began to use investment advisors. All investments are held by the City in a safekeeping account with Bank of New York Mellon, except for investments held by trustees related to bond financings, which are held by either US Bank or Bank of New York Mellon. Environmental, Social, and Governance (ESG) Investment Objectives ESG investing is the process of incorporating the analysis of non-financial environmental, social, and governance factors into investment decisions alongside traditional financial criteria. As set forth in the City’s Investment Management Plan dated August 18, 2020, it is City’s objective to integrate environmental, social, and governance (“ESG”) factors into investment decisions for its investment portfolio to the extent practical and possible. In order to achieve this objective, the City will apply the ESG Investment Criteria to the following Investments: Asset-Backed Securities, Bankers’ Acceptances, Commercial Paper, Corporate, Medium-Term & Bank Notes, and Negotiable Bank Deposit Obligations. The ESG investment criteria is based on ESG Risk Ratings, industry and subindustry definitions, and subindustry rankings as provided by Sustainalytics. Market Value includes accrued interest as of September 30, 2023. Average ESG Risk Rating is weighted by market value. Please see important disclosures at the end of this presentation. U.S. Treasury and municipal obligations are not included in the analysis. ESG Risk Composition Overview The ESG Risk Rating measures economic value at risk based on ESG factors. A company’s ESG Risk Rating is comprised of a quantitative score and a risk category. The score indicates unmanaged ESG risk. Risk categories are absolute and comparable across industries. Lower scores represent less unmanaged risk. Ratings are scored on a scale of 1-100 and are assigned to one of the following ESG risk categories: •Negligible Risk (overall score of 0-9.99 points) •Low Risk (10-19.99 points) •Medium Risk (20-29.99 points) •High Risk (30-39.99 points) •Severe Risk (40 and higher points) 29/35 of portfolio issuers are rated with a total rated market value of $41.1 million (41%) Negligible Low Medium High Severe Portfolio Average ESG Risk Rating 19.5 Allocation by ESG Risk Rating Low 24% Medium 17% High <1% Not Rated 58% Industry Diversification Portfolio holdings and Sustainalytics data as of September 30, 2023. Average ESG Risk Rating represents the market value -weighted average ESG risk rating for each industry. 29.3 19.4 19.1 25.3 23.2 17.7 15.8 18.9 15.1 0% 15% 30% 45% 60% 0 10 20 30 40 Portfolio Weight (%)ESG Risk RatingIndustry Exposure and Weighted Average Risk Score S&P Credit Rating Distribution ESG Risk Rating Key Negligible Low Medium High Severe 0-9.99 10-19.99 20-29.99 30-39.99 40-100 Portfolio holdings and Sustainalytics data as of September 30, 2023. If a security is not rated by S&P, the equivalent Moody’s rating is used. NR stands for ‘no rating’ and implies that the issuer is not rated by S&P or Moody’s but is rated by Fitch. $0 $5 $10 $15 $20 $25 A AA AAA Market Value Allocation (Millions $) Credit Rating Grouped by ESG Risk Rating Category 21.0 17.5 21.8 0 10 20 30 40 AAA AA A Average ESG Risk Rating by S&P Credit Rating Holdings as of September 30, 2023 Sorted by ESG Risk Rating Source: Sustainalytics. Holdings as of September 30, 2023. Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 9/30/2023 Coöperatieve Rabobank U.A.1.0%Diversified Banks 2 10.0 CarMax Inc.0.2%Automotive Retail 20 12.1 Adobe Systems Inc 0.6%Enterprise and Infrastructure Software 3 13.1 The Home Depot Inc 1.0%Home Improvement Retail 19 13.3 Federal National Mortgage Association 9.4%Thrifts and Mortgages 7 14.1 Target Corp 0.7%Department Stores 7 14.4 Microsoft Corp 1.6%Enterprise and Infrastructure Software 5 15.1 Novartis AG 1.5%Pharmaceuticals 1 16.2 Fifth Third Bancorp 0.7%Regional Banks 9 16.8 Mastercard Incorporated 0.6%Data Processing 20 17.1 Pfizer Inc 1.1%Pharmaceuticals 2 18.5 American Express Company 0.8%Consumer Finance 13 18.6 Federal Home Loan Bank System 2.8%Consumer Finance 14 18.7 Intel Corp 0.5%Semiconductor Design and Manufacturing 13 18.9 Kubota Corp 0.3%Agricultural Machinery 20 19.7 The Toronto-Dominion Bank 1.0%Diversified Banks 17 19.8 Deere & Co 0.8%Agricultural Machinery 26 20.0 Federal Home Loan Mortgage Corp 5.6%Thrifts and Mortgages 20 20.2 Bank of New York Mellon Corp 0.9%Asset Management and Custody Services 12 20.9 Holdings as of September 30, 2023 Sorted by ESG Risk Rating Source: Sustainalytics. Holdings as of September 30, 2023. Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 9/30/2023 Bristol-Myers Squibb Company 0.3%Biotechnology 9 22.7 Walmart Inc.1.3%Food Retail 48 25.3 The PNC Financial Services Group, Inc.0.7%Regional Banks 35 26.1 PACCAR Inc 0.8%Heavy Machinery and Trucks 40 27.6 Bank of America Corporation 1.9%Diversified Banks 57 28.3 Honda Motor Co Ltd 0.7%Automobiles 75 28.7 Citigroup, Inc.1.5%Diversified Banks 62 29.2 JPMorgan Chase & Co.1.9%Diversified Banks 63 29.3 Toyota Motor Corp 0.8%Automobiles 83 29.8 Amazon.com Inc 0.3%Online and Direct Marketing Retail 98 30.6 (continued) Socially Responsible Investment Policy In addition to the ESG criteria, the City’s Socially Responsible Investment (SRI) Policy restricts portfolio issuers who generate revenue from casinos, gambling, racetracks, brewery, wine/spirits, tobacco, electronic cigarette, or tobacco-related products, or who support the direct production or drilling of fossil fuels. The tables to the right show the Bloomberg Industry Classifications (“BICS”) for all the portfolio’s holdings. Issuer Sector (BICS) Adobe Inc Software & Services Amazon.com Inc Retail - Consumer Discretionary American Express Credit Account Credit Card ABS Bank of America Auto Trust Automobile ABS Bank of America Co Diversified Banks Bristol-Myers Squibb Co Pharmaceuticals Carmax Auto Owner Trust Automobile ABS Chase Issuance Trust Credit Card ABS Citigroup Inc Banks Cooperatieve Rabobank U.A.Banks Deere & Company Machinery Manufacturing FHLB Government Agencies FHLMC Government Agencies Fifth Third Auto Trust Automobile ABS FNMA Government Agencies Home Depot Inc Retail - Consumer Discretionary Honda Auto Receivables Automobile ABS Intel Corporation Semiconductors Issuer Sector (BICS) JP Morgan Chase & Co Diversified Banks Kubota Credit Owner Trust Other ABS Los Angeles Community College District Education Mastercard Inc Consumer Finance Microsoft Corp Software & Services New Jersey Turnpike Authority Transportation Novartis Capital Corp Pharmaceuticals Paccar Financial Corp Transportation & Logistics Pfizer Inc Pharmaceuticals PNC Financial Services Group Banks State of California General Government State of Maryland General Government Target Corp Mass Merchants The Bank of New York Mellon Corporation Financial Services Toronto-Dominion Bank Banks Toyota Motor Corp Automobile ABS U.S. Treasury Sovereigns Wal-Mart Stores Inc Mass Merchants Source: Bloomberg. BICs is an industry classification system developed and utilized by Bloomberg that classifies securities b ased on business, economic function, and other characteristics. Distribution List City Council Erica A. Stewart Mayor Jan Marx Vice mayor Emily Francis Council Member Andy Pease Council Member Michelle Shoresman Council Member Investment Oversight Committee Erica A. Stewart Mayor Anni Wang Public Member Derek Johnson City Manager Emily Jackson Director of Finance Debbie Malicoat Accounting Manager/Controller Natalie Harnett Principal Financial Analyst—Budget Independent Auditor Badawi & Associates PFM Asset Management LLC Monique Spyke Managing Director Appendix •Additional ESG Information •ESG Themes Information 0 5 10 15 20 25 30 35 40 Federal Agency & MBS Certificates of Deposit Corporate Notes ABS ESG Risk Rating ESG Risk Rating Range and Average by Sector Source: Sustainalytics. Data as of September 30, 2023. Bars represent the range of held issuers’ ESG risk rating that fall u nder each sector, and lines indicate the sectors market value-weighted average ESG risk rating. Please see important disclosures at the en d of this presentation. Sector Analysis 23.3 21.9 15.0 16.8 ESG Themes Glossary ESG Theme Theme Description Key Indicators Environment Carbon Output & Energy Use Refers to a company’s management of risks related to its energy efficiency and greenhouse gas emissions in its operation as well as its products and services in the production phase and during the product use phase •Carbon intensity •Renewable energy use •Env. Mgt. System certification •GHG reporting / risk management •Hazardous products •Sustainable products & services Waste & Pollution Evaluates the management of emissions and releases from a company’s own operations to air, water, and land, excluding greenhouse gas emissions •Emergency response program •Solid waste management •Effluent management •Radioactive waste management •Hazardous waste management •Non-GHG air emissions programs •Oil spill disclosure & performance •Recycled material use Resource Use & Biodiversity Analyzes how efficiently and effectively a company uses its raw material inputs and water in production. It also encompasses how a company manages the impact of its operations on land, ecosystems, and wildlife •Biodiversity programs •Deforestation programs / polices •Site closure & rehabilitation •Water intensity & risk management •Forest certifications •Supplier environmental programs / certifications •Sustainable agriculture programs Community Impact (Environmental) Evaluates the community impact from an environmental risk perspective based on an assessment of Community Relations, Products & Services, Occupational Health and Safety, and Product Governance •Env Impact – Community Relations •Env Impact – Products & Services •Env Impact – Occupational Health and Safety •Env Impact – Product Governance ESG Theme Theme Description Key Indicators Social Human Capital Management Evaluates the management of risks related to human rights, labor rights, equality, talent development, employee retention, and labor health and safety •Discrimination policy •Diversity programs •Gender pay equality / disclosures •Employee development •Supply chain management / standards •Human rights policies & programs •Employee health & safety Product Governance Focuses on the management of risks related to product quality, safety, wellness, and nutrition, as well as customer data privacy & cybersecurity •Product & service safety programs / c certifications •Data privacy management •Media & advertising ethics policy •Organic products / GMO policy •Product health statement Community Impact (Social) Assesses how companies engage with local communities and their management of access to essential products or services to disadvantaged communities or groups •Equitable pricing and availability •Access to health care •Price transparency •Human rights / indigenous policy •Community involvement programs •Noise management ESG Financial Integration & Resilience Analyzes financial stability and issues that pose systemic risks and potential external costs to society in the financial services industry. Also measures ESG activities by financial institutions •Systemic risk management / reporting •Tier 1 capital •Leverage ratio •Responsible investment / asset management •Underwriting standards •Financial inclusion •Credit & loan standards •Green buildings investments ESG Themes Glossary ESG Themes Glossary ESG Theme Theme Description Key Indicators Governance Corporate Governance Evaluates a company’s rules, policies, and practices with a focus on how a company's board of directors manages and oversees the operations of a company. Also assesses the management of general professional ethics and lobbying activities •Board / management quality & integrity •Board structure •Ownership & shareholder rights •Remuneration •Audit & financial reporting •Stakeholder governance •Bribery & corruption policies / programs •Money laundering policy •Whistleblower programs •Business ethics programs •Political involvement policy •Lobbying and political expenses Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general informatio n purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securit ies. There is no guarantee the investment objectives will be achieved as the investment portfolio will only include holdings consi stent with the applicable Environmental, Social, and Governance (ESG) guidelines. As a result, the universe of investments availab le will be more limited. ESG criteria risk is the risk that because the investment portfolio ESG criteria excludes securities o f certain issuers for nonfinancial reasons, the investment portfolio may forgo some market opportunities that would be available to investment portfolios that do not apply ESG criteria. PFM Asset Management LLC ("PFMAM") is an investment adviser registered with the U.S. Securities and Exchange Commission and a subsidiary of U.S. Bancorp Asset Management, Inc. ("USBAM"). USBAM is a subsidiary of U.S. Bank National Association ("U.S. Bank"). U.S. Bank is a separate entity and subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services or performance of PFMAM. The information contained is not an offer to purchase or sell any securities. Additional applicable regulatory information is available upon request. For more information regarding PFMAM's services or entities, please visit www.pfmam.com.