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HomeMy WebLinkAboutQuarterly Investment Report as of 9.30.2024Quarterly Investment Report AS OF September 30, 2024 This report presents the City’s investment portfolio for the quarter ending September 30,2024.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: •A labor market that has reached better balance and continues to support consumer activity •Inflation that has made meaningful progress towards the Federal Reserve’s (Fed) 2% target, although shelter costs remain a headwind •Resilient economic growth and consumer spending that support the ‘soft landing’ scenario The Fed cut the federal funds target rate by 50 basis points (bps) to 4.75% -5.00% at its September FOMC meeting. The yield curve began to disinvert in the 3rd quarter as the spread between the 2-year and 10-year Treasury reached positive territory for the first time in over 2 years Source: Bloomberg Financial L.P. and ICE BofA Indices. ABS indices are 0-5 year, based on weighted average life. As of September 30, 2024. 4.64% 3.60%3.53%3.63%3.76% 4.10% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% Yi e l d Maturity U.S. Treasury Yield Curve September 30, 2024 June 30, 2024 3mo 2yr 5yr 7yr 10yr 30 yr 3.39% 2.77%2.58% 3.70%3.76% 0% 1% 2% 3% 4% 5% U. S . T r e a s u r y Ag e n c y AB S Co r p A - A A A Co r p B B B 1-5 Year Indices Quarter Returns What we are watching… The second estimate of Q2 GDP was revised to 3.0%, an upside surprise that markets chalked-up to U.S. economic resiliency. Much of the increase came from higher-than- expected services consumption, with consumer spending contribution being a strong 2.9%. This was partially offset by downward revisions to business investment and government spending. Nonfarm payrolls for August came in at 142,000, which was better than July’s print but still below expectations. Meanwhile, the unemployment rate ticked back down to 4.2%. It now appears that a Fed rate cut in September is a formality, although there is still significant uncertainty regarding the size of the first cut. July inflation readings maintained an encouraging trajectory towards the Fed’s 2% target, with the Core Personal Consumption Expenditure (PCE) Price Index coming in at 2.6% year-over-year, in line with recent months and holding near a three-year low. Source: Federal Reserve, latest economic projections as of September 2024. 2.0%2.0%2.0%2.0%1.8% 0% 1% 2% 3% 4% 2024 2025 2026 2027 Longer Run Change in Real GDP June Projections 4.4%4.4%4.3%4.2%4.2% 0% 1% 2% 3% 4% 5% 6% 2024 2025 2026 2027 Longer Run Unemployment Rate June Projections 2.3%2.1%2.0%2.0%2.0% 0% 1% 2% 3% 4% 2024 2025 2026 2027 Longer Run PCE Inflation June Projections Sept Projections 4.4% 3.4%2.9%2.9%2.8% 0% 1% 2% 3% 4% 5% 6% 2024 2025 2026 2027 Longer Run Federal Funds Rate June Projections Sept 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, 2024, compared to the prior quarter. Investment Entity September 30, 2024 Percent of Total**June 30, 2024 City Held Cash & Investments $12,096,882.69 5.6%$46,675,427.39 JPMorgan Money Market Account $50,000,000.00 23.0%$50,000,000.00 LAIF Held Investments $47,517,108.13 21.8%$46,986,955.71 PFMAM Managed Investments*$108,130,204.16 49.7%$104,931,145.75 TOTAL**$217,744,194.98 100%$248,593,528.85 *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. 6/30/24 Permitted by Policy U.S. Treasury 66,836,609 61.5%2.1%100% Federal Agency 12,536,479 11.5%1.9%100% Municipal Obligations 446,999 0.4%-31.0%30% Negotiable CDs 1,026,612 0.9%-48.0%30% Corporate Notes 19,281,625 17.7%4.9%30% Asset-Backed Securities 7,595,550 7.0%29.0%15% Securities Sub-Total 107,723,873 2.9% Money Market Fund 406,331 0.4%64.4%20% Accrued Interest 539,517 0.5% Securities Total 108,669,721 100.0%3.6% PFMAM Managed 9/30/2024 6/30/2024 Average Maturity (Years)2.48 2.35 Effective Duration1 2.10 2.07 Average Market Yield 3.91%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 3.05%7.25%1.53%1.75% 0-5 Treasury Index 2.99%7.04%1.33%1.55% Variance +0.06% +0.22% +0.20% +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, 2024. 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) 31/34 of portfolio issuers are rated with a total rated market value of $40.6 million (38%) Negligible Low Medium High Severe Portfolio Average ESG Risk Rating 18.9 Allocation by ESG Risk Rating Low 25% Medium 12% Not Rated 63% Industry Diversification Portfolio holdings and Sustainalytics data as of September 30, 2024. Average ESG Risk Rating represents the market value-weighted average ESG risk rating for each industry. 27.5 18.5 19.2 20.8 20.1 18.7 14.6 15.1 14.7 0% 15% 30% 45% 60% 0 10 20 30 40 Po r t f o l i o W e i g h t ( % ) ES G R i s k R a t i n g Industry 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, 2024. 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 BBB A AA AAA Market Value Allocation (Millions $) Credit Rating Grouped by ESG Risk Rating Category 20.7 15.3 20.8 15.1 0 10 20 30 AAA AA A BBB Average ESG Risk Rating by S&P Credit Rating Holdings as of September 30, 2024 Sorted By ESG Risk Rating Source: Sustainalytics. Holdings as of September 30, 2024. Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 9/30/2024 CarMax, Inc.0.0%Automotive Retail 14 11.1 Federal National Mortgage Association 6.1%Thrifts and Mortgages 6 12.7 The Home Depot, Inc.0.9%Home Improvement Retail 20 12.9 Coöperatieve Rabobank UA 1.0%Diversified Banks 5 13.1 Adobe, Inc.0.6%Enterprise and Infrastructure Software 4 14.1 Microsoft Corp.1.5%Enterprise and Infrastructure Software 5 14.2 Intel Corp.0.5%Semiconductor Design and Manufacturing 6 15.1 Mastercard, Inc.1.0%Data Processing 17 15.6 Novartis AG 1.4%Pharmaceuticals 2 15.6 Deere & Co.0.7%Agricultural Machinery 18 16.0 Federal Home Loan Mortgage Corp.3.5%Thrifts and Mortgages 13 16.8 Fifth Third Bancorp 0.7%Regional Banks 12 16.9 Target Corp.0.7%Department Stores 10 17.1 American Express Co.1.4%Consumer Finance 14 18.3 BlackRock, Inc.1.2%Asset Management and Custody Services 8 18.4 Federal Home Loan Bank System 2.0%Consumer Finance 17 18.9 Kubota Corp.0.2%Agricultural Machinery 36 19.3 The Bank of New York Mellon Corp.0.9%Asset Management and Custody Services 11 19.9 PepsiCo, Inc.0.5%Packaged Foods 4 20.8 Bristol Myers Squibb Co.0.3%Biotechnology 8 21.2 Holdings as of September 30, 2024 Sorted By ESG Risk Rating Source: Sustainalytics. Holdings as of September 30, 2024. (continued) Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 9/30/2024 Citigroup, Inc.1.7%Diversified Banks 31 22.1 State Street Corp.0.5%Asset Management and Custody Services 18 23.6 Eli Lilly & Co.0.7%Pharmaceuticals 11 23.6 The PNC Financial Services Group, Inc.0.7%Regional Banks 30 23.7 Bank of America Corp.2.9%Diversified Banks 39 24.4 PACCAR, Inc.0.7%Heavy Machinery and Trucks 32 24.5 Hyundai Motor Co., Ltd.0.6%Automobiles 50 25.5 Honda Motor Co., Ltd.1.2%Automobiles 68 27.4 JPMorgan Chase & Co.2.3%Diversified Banks 56 27.5 General Motors Co.0.1%Automobiles 73 28.3 Toyota Motor Corp.1.0%Automobiles 78 28.8 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 American Express Credit Account Credit Card ABS Bank of America Auto Trust Automobile ABS Bank of America Co Diversified Banks BlackRock Funding Inc Financial Services Bristol-Myers Squibb Co Pharmaceuticals Carmax Auto Owner Trust Automobile ABS Chase Issuance Trust Credit Card ABS Citibank Credit Card Issuance Trust Credit Card ABS Citigroup Inc Banks Cooperatieve Rabobank U.A.Banks Deere & Company Machinery Manufacturing Eli Lilly & Co Pharmaceuticals FHLB Government Agencies FHLMC Government Agencies Fifth Third Auto Trust Automobile ABS FNMA Government Agencies GM Financial Automobile ABS Home Depot Inc Retail - Consumer Discretionary Issuer Sector (BICS) Honda Auto Receivables Automobile ABS Hyundai Auto Receivables Automobile ABS Intel Corporation Semiconductors JP Morgan Chase & Co Diversified Banks Kubota Credit Owner Trust Other ABS Mastercard Inc Consumer Finance Microsoft Corp Software & Services New Jersey Turnpike Authority Transportation Novartis Capital Corp Pharmaceuticals Paccar Financial Corp Transportation & Logistics Pepsico Inc Food & Beverage PNC Financial Services Group Banks State Street Corp Financial Services Target Corp Mass Merchants The Bank of New York Mellon Corporation Financial Services Toyota Motor Corp Automobile ABS U.S. Treasury Sovereigns University of California Education Source: Bloomberg. BICs is an industry classification system developed and utilized by Bloomberg that classifies securities based on business, economic function, and other characteristics. Distribution List City Council Erica A. Stewart Mayor Andy Pease Vice Mayor Jan Marx Council Member Emily Francis Council Member Michelle Shoresman Council Member Investment Oversight Committee Jan Marx Council Liaison Anni Wang Public Member Whitney McDonald Interim City Manager Emily Jackson Director of Finance Debbie Malicoat Deputy Director of Finance/City Controller Riley Kuhn Principal Financial Analyst—Budget Independent Auditor Badawi & Associates PFM Asset Management LLC Monique Spyke Managing Director Justin Resuello Relationship Manager 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, 2024. Bars represent the range of held issuers’ ESG risk rating that fall under each sector, and lines indicate the sectors market value-weighted average ESG risk rating. Please see important disclosures at the end of this presentation. Sector Analysis 23.5 19.9 13.1 15.0 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 report contains information developed by Sustainalytics. Such information and data are proprietary of Sustainalytics and/or its third-party suppliers (Third Party Data) and are provided for informational purposes only. The use of the data does not constitute an endorsement of any product or project, nor investment advice and are not warranted to be complete, timely, accurate or suitable for a particular purpose. The use of their data is subject to their conditions. For more information vis it http://www.sustainalytics.com/legal-disclaimer. Although PFM Asset Management’s information providers, including without limitation, Sustainalytics, Inc. and its affiliates (the “ESG Parties”), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accurate and/or completeness of any data herein. None of the ESG Parties make any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connect with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost pr ofits) even if notified of the possibility of such damages. There is a risk that the issuers selected to support client sustainable objectives may not perform as expected in addressing sustainability considerations or such performance may change over time, which could cause a client account to temporarily hold securities that are not in alignment with the account’s sustainable objectives. Further, there is a risk that informatio n used to evaluate ESG criteria may not be readily available, complete or accurate, which could negatively impact an account’s ability to apply its sustainable objectives. In managing client’s sustainability objectives, PFM Asset Management may rely on analysis and ratings provided by third parties in determining whether an issuer meets an account’s sustainability objectives. A client’s perception may differ from PFM Asset Management’s or a third party’s on how to judge an issuer’s adherence to client's guidelines. Disclosures (cont.) The views expressed within this material constitute the perspective and judgment of U.S. Bancorp Asset Management, Inc. at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income markets are based upon current opinion as of the date of issue and are also subject to change. Opinions and data presented are not necessarily indicative of future events or expected performance. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. No representation is made as to its accuracy or completeness. PFM Asset Management serves clients in the public sector and is a division of U.S. Bancorp Asset Management, Inc., which is the legal entity providing investment advisory services. 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