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HomeMy WebLinkAbout03-21-2019 IOC Agenda Packet - CancelledCity of San Luis Obispo, Agenda, Planning Commission City of San Luis Obispo, Agenda, Planning Commission Agenda Investment Oversight Committee REGULAR MEETING CANCELLATION NOTICE The following Regular Investment Oversight Comittee Meeting has been cancelled: March 21, 2019 NOTICE is hereby given that the Regular Meeting of the Investment Oversight Committee scheduled for Thursday, March 21, 2019 at 1:30 p.m. has been cancelled due to lack of quorum. The agenda packet for the meeting can be found on the following pages The next regular meeting of the Investment Oversight Committee is scheduled for Thursday, June 6, 2019 at 1:30 p.m. in the Council Chamber of City Hall, 990 Palm Street, San Luis Obispo, CA. Agendas for this meeting will be posted at least 72 hours in advance. Minutes - Draft Investment Oversight Committee Thursday, November 15, 2018 Regular Meeting of the Investment Oversight Committee CALL TO ORDER A Regular meeting of the Investment Oversight Committee was called to order on Thursday, November 15, 2018, at 1:30 p.m. in the Council Hearing Room at 990 Palm Street, San Luis Obispo, California, by Chair Brigitte Elke. ROLL CALL Present: Committee Members Alex Ferreira, Heidi Harmon, Derek Johnson, Rico Pardo, Shay Stewart (Public Member), and Chair Brigitte Elke Absent: None. Others Present: Izac Chyou, Senior Managing Consultant for PFM Asset Management LLC and Serenity Whorley, Recording Secretary PUBLIC COMMENT ITEMS NOT ON THE AGENDA (List first and last names only, if no speakers put None.) None. --End of Public Comment-- APPROVAL OF MINUTES 1.Review of Minutes of the Investment Oversight Committee Meeting of August 16, 2018: ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON, SECONDED BY COMMITTEE MEMBER FERREIRA, CARRIED 6-0-0, to approve the minutes of August 16, 2018 minutes, as presented. BUSINESS ITEMS 2.Presentation of the Quarterly Investment Report on Portfolio Performance a.Review and confirm investment policy compliance City of San Luis Obispo, Title, Subtitle Minutes - Investment Oversight Committee Minutes of Thursday, November 15 2018 Page 2 Finance Director Elke (or whomever presents the report) provided a PowerPoint presentation and responded to Committee inquiries. Public Comment (List first and last names only, if no speakers put None.) None. --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON, SECONDED BY COMMITTEE MEMBER PARDO, CARRIED 6-0-0, recommendation. 3. Changes to Investment Policies a. Review and approve proposed changes Finance Director Elke (or whomever presents the report) provided a PowerPoint presentation and responded to Committee inquiries. Public Comment (List first and last names only, if no speakers put None.) None. --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER STEWART, SECONDED BY COMMITTEE MEMBER JOHNSON, CARRIED 6-0-0, recommendation. COMMENT AND DISCUSSION Finance Director Elke provided an agenda forecast. Agreement to research CAMP. ADJOURNMENT The meeting was adjourned at 2:42 pm. The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, February 14 , 2018, at 1:30 p.m., in the Council Hearing Room, 990 Palm Street, San Luis Obispo, California. APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/XXXX Quarterly Investment Report As of December 31, 2018 March 21, 2019 This report presents the City’s investment portfolio for the quarter ending December 31, 2018. 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. 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 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 is able to 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 safe keeping 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. Investment Portfolio Benefits all Funds The City’s cash and investment portfolio represents money from all City funds, including the General Fund, enterprise funds, capital projects funds, and other funds which are restricted to specific purposes. In general, monies held by the city are either allocated by the City Council for spending or are purposefully retained in reserve. For example, the money in the Capital Outlay Fund has been identified to provide particular capital projects for the community and there is a plan for spending down the cash balance as the projects progress. In the General Fund, approximately $10 million is purposely held in reserve to meet the City’s reserve policy of 20% of operating expenditures. Quarterly Investment Report Current Cash and Investment Summary The following is a summary of the City’s cash and investments based on market value as of December 31, 2018 compared with the prior quarter: September 30, 2018 December 31, 2018 Percent of Total Cash and investments held by the City 32,594,827 41,673,965 34.77% Cash and investments managed by PFM 76,334,784 77,229,567 64.44% Cash and investments held by trustees 944,950 941,780 0.79% TOTAL 109,874,561 119,845,312 100% There are a number of factors which result in changes in cash and investment balances from month to month and quarter to quarter. Often they are the result of the receipt of revenues or a large disbursement. Some major City revenues are received on a periodic rather than a monthly basis. Property Tax, for example, is received in December, January, April and May of each year. Other revenues, such as Transient Occupancy Tax, are received monthly but vary considerably because they are seasonal. On the disbursement side, payments for bonded indebtedness or large capital projects can reduce the portfolio substantially in the quarter that they occur. Significant fluctuations of this type will be discussed in the following section of this report. Securities in the City’s portfolio are priced by IDC, 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 will impact the total value of the portfolio as reported. At December 31, 2018, the market value of the portfolio was $725,820 less than the cost basis. The difference is an unrealized loss due to the inverse relationship between interest rates and market values as it relates to the fixed income portion of the City’s investment portfolio. The portfolio’s yield on a market basis as of December 31, 2018 was 2.68%, and the yield on a cost basis was 2.06%. (These amounts do not reflect the returns on the assets held by the bond trustee.) As of December 31, 2018, the investment portfolio was in compliance with all State laws, the City's Statement of Investment Policy and the City’s Investment Management Plan. Summary of Activity for the Quarter and Future Liquidity Cash receipts and disbursements are generally consistent with past trends for the quarter. The cash management program contains enough liquidity to meet at least the next three months of expected expenditures by the City as well as by related parties, such as the Whale Rock Commission. Report Contents and Distribution. This report includes the following four schedules on the City’s portfolio as of December 31, 2018; summary of investments held or managed by the City, trustees or PFM; summary of investment portfolio liquidity; investment details; and detail of holdings for each investment. These schedules have not yet been reviewed by the City’s independent auditor. If you have any questions concerning this report, or require additional information, contact Brigitte Elke, Director of Finance at (805) 781-7125. DISTRIBUTION LIST City Council Heidi Harmon, Mayor Andy Pease, Vice Mayor Carlyn Christianson, Council Member Aaron Gomez, Council Member Erica Stewart, Council Member Investment Oversight Committee Heidi Harmon, Mayor Derek Johnson, City Manager Brigitte Elke, Interim Director of Finance Rico Pardo, Accounting Manager/Controller PFM Asset Management Izac Chyou, Senior Managing Consultant Allison Kaune, Senior Managing Consultant CITY OF SAN LUIS OBISPO SUMMARY OF INVESTMENTS As of December 31, 2018 Percent of Current Market Portfolio Yield Value Local Agency Investment Funds 55% 2.29% 22,905,924.57 Certificate of Deposit 2% 2.28% 1,000,000.00 Money Market Account 2% 0.25% 1,019,125.48 Checking Account 40% 0.57% 16,748,915.18 Treasury Issues 0% 0.00% 0.00 Total Investments Held by the City 100% 1.54% $41,673,965.23 Percent of Current Portfolio Yield Value Federal Agency Issues 29% 1.62% 22,173,113.69 Commercial Paper 4% 2.64% 3,474,970.50 Money Market Fund 0% 0.00% 286,575.39 US Corporate Notes 17% 2.00% 12,913,463.05 Negotiable CD 13% 2.53% 9,951,108.48 Treasury Issues 37% 2.20% 28,430,336.12 Total Investments Managed by Public Financial Management 100% 2.05% $77,229,567.23 Percent of Current Market Trustee Portfolio Yield Value First American Treasury Funds 0.00% 0.00% 0.00 Other Money Market Accounts 49.56% 0.30% 468,362.79 Certificate of Deposit 0.00% 0.00% 0.00 Guaranteed Investment Contracts 0.00% see below 0.00 Federal Agency Issues 0.00% 0.00% 0.00 Treasury Issues 50.44% Varies 476,587.00 Total Investments Held by Trustees 100% $944,949.79 Total of all Investments--Market Value $119,848,482.25 INVESTMENTS HELD AND MANAGED BY THE CITY INVESTMENTS OF THE CITY MANAGED BY PUBLIC FINANCIAL MANAGEMENT INVESTMENTS OF THE CITY HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS TOTAL CASH AND INVESTMENTS CITY OF SAN LUIS OBISPO SUMMARY OF INVESTMENT PORTFOLIO LIQUIDITY As of December 31, 2018 Managed Managed Percent of Market by City by PFM Portfolio Value On Demand 40,673,965.23 286,575.39 34% 40,960,540.62 Within Six Months 1,000,000.00 7,871,268.07 7% 8,871,268.07 Six Months to One Year 11,564,531.67 10% 11,564,531.67 Within One to Five Years 57,507,192.10 48% 57,507,192.10 Over Five Years 0% 0.00 TOTAL 41,673,965.23 $77,229,567.23 100% $118,903,532.46 Percent of Market Portfolio Value On Demand 0.495648335 468,362.79 Within Six Months 0% 0.00 Six Months to One Year 0% 0.00 Within One to Five Years 0% 0.00 Over Five Years 50% 476,587.00 TOTAL 100% $944,949.79 Total of all Investments--Market Value $119,848,482.25 CITY OF SAN LUIS OBISPO INVESTMENT DETAIL As of December 31, 2018 Agency Investment Coupon Current Purchase Maturity Market (Broker) Description Rate Yield Date Date Value Local Agency Money Market Fund On Investment Fund City NA 2.29% Varies Demand 22,836,652.87 Local Agency Money Market Fund On Investment Fund CIB NA 2.29% Varies Demand 69,271.70 On JP Morgan Chase Checking Account NA 0.57% Varies Demand 16,748,915.18 Collateralized Pacific Premiere Bank Certificate of Deposit NA 2.28% 12/20/2005 12/20/2019 1,000,000.00 On Pacific Permiere Bank Money Market Account NA 0.25% 1/24/2012 Demand 1,019,125.48 TOTAL $41,673,965.23 INVESTMENTS HELD BY THE CITY AND THOSE MANAGED BY PUBLIC FINANCIAL MANAGEMENT (PFM INVESTMENTS HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS TOTAL CASH AND INVESTMENTS INVESTMENTS HELD AND MANAGED BY THE CITY CITY OF SAN LUIS OBISPO INVESTMENT DETAIL As of December 31, 2018 Agency Investment Coupon Current Purchase Maturity Market (Broker) Description Rate Yield Date Date Value 2006 Water Revenue Bonds U. S. Bank First American Bond Refinanced Corporate Trust Services Treasury Fund N/A N/A N/A N/A - Guaranteed FSA Capital Investment Contract Bond Refinanced Management Services LLC Treasury Fund N/A N/A N/A N/A - 2012 Water Revenue Refunding Bonds (Refunded 2002 Water Revenue Bonds) U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $10,104.94 U. S. Bank United States Corporate Trust Services Treasury Note 7.13% 6.09% Varies 2/15/23 $219,033.00 U. S. Bank United States Corporate Trust Services Treasury Note 2.00% 2.05% Varies 11/15/21 $257,554.00 2012 Revenue Refunding Bonds (Refunded 2001 Revenue Refunding Bonds) U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $458.92 U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $405,600.00 2018 Water Revenue Refunding Bonds (Refunded 2006 Water Revenue Bonds) U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $79.40 U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $34,447.07 2018 Lease Revenue Refunding Bonds (Refunded 2005 Ref Lease Rev, 2006 Lease Rev, & 2009 Lease Rev Bonds) U. S. Bank U.S Bank Money Corporate Trust Services Market Account N/A 0.30% Varies on demand $4,411.83 U. S. Bank U.S. Bank Money Corporate Trust Services Market Account N/A 0.30% Varis on demand $13,260.63 TOTAL $944,949.79 INVESTMENTS HELD BY TRUSTEES FOR BOND DEBT SERVICE OBLIGATIONS CITY OF SAN LUIS OBISPO INVESTMENT DETAIL As of December 31, 2018 The City of San Luis Obispo maintains certain performance objectives for the investments that are managed by Public Financial Management. The overall performance objective for the portfolio is to earn a total rate of return over the market cycle that equals or exceeds the market index. In order to achieve this objective the portfolio invests in high-quality money market instruments, US Treasury securities, Agency securities, and high-grade corporate securities, with a maximum maturity of five years. To monitor the achievement of this objective, the City uses a “Benchmark” to compare to. The benchmark which is used is based on the BofA Merrill Lynch Index of 0-5 year Treasury securities. Below is a summary of the monthly results as compared to the benchmark. While the City strives to achieve this performance objective every month, the goal is assumed to be met on an annual basis. The City of San Luis Obispo is currently just under the benchmark goals in most categories. We feel that through market trends and current investing adjustments, our performance will meet or exceed the benchmarks by the end of the fiscal year. Benchmark Comparison for the Quarter Ended 12/31/2018 Benchmark 12/31/2018 Portfolio 9/30/2018 Average Maturity (yrs)2.26 1.99 2.08 Modified Duration 2.09 1.91 2 Average Purchase Yield N/A 2.06% 1.99% Average Market Yield 2.48% 2.68% 2.88% Average Quality AAA AA/Aa1 AA/Aa1 Total Market Value -$ 76,632,466$ 76,334,784$ The following pages provide a summary of the portfolio under management by Public Financial Management (PFM) as well as a detailed holding report for the month. MANAGED BY PUBLIC FINANCIAL MANAGEMENT © PFM 1 City of San Luis Obispo Investment Report For the Quarter Ended December 31, 2018 PFM Asset Management LLC www.pfm.com 50 California Street Suite 2300 San Francisco, CA 94111 415-982-5544 Izac Chyou, Senior Managing Consultant chyoui@pfm.com © PFM 2 Table of Contents I.Market Update II.Portfolio Review III.Appendix A.Consolidated Portfolio Information B.Investment Policy Snapshot C.Portfolio Holdings D.Quarterly Transactions © PFM 3 I. Market Update © PFM 4 Economic Summary Source: Bloomberg, latest data available as of 12/31/2018. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Inflation Measures (YoY) Core CPI Core PCE Fed's Long Term Inflation Target 60 80 100 120 140 160 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Consumer Confidence 6.7% 5.6% 5.0%4.7% 4.1%3.9% 3% 4% 5% 6% 7% 8% Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Unemployment Rate 3.0% -2% 0% 2% 4% 6%Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q32014 2015 2016 2017 2018 U.S. Real GDP (QoQ, SAAR) Rolling 4-Quarter Average © PFM 54.2%The Return of Volatility in 2018 Source: Bloomberg, as of 12/31/2018. VIX Index is the Chicago Board Options Exchange SPX Volatility Index, which reflects a market estimate of future volatility. 0 5 10 15 20 25 30 35 40 January March May July August October DecemberVIX Index LevelEquity Market Volatility 2018 2017 10-Year Average Market correction Market correction © PFM 6 Fourth Quarter Stock Sell-Off Erases Year-to-Date Gains Source: Bloomberg, as of 12/31/2018. -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Jan '18 Feb '18 Mar '18 Apr '18 May '18 Jun '18 Jul '18 Aug '18 Sep '18 Oct '18 Nov '18 Dec '18 Cumulative Total Return Year-to-Date S&P 500 Dow Jones NASDAQ Index 2018 Return 2017 Return S&P 500 -4.39%21.83% Dow Jones -3.48%28.11% NASDAQ -2.81%29.73% © PFM 7 Treasury Yields Fall from Recent Highs The sell-off in equity markets in the fourth quarter sparked a flight to quality as investors sought the relative safety of U.S. Treasury obligations, pushing yields lower. As was widely expected, the Federal Reserve raised the federal funds target rate by 25 basis points for the fourth time in 2018 at its December meeting, but the consequential bump in yields was overcome by continued equity market uncertainty. The 2-year Treasury decreased by 33 basis points to end the quarter at 2.49%. Source: Bloomberg, as of 12/31/2018. 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% Dec '17 Mar '18 Jun '18 Sep '18 Dec '18Yield2-Year U.S. Treasury 1.89% 2.27% 2.53% 2.82% 2.49% © PFM 8 U.S. Treasury Curve Source: Bloomberg, as of 12/31/2018. 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%3M6M1Y2Y3Y5Y10YYieldMaturity December 31, 2018 December 31, 2017 December 31, 2016 4Q2018 12/31/18 4Q2017 12/31/17 4Q2016 12/31/16 3-month 2.35%1.38%0.50% 6-month 2.48%1.53%0.61% 1-year 2.60%1.73%0.81% 2-year 2.49%1.88%1.19% 3-year 2.46%1.97%1.45% 5-year 2.51%2.21%1.93% 10-year 2.68%2.41%2.44% © PFM 9 Credit Spreads Widen with Market Volatility Volatility in equity markets in the fourth quarter caused an increase in demand for haven assets like Treasury bonds, widening credit spreads further to the highest level since 2016. Source: ICE BofAML Indices, as of 12/31/2018. OAS is option-adjusted spread versus a comparable maturity Treasury. 0 20 40 60 80 100 120 140 Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18Basis PointsYield Spread (OAS) of 1-5 Year AAA-A Corporate Index © PFM 10 FOMC “Dot Plot” –A Fourth 2018 Rake Hike in December Source: Federal Reserve and Bloomberg. Individual dots represent each Fed members’ judgement of the midpoint of the appropriate target range for the federal funds rate at each year-end. Fed funds futures as of 12/19/2018. 0% 1% 2% 3% 4% 5% Fed Participants’ Assessments of ‘Appropriate’ Monetary Policy Dec-18 FOMC Projections Dec-18 Median Fed Funds Futures 2018 2019 2020 Longer Term Fed expects 2 more hikes in 2019. History of Recent Fed Rate Hikes Dec ’18 2.25 -2.50% Sept ’18 2.00 -2.25% Jun ’18 1.75 -2.00% Mar ’18 1.50 -1.75% Dec ’17 1.25 -1.50% Jun ’17 1.00 -1.25% Mar ’17 0.75 -1.00% Dec ’16 0.50 -0.75% Dec ’15 0.25 -0.50% 2021 © PFM 11 II. Portfolio Review © PFM 12 Portfolio Characteristics -Internal For the Quarter Ended December 31, 2018 Portfolio Review 12/31/2018 9/30/2018 Average Maturity (yrs)0.01 0.01 Effective Duration1 0.01 0.01 Average Market Yield 1.52%1.57% Total Market Value 41,673,965 32,594,828 Securities and funds in the internal portfolio are not rated. 1.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for each 1% change in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). © PFM 13 Sector Distribution-Internal For the Quarter Ended December 30, 2018 Portfolio Review LAIF Money Market Rate Account Negotiable CDs*Cash 12/31/2018 55.0%2.4%2.4%40.2% 9/30/2018 69.9%3.1%3.1%23.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% * Issuer is Pacific Premier Bank. Percentages based on market values excluding accrued interest. © PFM 14 Aggregate Sector Allocation and Compliance Security Type Market Value % of Portfolio % Change vs. 9/30/18 Permitted by Policy In Compliance U.S. Treasury $28,579,786 23.9%+0.7%100% Federal Agency $22,302,142 18.6%-1.5%100% Negotiable CDs $9,951,108 8.4%-2.1%30% Corporate Notes $12,913,463 10.9%-1.0%30% Commercial Paper $3,474,971 2.9%-1.4%25% Securities Sub-Total $76,942,992 64.7%-5.3% Money Market Fund $286,575 0.2%+0.1%20% Accrued Interest $402,917 Securities Total $77,632,484 LAIF $22,905,925 19.3%-1.6%$65 Million  JP Morgan $16,748,915 14.1%+6.9%20% Pacific Premiere MMF $1,019,125 0.9%-0.1%20% Pacific Premiere Bank CD $1,000,000 0.8%-0.1%25% Total Investments $119,306,449 100.0% © PFM 15 Socially Responsible Investment Policy The City’s Investment Policy restricts issuers from the portfolio who generate revenue from tobacco, electronic cigarette, or tobacco-related products, or who support the direct production or drilling of fossil fuels. The City’s portfolio is in compliance with the SRI restrictions. Below are the Bloomberg Industry Classifications (“BICS”) for all of the portfolio’s holdings. Source: Bloomberg. BICs is an industry classification system developed and utilized by Bloomberg that classifies securities based on business, economic function and other characteristics. Issuer Industry (BICS) American Honda Finance Automobiles Manufacturing Toyota Motor Credit Corp Automobiles Manufacturing Skandinav Enskilda Banken NY Banks Credit Agricole Banks MUFG Bank Banks Wells Fargo & Company Banks Bank of Montreal Chicago Banks Bank of Nova Scotia Banks Nordea Bank AB NY Banks Swedbank NY Banks Westpac Banking Corp NY Banks Apple Inc Communications Equipment Proctor & Gamble Consumer Products Unilever Consumer Products General Electric Electrical Equipment Manufacturing Walt Disney Company Entertainment Content Issuer Industry (BICS) JP Morgan Financial Services BNY Mellon Financial Services UBS AG Stamford CT Financial Services Hershey Company Food & Beverage Federal Home Loan Bank Government Agencies Fannie Mae Government Agencies Freddie Mac Government Agencies John Deere Machinery Manufacturing Wal-Mart Stores Mass Merchants Berkshire Hathaway Property & Casualty Insurance Burlington North Railroad Home Depot Retail -Consumer Discretionary IBM Software & Services Microsoft Corp Software & Services U.S. Treasury Sovereigns JP Morgan Financial Services © PFM 16 Objectives 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. Performance Objectives The performance objective for the portfolio is to earn a total rate of return over a market cycle that equals or exceeds the market index, the ICE Bank of America Merrill Lynch Index of 0-5 Year Treasury securities. Strategy In order to achieve this objective, the portfolio invests in high-quality money market instruments, U.S. Treasury securities, Federal Agency securities, and high-grade corporate securities, with a maximum maturity of five years. For the Quarter Ended December 31, 2018 Portfolio Review © PFM 17 Fourth Quarter 2018 Recap For the past several quarters we have positioned the portfolio with a duration less than that of the benchmark. This benefited the portfolio for most of 2018 as the Federal Reserve raised rates, and yields across the curve increased. However, in the fourth quarter, sudden shifts in market sentiment caused interest rates to fall, which eroded some of those benefits, negatively impacting portfolio performance versus the benchmark. At the same time, the declines in longer-term yields positively impacted the portfolio’s absolute performance. •Our strategy over the past several months was to actively reduce exposure to credit sectors (and increase allocations to safer U.S. Treasuries), which helped to reduce relative underperformance versus the benchmark as U.S. Treasuries outperformed credit sectors for the quarter. •Corporates felt the pressure of wider spreads across all industries. As a result, the sector underperformed most fixed income alternatives in the quarter. While portfolio allocations to the sector detracted from performance relative to the benchmark, our shift to a more defensive bias at the beginning of the quarter—favoring higher quality issuers, active selling of lower-yielding issues, and shorter durations—helped mitigate the underperformance. •After yields narrowed to 12-month lows in the third quarter, spreads on negotiable bank certificates of deposit and commercial paper issuers rebounded in the fourth quarter. As a result, the portfolio benefited from additional allocations to these high-quality, short-term credit instruments at attractive yields. For the Quarter Ended December 31, 2018 Portfolio Review © PFM 18 3 Months 1 Year 3 Years Since Inception City of San Luis Obispo 1.26%1.68%1.28%1.17% 0-5 Yr. Treasury Index 1.48%1.60%1.09%1.02% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80% •Performance is for the City of San Luis Obispo’s Operating Funds. •Performance on trade-date basis, gross (i.e., before fees), in accordance with the CFA Institute’s Global Investment Performance Standards (GIPS). •Performance for periods one year and greater are presented on an annualized basis. •ICE Bank of America Merrill Lynch Indices provided by Bloomberg Financial Markets. •Inception date is December 31, 2014. Total Rate of Return For the Quarter Ended December 31, 2018 Portfolio Review -0.22%+0.08%+0.19%+0.15%Difference: © PFM 19 Earnings for the City of San Luis Obispo’s Operating Funds. Portfolio Earnings For the Quarter Ended December 31, 2018 Portfolio Review Market Value Basis Accrual (Amortized Cost) Basis Beginning Value (9/30/2018)$76,232,118 $77,467,879 Net Purchases/Sales $111,838 $111,838 Change in Value $599,036 $17,853 Ending Value (12/31/2018)$76,942,992 $77,597,570 Interest Earned $365,654 $365,654 Portfolio Earnings $964,690 $383,507 © PFM 20 1.The City of San Luis Obispo’s current benchmark is the ICE Bank of America Merrill Lynch (BAML) 0-5 Year U.S. Treasury Index. 2.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for each 1% change in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). 3.Total Market Value includes cash and accrued interest. Portfolio Characteristics —PFM Managed For the Quarter Ended December 31, 2018 Portfolio Review 12/31/2018 Portfolio Benchmark2 Average Maturity (yrs)1.99 2.26 Effective Duration1 1.91 2.09 Average Purchase Yield 2.06%N/A Average Market Yield 2.68%2.48% Average Quality AA/Aa1 AAA Total Market Value3 76,632,466 © PFM 21 Sector distribution based on market value and excludes accrued interest. Sector Distribution —PFM Managed For the Quarter Ended December 31, 2018 Portfolio Review U.S. Treasury Federal Agency Negotiable CDs Commercial Paper Corporate Notes Money Market Fund 12/31/2018 36.8%28.7%12.9%4.5%16.7%0.4% 9/30/2018 33.1%28.8%15.0%6.1%16.9%0.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% © PFM 22 Credit Industry Exposure —PFM Managed For the Quarter Ended December 31, 2018 Portfolio Review *Issuer’s industry as defined by Bloomberg.Detail may not add to total due to rounding. **General Electric corporate notes were downgraded to BBB+ by S&P, Moody’s and Fitch during the further quarter 2018. Automobiles Manufacturing 6% Banks 53% Communications Equipment 5% Consumer Products 2%Electrical Equipment Manufacturing 6% Entertainment Content 2% Financial Services 17% Food & Beverage 1% Machinery Manufacturing 1% Mass Merchants 7% Industry ExposureIssuerIndustry%of Credit Allocation American Honda Finance Automobiles Manufacturing 1.5% Toyota Motor Credit Corp Automobiles Manufacturing 4.1% Bank of Montreal Chicago Banks 7.0% Bank of Nova Scotia Banks 5.7% Credit Agricole Banks 5.7% Nordea Bank AB NY Banks 4.3% Skandinav Enskilda Banken NY Banks 5.7% Swedbank NY Banks 5.7% Wells Fargo & Company Banks 3.6% MUFG Bank Banks 3.7% Westpac Banking Corp NY Banks 5.0% Apple Inc Communications Equipment 4.0% Proctor & Gamble Consumer Products 1.2% Unilever Consumer Products 0.4% General Electric**Electrical Equipment Manufacturing 5.0% Walt Disney Company Entertainment Content 1.9% BNY Mellon Financial Services 6.9% JP Morgan Financial Services 3.8% UBS AG Stamford CT Financial Services 4.3% Hershey Company Food & Beverage 1.2% John Deere Machinery Manufacturing 0.7% Wal-Mart Stores Mass Merchants 5.6% Berkshire Hathaway Property & Casualty Insurance 1.6% Burlington North Railroad 1.9% Home Depot Retail -Consumer Discretionary 2.9% IBM Software & Services 2.8% Microsoft Corp Software & Services 3.8% Total 100.0% © PFM 23 Ratings by Standard & Poor’s. Credit Quality —PFM Managed For the Quarter Ended December 31, 2018 Portfolio Review AAA AA A BBB A-1 12/31/2018 1.7%76.3%13.1%1.7%7.3% 9/30/2018 1.4%72.7%15.0%0.0%10.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% © PFM 24 Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. *Benchmark is composed of the ICE BAML 0-5 Year U.S. Treasury Index. Data from Bloomberg. Maturity Distribution —PFM Managed Portfolio vs. Benchmark For the Quarter Ended December 31, 2018 Portfolio Review 0-1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years Portfolio 25.5%30.7%16.1%23.3%4.4% Benchmark*22.5%25.3%20.6%15.5%16.1% 0% 5% 10% 15% 20% 25% 30% 35% © PFM 25 Issuer Distribution —PFM Managed For the Quarter Ended December 31, 2018 Portfolio Review Ratings by Standard & Poor’s and Moody’s. *Financial securities rated “A” by S&P are rated “AA” by Fitch and /or Egan-Jones Rating Company. **General Electric corporate notes were downgraded to BBB+ by S&P, Moody’s and Fitch during the further quarter 2018. Issuer Name Investment Type % of Portfolio S&P Moody's U.S. Treasury U.S. Treasury 36.9%AA+Aaa FNMA Federal Agency 15.9%AA+Aaa FHLMC Federal Agency 9.6%AA+Aaa FHLB Federal Agency 3.3%AA+Aaa Bank of Montreal Chicago Negotiable CD 2.4%A+Aa2 BNY Mellon Corporate Note 2.4%A A1 Bank of Nova Scotia Negotiable CD 1.9%A+Aa2 Swedbank NY Negotiable CD 1.9%AA-Aa2 Skandinav Enskilda Banken NY Negotiable CD 1.9%A-1 P-1 Credit Agricole Commercial Paper 1.9%A-1 P-1 Wal-Mart Stores Corporate Note 1.9%AA Aa2 Westpac Banking Corp NY Negotiable CD 1.7%AA-Aa3 General Electric**Corporate Note 1.7%BBB+Baa1 UBS AG Stamford CT Negotiable CD 1.5%A+Aa2 Nordea Bank AB NY Negotiable CD 1.5%AA-Aa3 Toyota Motor Credit Corp Corporate Note 1.4%AA-Aa3 Apple Inc Corporate Note 1.4%AA+Aa1 JP Morgan Commercial Paper 1.3%A-1 P-1 Microsoft Corp Corporate Note 1.3%AAA Aaa MUFG Bank Commercial Paper 1.3%A-1 P-1 Wells Fargo & Company Corporate Note 1.2%A-A2 Home Depot Corporate Note 1.0%A A2 IBM Corporate Note 0.9%A A1 Walt Disney Company Corporate Note 0.7%A+A2 Burlington North Corporate Note 0.7%A+A3 Berkshire Hathaway Corporate Note 0.6%AA Aa2 American Honda Finance Corporate Note 0.5%A+A2 Proctor & Gamble Corporate Note 0.4%AA-Aa3 Hershey Company Corporate Note 0.4%A A1 John Deere Corporate Note 0.2%A A2 Unilever Corporate Note 0.1%A+A1 Total/Average 100.0%AA Aa1 © PFM 26 Current Outlook and Strategy For the Quarter Ended December 31, 2018 Portfolio Review While the path of future Fed rate hikes is less clear than in recent years, we expect future tightening (additional Fed rate hikes) to be modest, or nonexistent throughout 2019. At the most recent Fed meeting in January, Chairman Jerome Powell noted a more conservative approach to monetary tightening, as markets are currently pricing in no rate hikes for 2019. Federal agency spreads (incremental yield) remain very narrow as most maturities offer less than five basis points (0.05%) of incremental yield relative to U.S. Treasuries. We will continue to moderate use of agencies where yield differences are narrow, seeking better relative value in either Treasuries or other sectors. Callable agencies will continue to be evaluated, and, where analyses indicate strong value, we will seek to utilize these securities as portfolio diversifiers. Though it appears that volatility may not dissipate quickly, the significant sell-off in the corporate sector (resulting in wider spreads) presents an opportunity to selectively add to the sector. We prefer high-quality, defensive issuers with a focus on one-to three-year maturities and continue to prefer financials (specifically domestic issuers) and to remain selective in industrial issuers. Short-term money market investors continue to reap the rewards of current monetary policy as the fed funds effective rate now nears two and a half percent. Short-term negotiable bank certificates of deposit and commercial paper have since normalized following very narrow yield differences at year-end, and once again provide an attractive, high-quality source of incremental income. © PFM 27 III. Appendix © PFM 28 A. Consolidated Portfolio Information © PFM 29 Portfolio Characteristics -Consolidated For the Quarter Ended December 31, 2018 Portfolio Review 1.Effective duration used in place of modified duration. Effective duration is the approximate percentage change in price for each 1% change in interest rates. Modified duration is a similar risk measure but it ignores how changes in rates will impact cash flows on bonds with embedded options such as callable notes, MBS, or ABS. Effective duration takes into account the impact that changing interest rates has on cash flows (i.e., if interest rates fall and a callable bond is more likely to be called prior to its final maturity, the effective duration will decrease). 12/31/2018 9/30/2018 Average Maturity (yrs)1.30 1.47 Effective Duration1 1.25 1.41 Average Purchase Yield 1.87%1.87% Average Market Yield 2.27%2.49% Average Quality AA/Aa1 AA/Aa1 Total Market Value 118,903,532 108,929,611 © PFM 30 Sector Distribution -Consolidated For the Quarter Ended December 31, 2018 Portfolio Review Sector distribution based on market value and excludes accrued interest. U.S. Treasury Federal Agency Comm. Paper Corporate Notes Negotiable CDs Money Market Fund Money Market Rate Account LAIF Cash 12/31/2018 23.9%18.6%2.9%10.9%9.2%0.2%0.9%19.3%14.1% 9/30/2018 23.2%20.2%4.3%11.8%11.4%0.1%0.9%20.9%7.2% 0% 5% 10% 15% 20% 25% 30% © PFM 31 Maturity Distribution -Consolidated For the Quarter Ended December 31, 2018 Portfolio Review Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. Overnight - 3 Months 3 - 6 Months 6 Months - 1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years 12/31/2018 36.2%5.7%9.8%19.9%10.4%15.1%2.9% 9/30/2018 33.9%1.9%11.3%19.1%12.1%16.5%5.2% 0% 10% 20% 30% 40% © PFM 32 Issuer Distribution -Consolidated For the Quarter Ended December 31, 2018 Portfolio Review Ratings by Standard & Poor’s and Moody’s. *General Electric corporate notes were downgraded to BBB+ by S&P, Moody’s, and Fitch during the fourth quarter 2018. Issuer Name Investment Type % of Portfolio S&P Moody's U.S. Treasury U.S. Treasury 23.9%Aaa Aaa LAIF LAIF 19.3%NR NR Cash Cash 14.1%NR NR FNMA Federal Agency 10.3%AA+Aaa FHLMC Federal Agency 6.2%AA+Aaa FHLB Federal Agency 2.2%AA+Aaa Bank of Montreal Chicago Negotiable CD 1.6%A+Aa2 BNY Mellon Corporate Note 1.5%A A1 Bank of Nova Scotia Negotiable CD 1.3%A+Aa2 Swedbank NY Negotiable CD 1.3%AA-Aa2 Skandinav Enskilda Banken NY Negotiable CD 1.3%A-1 P-1 Credit Agricole Commercial Paper 1.3%A-1 P-1 Wal-Mart Stores Corporate Note 1.2%AA Aa2 Westpac Banking Corp NY Negotiable CD 1.1%AA-Aa3 General Electric*Corporate Note 1.1%BBB+Baa1 UBS AG Stamford CT Negotiable CD 1.0%A+Aa2 Nordea Bank AB NY Negotiable CD 1.0%AA-Aa3 Toyota Motor Credit Corp Corporate Note 0.9%AA-Aa3 Apple Inc Corporate Note 0.9%AA+Aa1 Pacific Premier Bank Money Market Rate Account 0.9%NR NR Pacific Premier Bank Money Market RA 0.8%NR NR JP Morgan Commercial Paper 0.8%A-1 P-1 Microsoft Corp Corporate Note 0.8%AAA Aaa MUFG Bank Commercial Paper 0.8%A-1 P-1 Wells Fargo & Company Corporate Note 0.8%A-A2 Home Depot Corporate Note 0.6%A A2 IBM Corporate Note 0.6%A A1 Walt Disney Company Corporate Note 0.4%A+A2 Burlington North Corporate Note 0.4%A+A3 Berkshire Hathaway Corporate Note 0.4%AA Aa2 American Honda Finance Corporate Note 0.3%A+A2 Proctor & Gamble Corporate Note 0.3%AA-Aa3 Hershey Company Corporate Note 0.3%A A1 Dreyfus Prime Cash Management Fund Money Market Fund 0.2%AAAm Aaa John Deere Corporate Note 0.1%A A2 Unilever Corporate Note 0.1%A+A1 Total 100.0% © PFM 33 B. Investment Policy Snapshot © PFM 34 Category Standard In Compliance Treasury Obligations 5 year maximum maturity Yes Government Sponsored Enterprise (GSE) Securities 5 year maximum maturity Yes Corporate Notes 5 year maximum maturity At least an “A” rating, its equivalent or better by one or more NRSROs 30% maximum,5% per issuer Yes Asset Backed Security 5 year maximum maturity At least a “AAA” or better 15% Maximum, 2.5% per issuer Yes Local Government Investment Pool (LAIF)Up to maximum permitted by State Law Yes Negotiable Certificates of Deposit 5 year maximum maturity At least an “A” rating, its equivalent or better by one or more NRSROs 30% maximum,5% per issuer Yes Commercial Paper 270 day maximum maturity At least one “A-1” rating 40% maximum,10% per issuer Yes Collateralized Bank Deposits 25% maximum, 5% per issuer Yes Money Market Mutual Funds Highest rating category by 2 NRSROs 20% maximum,10% per issuer Yes Maximum maturity 10 years; 10% maximum of portfolio in Treasury and GSE obligations with maturity >5 years Yes Duration limit Duration of portfolio equal duration of benchmark plus or minus 10%Yes Social responsibility No investments in companies involved in tobacco, electronic cigarettes, or the direct production or drilling of fossil fuels Yes Applies to aggregate portfolio. Source: City of San Luis Obispo Investment Management Plan, 2018. Investment Policy Snapshot The portfolio complies with California Government Code and the City of San Luis Obispo’s Investment Policy in regards to credit quality, maturity, sector, and issuer limits. For the Quarter Ended December 31, 2018 Portfolio Review © PFM 35 C. Portfolio Holdings © PFM 36 D. Quarterly Transactions © PFM 37 Important 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 information 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 securities. •Market values which include accrued interest, are derived from closing bid prices as of the last business day of the month as supplied by Interactive Data, Bloomberg or Telerate. Where prices are not available from generally recognized sources the securities are priced using a yield based matrix system to arrive at an estimated market value. •In accordance with generally accepted accounting principles, information is presented on a trade date basis; forward settling purchases are included in the monthly balances and forward settling sales are excluded. •Performance is presented in accordance with the CFA Institute’s Global Investment Performance Standards (GIPS). Unless otherwise noted, performance is shown gross of fees. Quarterly returns are presented on an unannualized basis. Returns for periods greater than one year are presented on an annualized basis. Past performance is not indicative of future returns. •Bank of America/Merrill Lynch Indices provided by Bloomberg Financial Markets. •Money market fund/cash balances are included in performance and duration computations. •Standard & Poor’s is the source of the credit ratings. Distribution of credit rating is exclusive of money market fund/LGIP holdings. •Callable securities in portfolio are included in the maturity distribution analysis to their stated maturity date, although they may be called prior to maturity. •MBS maturities are represented by expected average life. © PFM 38 Glossary •ACCRUED INTEREST: Interest that is due on a bond or other fixed income security since the last interest payment was made. •AGENCIES: Federal agency securities and/or Government-sponsored enterprises. •AMORTIZED COST: The original cost of the principal of the security is adjusted for the amount of the periodic reduction of any discount or premium from the purchase date until the date of the report. Discount or premium with respect to short term securities (those with less than one year to maturity at time of issuance) is amortized on a straight line basis. Such discount or premium with respect to longer term securities is amortized using the constant yield basis. •BANKERS’ ACCEPTANCE: A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the insurer. •COMMERCIAL PAPER: An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. •CONTRIBUTION TO DURATION: Represents each sector or maturity range’s relative contribution to the overall duration of the portfolio measured as a percentage weighting. Since duration is a key measure of interest rate sensitivity, the contribution to duration measures the relative amount or contribution of that sector or maturity range to the total rate sensitivity of the portfolio. •DURATION TO WORST: A measure of the sensitivity of a security’s price to a change in interest rates, stated in years, computed from cash flows to the maturity date or to the put date, whichever results in the highest yield to the investor. •EFFECTIVE DURATION: A measure of the sensitivity of a security’s price to a change in interest rates, stated in years. •EFFECTIVE YIELD: The total yield an investor receives in relation to the nominal yield or coupon of a bond. Effective yield takes into account the power of compounding on investment returns, while nominal yield does not. •FDIC: Federal Deposit Insurance Corporation. A federal agency that insures bank deposits to a specified amount. •INTEREST RATE: Interest per year divided by principal amount, expressed as a percentage. •MARKET VALUE: The value that would be received or paid for an investment in an orderly transaction between market participants at the measurement date. •MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. •NEGOTIABLE CERTIFICATES OF DEPOSIT: A CD with a very large denomination, usually $1 million or more that can be traded in secondary markets. •PAR VALUE: The nominal dollar face amount of a security. © PFM 39 Glossary •PASS THROUGH SECURITY: A security representing pooled debt obligations that passes income from debtors to its shareholders. The most common type is the mortgage-backed security. •REPURCHASE AGREEMENTS: A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. •SETTLE DATE: The date on which the transaction is settled and monies/securities are exchanged. If the settle date of the transaction occurs on a non- business day (i.e. coupon payments and maturity proceeds), the funds are exchanged on the next business day. •TRADE DATE: The date on which the transaction occurred however the final consummation of the security transaction and payment has not yet taken place. •UNSETTLED TRADE: A trade which has been executed however the final consummation of the security transaction and payment has not yet taken place. •U.S. TREASURY: The department of the U.S. government that issues Treasury securities. •YIELD: The rate of return based on the current market value, the annual interest receipts, maturity value and the time period remaining until maturity, stated as a percentage, on an annualized basis. •YTM AT COST: The yield to maturity at cost is the expected rate of return, based on the original cost, the annual interest receipts, maturity value and the time period from purchase date to maturity, stated as a percentage, on an annualized basis. •YTM AT MARKET: The yield to maturity at market is the rate of return, based on the current market value, the annual interest receipts, maturity value and the time period remaining until maturity, stated as a percentage, on an annualized basis. © PFM 40 Thank You