October 6, 2022 Council Finance Committee/Investment Review Committee

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[00:00:00] Unknown Speaker: I'd like to welcome everyone to our council finance committee and investment review committee. Uh, this meeting is uh, being held in accordance with California government code, section 54953E is authorized by resolution. Please contact city. clerk at mountain view.gov to obtain a copy of the ethical resolution. All members of the council finance committee and investment review committee will participate in the meeting by video conference with no physical meeting location. Members of the public who would wish to observe the live meeting, may do so at mountain view.gov slash meeting, or mountain view dot legistar.com. Um, members of the public wishing to comment on an item on the agenda. Um, may comment during the meeting online by joining the Zoom webinar, uh, using the link, HTTPS, colon slash slash mountain view.gov slash meeting, and entering webinar ID, 857-5001-9034. You may be asked to enter an email address in a name. However, your email address will not be disclosed to the public. Uh, when we announce the item on which to wish to speak, click the raised hand feature in Zoom. And you can also make comments by phone by dialing 669-9009128 and entering webinar ID 857-500-19034. When we announce the item on which which you wish to speak, press star 9. Uh, phone participants will be called on by the last 2 digits of their phone number. Uh, when we call your name to or your number to provide public comment. If you are participating by phone, please press star 6 to unmute yourself. And we'll go now to our roll call and we can let the, the role reflect that all the members of the committee are present. And so we'll go on to uh, minutes approval, minutes for the September 21st, 2021 meeting, have been delivered to the committee members and copies posted on the city hall bulletin board. Uh, if there are no corrections or additions, a motion is in order to approve these minutes. Uh, Council member Manachek. Thank

[00:02:38] Member Lisa Matichak: you. Just one question. On the, um, vote for the minutes approval, it says, uh, 30? Um, and I'm wondering, did a couple of people abstain? Because we were all there.

[00:03:02] Unknown Speaker: Not sure if, um, The community members of the committee perhaps didn't vote on the minutes. Um, The staff have an idea of. What happened to 2 votes on that one?

[00:03:21] Takahashi: That looks like it was from the meeting of October 20th of 2020. And it's possible we may not have had a full committee, but, um, You have to go back for the notes to just verify that, I believe. And that's actually our, well, our current secretary, who was not here at that time, I don't know if it, Tori, if you have that information or not.

[00:03:51] Tori: No, I currently do not have that, but I can, I can look for the, the minutes on, on this particular day.

[00:03:58] Takahashi: Okay. So, I'll see if maybe uh, we can come back, come back to that um, before this meeting's over. Just to confirm.

[00:04:11] Unknown Speaker: I saw a hand from Mirror Ramirez, did you want to make a comment about it now? No? Okay, well, um, come back to the minutes approval. And we'll go on to oral communications from the public. I'm not seeing any members of the public in the participant box. Do we have anyone on the phone who's waiting to, um, make comments on any matter that is not on the agenda?

[00:04:42] Takahashi: I'll just add that there were no communications by email that were submitted. As well.

[00:04:49] Unknown Speaker: Okay, thank you. Um, so going on to unfinished business, we have none at this meeting, and we'll go on to our new business. Uh, going to item 6.one, which is a presentation on the status of the city's portfolio and investment policy. Uh, this presentation will be by Mr. Carlos, uh, senior vice president, portfolio, strategist of Chandler Asset Management, the city's investment practices and investment policy. Thank you so much for joining us. Thank

[00:05:26] Carlos: you so much for having us. I'm pleased to meet up with you once again. I don't get to see you very often. It's a delight to see you all. I want to bring you up to date on some of the events that have driven the returns in the portfolio, give you an overview of what we're facing right now and what I think you're going to be looking at going forward. As always, I want to remind everybody, this portfolio is subject to California government code, whose, um, uh, the objectives are safety, followed by liquidity, followed by return. Additionally, the city has additional restrictions on the portfolio. Uh, just from a safety and compliance standpoint and socially responsible investings are various layers about this program that are very specific to the city. And the program encompasses all of those, um, all of those layers and restrictions as we go along. If I may share my screen, I'm going to, uh, this presentation is in your packet, but I will, um, run very briefly through it. I'll keep it very conversational. And of course, if there's questions on it, please do not hesitate to stop me and I'll answer them. I want to remind you, I just said that your subject has safety, liquidity, and and return, um, and I'll let you read that narrative on your own, but, but there's, there's really, um, uh, the, the California government code restricts you to purchasing fixed income securities, debt securities, bonds. You can only buy bonds. And those bonds have to be very high credit quality. California government code limits to single A or higher, which is very high, and the city additionally limits it to double A or higher. Um, So those those bonds generally can be 5 years or less, and the types of bonds that you're able to buy the sectors are clearly outlined by code and the policy. Um, why am I telling you all of this? The reason I'm telling you all of this is because recent economic events have really driven the capital markets and have had a profound impact on your bond portfolio, which I'm going to share with you now. I think everybody here is aware that the United States is experiencing significant inflation at the moment. If you look at the chart on the left-hand side, that's the consumer price index, it's a basket of goods that we use to measure changes in prices. And I know a lot of you are familiar with it. You may use it for labor negotiations or for contract procurement, or other reasons in your businesses. Uh, Inflation, at least the what we call the headline number, the number that encompasses, um, all the changes, uh, as measured by CPI on the left, I'm looking at the line, the green line on the top on the left, that reached 9.one% in June. And, and it came down in the month of July uh, to 8.3, not much, and it came down to 8. at the end of August. And that is the highest level of inflation that we've seen in the United States since the Reagan, the early Reagan era. Uh, back when when you could buy a house and your mortgage was a double digit um, loan, it looked like a credit card rate. Okay? So, um, all this to say is, is that, uh, uh, and hold on a 2nd. I'm freezing out on something here, forgive me. Um. So, uh, all this to say is that that inflationary pressure, if left unchecked, can derail an economy, uh, essentially, people cannot afford goods and services to be able to survive. And, um, eventually, the government has, or not the government, our central bank, the federal reserve, has to step in and do something, which they have been doing. What are the causes of inflation? Well, generally, we've had, um, we had coronavirus, which shut the economy down, and the federal government and the federal reserve boat have taken steps to reopen that economy, and they they stimulated the economy to help people keep jobs. And um, they did that in the form of very, very low interest rates. They lowered interest rates so that businesses and individuals can borrow money, have access to liquidity, and expand their businesses to expand hiring and maintain jobs. The federal government, uh, set up a stimulus program. You know it as the Cares Act, where it had about 5 related acts that pumped about $55000000000000 with a T $100000000000 into the economy so that people wouldn't lose their jobs so that you would have a paycheck protection program so that they would get tax breaks so that businesses would get tax breaks to not shut down operations and keep people employed. So all of that stimulus is in and of itself, uh, by its nature inflationary. It puts a lot of money into the system, and it puts money into the hands of investors and businesses and individuals who have foregone purchases during coronavirus. They held off on buying things, on taking vacations. So while they did that, their savings rate went up because they weren't spending money. And their savings rate went up because they were getting money from the government or they were getting a tax break from the government. Um, So all this to say is that people now had pent up demand and they had the money to go meet it. And not only that, but the reopening of the economy had, um, has created a number of dislocations in various markets, particularly, um, in the supply chain coming from Asia. There's been a global chip shortage for some time, delivery of goods and services to markets, have have been delayed. So all of that, um, it creates pressure on prices. There's demand for goods and services and not enough supply. It's going to push prices up. And this is why you see these these inflation numbers spike up. There's one last bit. I won't go too much into it, but we are, and there is a war going on in Eastern Europe, which is placed pressure on commodities, although it's tapered off in the last 6 weeks. We've seen very high oil prices, which are now likely to come back up again. Um, and and indeed, uh, Russia and Ukraine, our major grain producers, their major, uh, uh, agricultural commodities, uh, natural gas, uh, oil, coal, um, uh, and fertilizer. So that war has certainly put pressure on supplies. All of these forces have caused prices to go up. So now it's for the federal reserve to start tackling that because if left unchecked, It could really derail the economy. So, What the federal reserve has done is they have been cutting off access to liquidity in the form of higher interest rates. I'm going to jump to another page to give you an idea of what that looks like. What you're looking at on the right hand side is the effective federal funds rate, the federal funds rate, is the overnight lending rate between banks. And, um, it sets sort of a standard for where banks can borrow from one another on an overnight basis, and the Federal Reserve sets a target for where they want these rates to be. And if they, if they lower that target, it means that they want rates to be lower because they want to increase liquidity to the economy. They want people to be able to borrow cheaply and they encourage them to do that, to expand the economy. But when they want to slow the economy down, like in this case, because we have to, you know, there's too much inflation and they want, they need to sort of slow things down so that, so that prices don't get out of control. They do the opposite. They raise their target rate for it. This past year, they have raised the target rate for this, for this chart on the right hand side, 5 times, the, uh, at the 1st clip they did, uh, 25 basis points, they raised it a quarter percent from zero. Uh, there was a 0 to 25 basis point range. So 0 to 25, they raised it 25 basis points, a quarter of a percent. The 2nd time, second, 3rd and fourth. The 2nd they did 50 The 3rd, 4th and 5th, they did 75 basis points apiece. We're now, that rate is now, the top, and this is, this chart is out of date because when we produced our materials in time for this meeting, we still haven't caught some of the action. But we're now at 3.5 quarter at its peak of that range is where we are, which is significantly higher than where we were last year. So the federal reserve is simply signaling to the markets that they want things to slow down in order to tackle price pressures. Now, the flip side of all of that, of course, is that the Federal Reserve is tasked with controlling prices, but at the same time, they are also tasked with creating jobs or promoting conditions, which create jobs. That's probably better said. So the concern is that, um, as you slow an economy down with this activity, you could lose jobs and and it's a balancing act for them to try and tackle this. Right now, the jobs picture is looking very, very, very strong. Over the last month, we generated 315,000 jobs. And in the prior months before that, we were averaging 381,000 jobs a month of new jobs created. So from a jobs perspective, these are very, these are considered very strong numbers. But pre-COVID. We were needing to generate somewhere around 100,000 to 150,000 jobs a month to be able to absorb new entrants into the job market. And we were generating much more than that, somewhere in the 180s, 190, 200 sometimes. But, you know, when you're averaging 381,000. That's that's a spectacular job market. There's a job measure that, uh, that tracks the number of jobs available for job seekers. And the measure, the ratio was 2 job openings for every job secret. That's tapered off a little bit. It's come off a little bit. It's not as high, but it's still very much a job seekers market. And frankly, because people can jump around because there's demand for labor, that people have to pay to hire, you know, businesses have to pay up to hire people. And that's part of why inflation is going up. The unemployment rate is currently at 3.7%. Um, uh, the, the, that's, that's considered very low unemployment by, by most any economist. Um, it's, it's, uh, definitely, uh, I think that the federal reserve, the firm view of Chandler is that the federal reserve, uh, is okay with slowing the economy down. And even allowing the jobs market to deteriorate a little bit because it's quite strong before they stop raising rates and stop slowing the economy down. The fear of all of this, of course, is that if they go too far, they could put us in a recession. And what you're looking at here in this chart on the table on the left-hand side is gross domestic product, the way that we measure the growth of the economy, just look at the road on the very, very bottom, that's the quarterly number on an annualized basis. We're giving you the annual equivalent of what occurred during that quarter. And you can see that for the last 4 quarters, the last 2 quarters of calendar year 2021 we had growth. In fact, the 4th quarter was spectacular. 2.5%, 2 to 2.5% in the United States is considered good growth. We had 6.9 ended December 31st. But you'll see that the 1st quarter ended January, March 31st and then the 2nd quarter, June 30th. Both of those were negative. And traditionally, in the United States, when people see 2 negative back-to-back quarters, that generally signals the beginning of a recession of a contraction in the economy, uh, uh, it has not yet officially been called. The group that calls that is called the National Bureau of Economic Research, and they have not yet called it. They may not even call it until after it's over. We could very well be in a mini recession right now. We won't know it until they come up with the numbers. But it's very difficult to say that we're in a recession. When you have 3.7% unemployment. It's extremely low. Most recessions have high unemployment or an increase in unemployment associated with it, and we just haven't had that. The jobs market is too robust. But uh, the data has been softening. Uh, uh, if I look at other economic measures, I won't go through every single one, I'll go through some that are very obvious to everybody here. Housing starts have have certainly slowed down as a result of the federal reserve raising rates. 30 year fixed rate mortgages are now more expensive. I think you saw everyone here saw that they reached 7% for the 1st time in a very, very long time. It's dropped down to 6.7, but that's still very elevated. Those high mortgage rate. Price, people out of the housing market, and builders will see sort of slow their building because they know that the demand is tapering off. And if I can even update you with this, This is the year over year price change, um, in in housing on average in the United States, and, and, and that's actually now down below 18%. So it's tapering off significantly. This isn't the only measure. Manufacturing is slowing down. We look at this purchasing managers index. It's a diffusion index of 50 to 100. If you're below 50. Um, this is, you're moving in a contraction. This has been slowing down for a while. That's not the only one. There's several other measures, but all I want to say is this. The, The data is softening. The economy is softening because the federal reserve is trying to slow things down because they really need to tackle that measure. These numbers right here. Now to give you an idea. The the Fed, when they think of inflation, they look at this measure here, personal consumptions expenditures. It's similar to consumer price index. It's just a different basket of goods. They allow for substitutions. I can get into the minutiae of it, but basically they remove food and energy out of that measure to get a trend, and that's this gray line here, and they call that the core PCE when they remove food and energy. They want core PCE to be down in the 2% range. And in the last month to update you, this actually ticked back up a little bit, which is not the direction that they wanted to see it. So, it tells us the federal reserve has been slowing the economy down to tackle high prices. But it seems like they're not done. And I'll throw one more thing into the mix this past week, Fed governors, uh, Boston and Kashkari and a couple others, people that sit on the committee that sets the federal funds target rate have basically come out and said, we're not done raising rates. Inflation is still too high. We think that this 3 and a quarter rate that we set for the federal funds target rate. We think we're going to be closer to 4.5 . So, what's the message here? The message is that the rates are going to continue going up. Um, that, that's, that's the extent of it and and they did pop up for a period of time. They've come down slightly. There was an event in, in, in the UK that caused it to do that. I'm happy to discuss that in greater detail, but the net result of all of this. I'm trying to keep it very conversational. I know not everybody here is an economist or cares that much, but here's the net result. The net result is that as a result of all of this, interest rates are much higher. You're looking at, you're looking at 2 year, 5 year, and 10 year, yield history. So these are U.S. Treasury securities and you're looking at the yield that they would pay you. So at any point that had you purchased them along this line, the bottom line would have been buying something for two, you know, and putting your money in and earning for 2 years for 5 years for 10 years. And you can see that for 2 year treasuries, we began the year, um, right around here at around 70 basis points, 0.7%. That rate reached 4.3, almost 4.4% at its peak. It's down to about 44.25, 4.28 today. But that's a significant rise in interest rate. Why does this matter to you? Why do you care about this? For 2 reasons. Number one. When interest rates rise. The value of your investment goes down. Bonds go down in value when interest rates rise. And this is a significant rise in a very short period of time. So the value of your bonds on paper have been diminishing significantly. The good news is, it's only on paper. And um, as long as you hold the bond of maturity, which, For the most part, you do, that's what, that's generally the practice of the city. If you hold your bonds to maturity, that drop in value goes away because you receive your principle at maturity. So that's the good news. The other good news, of course, is that as you have maturities in the portfolio, as a bond matures, it comes due, and you get your principal back, and you get your interest payments back, you are now able to reinvest those principal amounts and interest at significantly higher yield. It just means that your interest income in this portfolio has been on the rise and is expected to continue rising as we see the current interest rate structure. Um, All this to say is, when we show you returns, the returns are going to be a blending of the interest income that you have earned in the past year and so forth. But we're also going to blend in the change in fair value, even though you don't realize it, we're going to blend that number in there so that you get a holistic picture of what's going on. And I will tell you that the interest income was strong. But the change in fair value was so negative. It overwhelmed it. Okay? You'll see that we have some negative returns. You'll see that in a minute. Okay? So all this to say is valuations are down, but it's okay because you won't realize them generally. And um, interest income is up and we anticipate that you're going to have a better interest income year, next fiscal year. Now, before I'm going to get into the portfolio and walk through, walk you through the results, but before I do that, any comments, any feedback or questions so far.

[00:24:08] Unknown Speaker: Not seeing any yet. Okay. So let's let's proceed. Uh,

[00:24:19] Carlos: again, a reminder, uh, this portfolio is, uh, uh, the, the city's investment program is subject to California government code. It's very restricted in what can be done. Generally, the city manages the bulk of its investments in house. The team does a fantastic job of that. Um, we, we augment what the team does by managing a corporate portfolio. It's a corporate credit portfolio. And we, you know, the city's engaged us to do that because we have, uh, uh, uh, processes and, and, and proven credit analysis that we overlay into our program to be able to mitigate the risk of credit risk. Additionally, the city has always been very conservative in its approach. The limit on corporate credit on any credit is double A or higher, which is, which is um, a very, very, very strong credit. The bottom of the investment grade world, what we call investment grade is triple B, the bottom of what you're able to buy by code is single A, you go even a notch above that. Um, Looking at the portfolio, I'm gonna, this is a, uh, this is a summary of your investment policy. I'll let everyone look at that on their own, but effectively, one of the things that we hire us to do is to make sure that, at least with our portfolio, we comply with the policy, and the restrictions, and certainly the city's team and Chandler both do. Um, when you look at the overall consolidated portfolio. So this includes everything but everything but the, but the, uh, actually, it's everything, including the corporates, except for the, the SRPC, you can see that the portfolio average one. 189 years. Generally, we maintain it. What does that mean? It means we maintain, we and the city maintain the bulk of the investments between 0 and 5 years. And when, when that gets built up, they average close to 2 years, a little bit, uh, a little bit lower, an average weighted average maturity, but the duration is a little bit shorter, the duration is a risk measure that informs us how the market value of this portfolio will move for a given interest rate shift in the markets. So, obviously, the longer that is, the more of an impact it has on the portfolio. And what we do is we try, uh, we try and collectively keep that somewhere near the target, uh, as measured by a benchmark of securities between 0 and 5 years. Right now, the yield to maturity of the portfolio, that's the annualized effective, uh, earnings rate for the coming year, right now that you're set up to earn the way that you have the portfolio is one. 52%. 3 months ago. This is through June 30th, 3 months ago, that number was one. 3. So you can see that it's been on the rise, because as I stated earlier, when you have maturities, we are able to reinvest them and the city's team is able to reinvest them at significantly higher rates, which moves that weighted average number higher, which is great. It means you're earning more. Now, obviously, the market yield has also been on the rise. The market yield is, is what you would get for this portfolio. Had you purchased it on this day. Here's another way to say that. If you have new money. Or if you have a maturing security, we're able to reinvest that new money or maturing security at gener- if we've invested like the portfolio at generally this level. And I can tell you that through yesterday, that level is like in the 3.5% range, it's gone up significantly. So your earnings are going up. Right now, you're averaging a double A, uh, double A, triple A, uh, rating, and the entire investment program is worth about almost $9300 million. When we look at the makeup of the portfolio. Governmental securities continue to be the bulk of the portfolio. Like I said, Chandler focuses on the corporate part, which is this slice of the pie, the gray, the city's team purchases the rest. The city's team has been focusing quite a bit on U.S. Treasury securities. And one of them, plain reasons for that is simply because not only are they considered the safest investment, but also because recently, um, federal agencies, uh, and government sponsored enterprises, uh, uh, they have curtailed their issuance, and that's been going on for several years. And as they issue less, the supply is smaller, it pushes their prices up, which means it pushes their yields down. You earn less on these. So we'd rather, uh, and the city's team would rather have the liquidity of the treasury and the safety of the treasury for even for similar or even higher yield. Um, we are always trying to expand the corporate component of it. Uh, we, or we're always looking for ways to do that. Um, the city's policy allows up to 15% in corporate credit. California government code actually allows you to go up to 30% but the city's a little more conservative. But because of that double A rating, um, the, the, the universe of double A credits that are available to us are really limited. That's just the nature of the credit landscape. But even so, we were able to increase that from 3 months ago about one%, and we were able to do that through, um, through specific type of security, which I'm going to highlight in just a moment. Part of your investments, of course, are invested in the state pool, about 16% through the end of the fiscal year. That's this life, local agency investment fund. Super nationals are AAA rated world bank bonds that are allowed by code. Um, and then, of course, the money fund is just a sweep vehicle. It's it's where maturities come in and sit while they wait to be reinvested. Um, If I go through really quickly, this is the duration distribution, it just, what, what money, how much money do you have placed in different maturity ranges? You can see that the city maintains ample liquidity, uh, uh, 21% of its money through June 30th was coming due within the next 3 months. In fact, today here we are October 6th. So you can, you know, all of these bars are basically shifting to the left. All of this has come due. And of course, a portion of it is always kept liquid to meet day-to-day liquidity, but the city turns around and reinvest a portion of that, as do we. Again, we take advantage of investments all the way out to 5 years, which is what code allows you to do. Um, this is the, this is the, and I forgive me, this is the duration distribution. Remember, the duration is that special number that tells us your sensitivity to changes in interest rates. This is when I average that, that's this 189 number. Now we're going to look at this 196 number when I average that number out. It's it's this one, the maturity distribution, and you can see that it's not very different one from the other. They're very similar. Um, in terms of the returns. Here's those negative returns I told you about. Um, 2 things about it. Number one, when we see the one year return at -338. If you're earning an average yield of somewhere around one. 4% because that's just kind of what I average it out to be. If you're picking up interest income somewhere, you've averaged for the year somewhere around one. 4 but you ended up with a 3.4 Well, it tells you that the values on paper fell more than 4 or 5% to end up with a -3.38. So all of this has been driven by change in fair value, because of the rise in interest rates. Really, it hasn't been because of deteriorating credit. In fact, balance sheets are fairly strong right now in the United States. Um, it's really mainly due to fed activity, um, and they're measures to fight inflation and interest rates rising as a result of those measures and as a result of inflation. Um, the key thing here, of course, is we, we managed to a benchmark. And you can see here, so this is the overall portfolio, the you're certainly ahead of the benchmark on a relative basis, which is good news. That's another one. Maybe there's a better way of saying that. The market in which you invest. You did better than the market in which you invested. Everything was negative, but they went even more negative than you, which is a good, it's good that you did better. It means you safeguarded your money through this period. When you look at the corporate component, obviously, the corporate component is going to be a little bit more volatile because of the corporates, but you can see in, in the account, this is the component that Chandler manages. Currently, uh, the benchmark for that same time period was significantly lower. And, and of course, that's that's just through wise management, um, diversification, credit quality assurance, and so forth. When you look at it on a consolidated basis, this is the city's portfolio on the benchmark, the corporate and the benchmark, when you look at it on a consolidated basis, we were down about 3.41. But, but of course, most of that, that whatever drove that negative was because of fair value change on paper, you don't recognize that in your budget. Um, the budget focuses on spendable dollars and those spendable dollars. You earn and you earned significantly, and that will continue to rise into the future. Over the long run. The city's portfolio, the city managed portfolio has been generating 329 per year since 1995. You've been averaging 329, which is great. This encompasses a period of about 10 years when interest rates were below one%. So I'd say that if you average 329 per year, That's pretty good. Um, we started much later in the portfolio that we managed, that, that, that, the, the, the inception of that was, was a lot later than that. But you can see, um, it's all very competitive. You've been averaging 331 per year going back to 1995. I do want to highlight. I don't know. I think we skipped the. Let me go back. Uh, it looks like it was taken out. I mentioned to you that there were. Oh, no, here it is. This is what I wanted. So these are the issuers in the portfolio. You'll recognize some of the names. I want to highlight just a couple of things. The 1st is that obviously our exposure to any single name that is not a governmental security is really limited. You can just look at these numbers down here. Some of them are just tiny. Some of them are even about a quarter of a percent. We don't like to hold our eggs in one basket. This is one of the reasons why for us and for the city's team. This portfolio is is, um, portfolio management in this in, in, in this, uh, landscape is risk management to us. We want to generate a competitive return, but before we even think about competitive returns. We need about think of safety, we need to think of safety and liquidity, which is what the California government code and your policy requires, but you can see some of the, some of the corporations you're lending to Apple, um, Amazon, uh, US Bank Corp. I wanted to highlight a couple of them. This, this New York life, uh, global funding. Uh, this New York, New York life, global funding, and this MetLife right here. So those were some of the one% that you saw in there and that have helped us. Um, because this is a, an, a little bit of an event with a securities and exchange commission. The Securities and Exchange Commission. changed their definition of what they call a qualified institutional buyer, a QIB, qualified institutional buyer. Um, generally, uh, in the past, local governments were excluded from that definition. The Securities and Exchange Commission went through a study period where they solicited feedback from various parties and changed the definition of qualified institutional buyer, and they now have included local governments that have investable assets of $1000000 or more. That's been good news for you because it now allows you to purchase securities, which only qualified institutional buyers are allowed to purchase. Um, and the 2 securities that we purchased are this New York-like funding and MetLife. These these two, one of the New York, both of them are double A rated or higher. The New York Life is actually AAA rated by Moody's, I believe. So very high credit quality. Some insurers, uh, like Apple, uh, will only issue, especially in the short end in commercial paper, things like that, they will only issue 2 markets that are only available to qualified institutional buyers. So this is, this allows us to diversify more and pick up a little bit of yield, which has been a good thing for the portfolio. Um, you know, uh, Tyler asked me to also highlight, through the end of the year, we did have the Toyota Motor Corp, which had been downgraded beneath the minimum credit quality, but it was, the decision long ago was made to hold it for various reasons. That's now rolled out of the portfolio. It's no longer there. Um, I want to pause there. That's a lot of information, but I, I, I, I want to open it up to your questions and feedback, but the key things are this. The rise in interest rates is not quite over. You could see the Fed funds target rate go even higher. You may see increased, uh, interest rate pressure, interest rates may go even a little bit higher, and they will, and they have been, and will continue to be volatile, as long as this war continues, as long as in the UK, you've probably seen some of the news coming out of the UK and the mini budget, and how it turned the the English, the British bond market on its, on its head, guilts um, dropped in value quickly, and the bank of England had to step in and, and, and back them. So that that sort of had reverberations around the markets. So events like that have been have created volatility for the markets. They've created volatility for the stock markets as well. You've probably seen that, try not to stare too long at your 401 k or your pension money. But, um, all this to say is that we've seen a lot of volatility. That's not quite going away anytime soon. Um, but the, the tenets of safety and liquidity, the tenets of a local government portfolio, um, and that risk management, uh, uh, culture that permeates this investment program, those are the things that you can rely on. Those are the things we're supposed to get you through all of it. You can't cover everything, but you can do it, when I get asked a lot, is there something else we should be doing? And I said, from a risk management standpoint, no, if anything, you're actually on the restrictive end of things. Maybe sometimes you could maybe be considered a little too conservative, but it has served you well. It's provided you the liquidity that you needed. It's provided safety for the money that you needed when you need it, and that's been a very big bonus for the, for the investment program in the city, and and your returns have been competitive. Let me stop there. I'm going to stop sharing my screen and perhaps you have some questions for me. Um,

[00:38:57] Doug: Carlos, this is Doug. I've got a question. Um, I know the, um, in the rate of return, it's kind of an academic number, and most of the stuff is held to maturity. Um, in the calculation of the rate of return. Are you guys doing just a kind of simple present value with the current interest rate or is it like the fair value market driven and all or how's that computed? I was just curious.

[00:39:26] Carlos: The return is, and you can Google this, if any of you that really want to get into the weeds on this. The return is the modified Dietz method, where we are looking at the combined change in value of the portfolio, combined meaning from interest earnings, and from change in fair value. whether that change in fair value was realized or not. So the portfolio will grow or shrink based on how much interest you earn and the change in value that people are willing to pay for it. So that change is calculated through a methodology called modified deats, which factors in cash flows, because cash flows can throw things in. Now I'm getting into the weeds here. But all this to say is that that's an industry standard. And when we come up with those returns, The returns that we show you for periods that are smaller than a year, the number is nominal, meaning that's the actual return that you had. For periods that are long that a year or longer, we provide you the annualized return, which means that that's the, that's the geometric mean of that return on an annual basis. A geometric means it just takes compounding into effect. That was really dirty. I apologize.

[00:40:42] Doug: No, I, I, I, I wrap my head around that. That's good. Um, to piggyback off that. Um, Since you said that most things the city's holdings held to maturity. Does it? Are you guys looking at or does it ever make sense to look at those fixed, uh, fixed income investments with a longer maturity period? Does ever make sense? If the fair values drop to find a replacement thing with a higher yield, you know, factoring in the fair value of both or, I mean, you know what I'm kind of getting at?

[00:41:18] Carlos: I do, Doug, and that's actually it's, it's, that's a fantastic question. We do. It is always worth it. Um, in the bond markets, I'm speaking now with my portfolio manager's hat on. In the blonde markets, active management actually does add value over the long run. I think, Doug, what you're saying. I'm going to say it in a different way to make sure everybody's kind of tracking. I think what you're saying is, do you ever do a break even analysis, where you look at a bond, and and determine that, well, you can take a loss, you can sell it and take a loss. But you can replace that loss and maybe do better if you sold it before maturity. And reinvest it in a higher yielding security. That what you're asking. So, yeah, exactly, yeah. Okay. Okay. So, so in so as managers, in the bond markets, we do that every day. But it's been the policy of the city that the city simply holds to maturity. That's just, that's just a city policy and we've been respectful of that policy. If we had that ability. Absolutely. We do that for clients every single day. That active management, where we do that very break, even that you and I just described and discussed, that, that mitigates some of this because you can sometimes, um, move into different sectors where the yield relationship is different. You can do that while rebalancing that duration, you can go into different maturity ranges that are offering value. There's various things you can do all while always looking to improve the credit quality, the portfolio, the maintaining the duration where you want it, all those things. And now I am getting into the weeds again. I apologize. But yes, active management adds value. We do it every day. Just not in this portfolio because it's a city's policy that we just hold the maturity. Um,

[00:43:09] Stephen: I have a a, um, a comment and a question. So 1st in terms of the comment, after being on the committee for many, many years, I think there's always been, um, a little bit of a pull to, as to why the portfolio is so conservative, relative to code and relative to what people view as being their, um, their knowledge of the market. Um, So, and we have always had a very conservative portfolio both in terms of duration and credit quality. And I think it's worth noting that with the volatility that the markets had over the last year, um, especially with the rising interest rates, which is, One of the most dramatic, I don't know what the figure is. It's like 40 or 50 years, um, the the unrealized loss and the negative total return would have been a lot worse if the portfolio had been longer or lower in credit quality, um, because credit spreads have also widened in the last year. So I think it's worth just being aware and noting for the minutes that the loss, which is unrealized, of $27 million, which is a lot of money, but it's unrealized, and the, um, negative total return of roughly 3%, which is one of the higher negative total returns I've seen, um, since I've been on the committee, would have been a lot worse if we had not been conservative. Um, and I think when you go back to the time when, um, the committee was originally formed, and I wasn't on that committee, on the committee then, after the default of Orange County, that's what kind of drove there to be this, this, um, this committee. It, um, We've, I think, been smart in terms of having a conservative portfolio, and I think it served the residents of the city very well, because the numbers could be a lot worse. Um, if a different uh, methodology or different approach had been taken to how we managed risk and how we managed, um, the portfolio, um, in terms of trying to, you know, maximize return. So I just think, to me, that's really the big takeaway here is all the years of being conservative, maybe we gave up a little bit or the city gave up a little bit in terms of return and yield. But when you have a period of this kind of volatility, Everyone sleeps better at night, and I believe that everyone is happier when the numbers are less negative than they would have been if, um, a different approach have been taken.

[00:45:44] Carlos: And Stephen, I think you said you also had a question, and before you get into that, I just want to say real quickly, um, that's exactly right. Stephen said that there were, I want to explain a term that he used. He said corporate spreads widened. I want to make sure everybody understands that because that's exactly what happened. He's absolutely right. Um, uh, if you're picking up a certain amount of yield from a risk-free investment, what's considered risk-free as a treasury, a debt of the United States government. Other issuers are a riskier, a riskier bet. I don't like to use the word bet, we're investment advisors here, but it's a riskier investment than a treasury. So therefore, you should expect to get paid additional yield above the treasury. That additional yield is called a spread. So that price, that's spread relative to treasuries, widened out. I remember when when yields go up, the values go down. So to Steven's point, it just means that corporate credit, uh, the, the, the, the spreads widened means that they lost even more value than the treasuries is, is just a technical way of saying, and I think that's the point that he's making. That's absolutely right. Indeed, that's why you saw the returns for the past year on the corporate portfolio be worse than the treasuries because the treasury's fared better. But that's that's all of it is from evaluate. I'm speaking from a combined valuation and interest income standpoint. From an interest income standpoint, those corporates are your highest yielding pieces. And of course, the longer duration treasuries and agencies that the city's team purchases are your highest yielding pieces. But yes, we have to look at it holistically. We cannot ignore that change in fair value. It won't impact you from an operational perspective, but we do have to, it's a true economic shift and we do monitor it. But I said you, I think you had a question as well.

[00:47:33] Stephen: I did. So on the 2 securities, the Toronto, I believe it's Toronto Dominion and New York life that are quibs, um, qualified institutional buyers can buy. Are they private placements? Number one, number two, um, is there less liquidity in them, then there would be in a publicly offered security. Um, because I don't believe we've ever held private placements before, and, um, is that a concern if there were to be a need to sell it?

[00:47:59] Carlos: Uh, so there's a couple questions there. The 1st one is, uh, the securities, they are MetLife and New York Life, uh, not the Toronto Dominion. So they're Met life in New York life. I apologize. And the 2nd question I think was, are those private placements? The answer is, yes, they are. They're considered 144 ace securities. The reason they're limited to qualified institutional buyers is simply because the reporting requirements for those particular issues are less than what would be normally available in the public market. It doesn't mean that their financials are worse. In fact, indeed, they're better. One of them is triple A rated. Um, uh, it just, it just means that the, the, the, the, the securities and exchange commission, because of the less information that they are required to publish, even though they publish just as much as in the public markets. Because of the requirement, the securities and exchange commission really wants people who have a sophisticated investment program to buy into them, and that's how they come up with a definition of qualified institutional buyer. And you with your size, with your team, with an advisor who's knowledgeable, you qualify and you qualify also because because you meet their match. So you're absolutely right. You've never had them before, Stephen, because this is a new change in the definition. Most of it happened in early 20 or late 2020 into 2021 and only recently have we added these. Your other question was, is there any concern? Are they less liquid? Well, they're not, the market for them is not as big as the public market, certainly, but we have no concerns from a liquidity standpoint. Those are securities that are widely held. Um, widely distributed, desirable, and very high credit quality and pay competitive yields. We don't have any concerns. If we had, we wouldn't add them to this portfolio. Knowing knowing the nature. And the culture of the city, knowing that the city is a very conservative investor and has always been. That's always been the culture here. We still felt comfortable putting them in there. We wouldn't do something that would go against your culture. And

[00:50:04] Stephen: there's no, I don't remember the policy, but when we approved corporate holdings. We didn't put any limits on quibs or private placements in terms of percentages or anything of that nature. That's

[00:50:19] Carlos: correct. And that's mainly because the fact that they're, that they're a private, a private, there are 144 a security, that's the term. Um, that's that's a determination from the SEC. It's not something that's driven necessarily by code. Now, you can place your own limits on it, obviously, absolutely. But, you know, most people, when they start building their policy, their 1st sort of default is to see what code does. And then from there, they try and fit in whatever, you know, whatever fits their culture and what they're trying to do. But no, there are no limits on that in the portfolio right now. And I would, and I would tell you, I would tell you the amount of, of 144A issues that we would add to the portfolio. I don't think they're going to amount to very much, right now, to give you an idea. Um, the New York Life currently makes up .31% of your investment program about $3000000 The MetLife makes up .29% of your investment program.

[00:51:22] Stephen: That might be something as a committee we might want to consider in the future, putting a total percentage cap on 144 A securities. Um, not that I'm not suggesting that your firm would do this, but I don't think we want to have a portfolio that's 85% private placements. Um, so I think that's something we didn't consider when we initially put the policy together, but I think it might be something worth considering having an aggregate market cap on 144 A's as a percent of the total corporate holdings. Very good. Any

[00:52:01] Member Lucas Ramirez: other questions? Mr. Oakley does. And I don't think that we have any folks who are on the phone or in the participant box and Zoom. There, uh, Councilman Romanachek.

[00:52:16] Member Lisa Matichak: Thank you. How long have we been working with Chandler?

[00:52:22] Carlos: Well, Chandler has been um, providing report, we started out providing reporting services for the city. The city ran its portfolio for a very long time, and and and we, we were hired to sort of run the, the, the, just the perform, excuse me, the, the reporting to, to, to sort of generate all the accounting and reporting for that. But shortly, you know, there was a period of time. I'm looking here and I apologize, I'm going between 2 screens here. Um, uh, I'm just trying to pull up. Uh, I can probably pull that information and send it to you. Um, but, Let's take a look.

[00:52:59] Member Lisa Matichak: I was just kind of curious, curious if it was like, 10 years, 20 years.

[00:53:06] Carlos: Absolutely, um,

[00:53:10] Member Lisa Matichak: I guess while you're looking, You know, I appreciate Steven's comment about, um, something we might want to start thinking about, and I was wondering from Chandler's perspective, is there anything that you think we should start discussing now because we might want to make changes in the future, either to our policy or to, um, kind of how we approach this. Uh,

[00:53:35] Carlos: Knowing your culture, knowing that you are, Knowing that you are, um, are more conservative than the average investor, at this stage, we would not recommend any major changes. The changes that we would have would definitely be associated with if you were, uh, if the city were more willing to realign its investment program a little bit closer to California code, we would have several changes that we would recommend. But I'm not pushing any of that right now because I want to be respectful to the fact that this has been, that the culture of the city has historically been much more conservative than your average city. And I just don't want to disrespect that. If you said, well, what are we, what are we talking about and should we contemplate it and what would it entail? We'd have a host of ideas. Okay. So

[00:54:27] Member Lisa Matichak: I'm not sure if this is where I should bring this up or not, but I did have a question about the shoreline bonds. Um, and where we stand with those. I actually, you know, the more I thought about this, I thought, wow. You know, the city bought some of the shoreline bonds. And yet we are considering refinancing those. I'm not sure where we are in that process. And so it's, um, in some ways it has a positive impact on the city and a negative impact on the city. Um, so I found it interesting that we actually allow that in our policy to buy our own bonds.

[00:55:04] Takahashi: Definitely, I can probably step in and answer that specific question. We actually are in the process of, um, refinancing as we speak, um, and actually just, uh, circulated at a request for proposals to, um, uh, to the market. Interesting. We had a discussion on private placements. We are actually contemplating doing this as a private placement for this particular set of bonds, despite the increase in interest rates. Um, you know, our financial advisors have done, uh, recent analysis and concluded that they're still are actually savings to be had, uh, despite the the recent increases. Um, and so we're trying to get that done, um, and actually should be coming back to council in October, um, November. Uh, for the final approval, and we expect to close also uh, shortly thereafter in November.

[00:55:57] Member Lisa Matichak: Great. And um, if I recall correctly, it was like, 7000000 savings. Um, I assume that's decreased June.

[00:56:06] Takahashi: Yeah, that's that's decreased since the original time, but you know, the feds have been going on great guns on on increasing rates every, every month. Um, so that, you know, has eaten away into it. Um, but we are are in the process of trying to get that uh, finalized now. Um, and as far as the holdings, yes, there is a 2 edged sword, as it were, since we are also investors in our own bonds, as it were, um, uh, you know, those, those, uh, will get, get called, called out. So, um, just depends on which side of the fence you're on.

[00:56:45] Member Lisa Matichak: Yeah, yeah.

[00:56:46] Stephen: Would all of the bombs get called or is what is the call? I't know what the call date is on the, The issue. I see the maturities from 2022 to 2031.

[00:56:56] Takahashi: Um, for the 2011. I think they actually go out to like 2040 on the 2011 shoreline bonds. So yeah, they will all be called. They were call after August of last of this past year.

[00:57:11] Stephen: So all of the bonds from the city's portfolio would be called. Um,

[00:57:15] Takahashi: yes.

[00:57:20] Carlos: I want to respond, um, council member Matachek. I want to respond to your question. I just want to be faithful to that. Um, we've been working with you since the mid 2000s to provide accounting reporting. In 2018, in 2019, four, Let me rephrase that, in 20, in 2018, 4, 2019. You retained our services to provide investment advisory on a limited basis, which is these corporates. And um, and then you renew that in 2021.

[00:57:53] Member Lisa Matichak: Okay, thank you. Um, I think that's all I have right now. Thank you.

[00:58:00] Member Lucas Ramirez: Any other questions? Seeing none, and I'm assuming that, um, from Victoria that we don't have anyone in the phone. Q waiting.

[00:58:12] Victoria Labrador: No phone. No one in the phone waiting.

[00:58:16] Member Lucas Ramirez: Okay. Um, well, we very much appreciate your report, and I, I think it would be very beneficial for council to, as a whole, to receive the report as well, because I, I think it gives us a lot of insight into, um, our other policy issues and what some of our constituents are facing with increased inflation and increased interest rates, um, for, for home loans and, and et cetera. Um, and I think it would be very helpful. It's a very good concise way of uh, bringing together these these issues for us. So thank you so much for coming today.

[00:59:00] Carlos: Absolutely. As always, it's it's a delight to see all of you. If you have any questions, please don't hesitate to reach out to me or to reach out to my colleague, Bill Denahey. He normally handles he and I team up on this relationship, but he handles the day-to-day usually with you. Uh, he, but he's also our co-chief investment officer and tonight he had a, we had to divide and conquer tonight. I apologize for that, but we're always both available. If you need anything, please don't hesitate to call out. It's good to talk to you guys. Take care. You guys be safe. Bye bye.

[00:59:29] Member Lucas Ramirez: Thank you. Okay, we're gonna go on now to item 6.2 uh, report from uh, the investment review committee, and the presentation will be by uh, finance and administrative services department staff on the portfolio results in draft fiscal year, 2021, 22 uh, investment review committee report to the council.

[00:59:55] Takahashi: Yes, uh, thank you, Terry Lee, and I'm going to uh, have Tyler Cook. She's been doing the primary manager of the portfolio. present the report. to the committee. Take away, Tyler.

[01:00:09] Tyler Cook: All right, so I think you all receive the draft of the report before our meeting. I'm going to share my screen and just, you know, a lot of the information that Carlos went over pertaining to the city's portfolio itself. really overlaps with a lot of what I have to say. So it'll be pretty pretty quick here. But, um, So, uh, I'm going to start on page 3 of the report, of the draft report. This table here shows a few of the metrics of the city's portfolio. Of course, the Torre Return. Carlos talked quite a bit about. We see those same numbers here in the 2022 fiscal year, the -3.38%. Um, and I believe a committee member permit mentioned that he hasn't seen a negative number that big in in a long time, and you can see in the 10 year history here certainly is the largest, um, but, um, because the interest rate environment Carlos mentioned, that's, uh, that's where we're at. Um, he also talked quite a bit about duration. So just a metric here. The city's, the average duration for the fiscal year in the city's portfolio was 2.0, I'm measured against the benchmark of one. You might recall, the policy requires that we stay within 15% of the the benchmark of, um, Blend the blended index government securities. Certainly, we stay within that 15% throughout the fiscal year. Um, and uh, and we're also required to stay within 3% or to rebalance within 3%, at least on a quarterly basis, which we also did there. I'll go down to the next page, page number four. This table calculates an average earnings rate. So basically we take the, the interest that's the portfolio earn throughout the fiscal year, compared to the average size of the portfolio, and we get this average earnings rate of one. 3%. Um, of course, that's, uh, pretty low, but that's because of all the, uh, the investments that we purchased throughout COVID, when the interest rates were were quite low as well. This table also shows, you can see how the portfolio size of the portfolio has grown over the last 10 years. Uh, 306.900000 and 2013 up to 841.9 million, uh, ending June 30 of 2022. Pretty significant rise there. Next page, page 5 is what we call our diversification compliance report or table. This just shows all the different types of investments that the C's portfolio holds, and they're all within the policy limits that are required there. Um, which uh, you can see all the holdings here. Also, Carlos, talk quite a bit about that. Despite calling your attention to this, the corporate portion, 7.3%. Last year, um, that that number was 6.2%. So as the, as Carlos indicated they've been able to increase that portion of our portfolio over the course of the last of the last year as well. And maybe the last portion I'll point your attention to is on page number 7. Here we can see the entire portfolio broken out by fund. So the total portfolio, a 971.5 million. General Fund makes up 192.700000 or 19.8%. And you can see the other funds there, um, showing what portion of the portfolio. Those funds hold as well. Um, There were no violations of the investment policy throughout the fiscal year, whether in terms of duration requirements, diversification, or safety, or equality. Um, so we're happy to report that. Um, staff's not uh, recommending any changes to the policy at this time. And of course, this is a draft report. So any comments that are made can be added before we afford it to the council as a whole. So it's all I have to, uh, to add there, if you have any questions, happy to entertain them as well. Thank you Uh,

[01:04:21] Member Lucas Ramirez: any questions? Mr. Cook? And, um, not seeing any in the participant, uh, box or I'm assuming that we don't have any on the phone queue?

[01:04:33] Victoria Labrador: No phone can.

[01:04:35] Member Lucas Ramirez: Okay, thank you. Well, this is, um, Very helpful and we don't need to take emotion on this or anything. We're just accepting it unless we have changes. Good. Go ahead. Counselor, roommate, check. Yeah,

[01:04:55] Member Lisa Matichak: um, I don't have any suggested changes. I don't feel like we talked about anything that would change. Um, you know, the summary that's in there. Um, I do want to say, I appreciate the monthly reports. I do look at them. Um, so thanks for sending those out. Um, I feel like sometimes, um, we don't talk about our financial situation in the city very often. So thank you for the past year of reports. I appreciate it, and I think the summary is, um, good as it is. Thank you.

[01:05:31] Unknown Speaker: Great. Well, that brings us to um, committee staff, comments, questions, and committee reports. Uh, I wanted to doff my virtual hat to counsel my romantic. And to the mayor for, uh, and also to staff, Mr. uh, Takahashi, for getting a letter out to Leif. Um, urging divestment from, uh, carbon related, um, investments and, um, I know that that will end up having a positive impact. So it's really nice to see something, go out the door and move on down the road. And, um, I wanted to thank everyone for participating in the meeting today, our, um, committee members, especially our community, uh, committee members and our, uh, staff, Gray Singh, uh, Victoria Labrador, Tyler Cook, of course. Um, our city manager was here and then got called away. And especially uh, Jesse Takahashi. I think today may be your last one of these. Last week, somehow, rope you in. But Mr. Takashi.

[01:06:48] Takahashi: Yes, um thank you. I did want to just follow back up, circle back to the minutes question. We did find that out. Um, So what happened back then? Uh, Mr. Radke was not yet appointed, so we did have a vacancy on the committee um, back then in 20 October of 2020, so right, he was appointed actually in December of 2020. So we only had 4 members and, um, kind of strangely enough, Mr. Permute, um, was there on the uh, call, but somehow was not counted in the initial roll call at that time. So when we did the vote, He was not officially attendee. Uh, even though he was there. So that's why there's a 3-0. Um, but he was later, uh, it was acknowledged he was actually at that meeting, um, after the after that particular moment was was taken. So that's how we end up with a 3-0. So if we wanted to go back to, to prove the minutes, um, we, I just offer that up, that information there. Great.

[01:07:49] Unknown Speaker: Uh, come. Council member Met a check.

[01:07:52] Member Lisa Matichak: Yeah, thank you very much for looking that up. Um, I thought we were all there. I forgot, Mr. Bradke joined slightly later. Um. So I'll make a motion that we approve the minutes as they stand. Okay. And Mayor Ramirez?

[01:08:10] Member Lucas Ramirez: I'll 2nd emotion. Thank you.

[01:08:12] Unknown Speaker: Okay. Great. Do we need a roll call on the minutes?

[01:08:20] Takahashi: I would think you probably could, could either do a, by voice, voice boat or?

[01:08:24] Unknown Speaker: Okay, all in favor? Raise your hand or? I will be sure my vote gets counted this time. Any opposed? Okay, seeing none. It's unanimous approval. There and we're ready to adjourn. If there's nothing else coming forward. Mr. Takahashi.

[01:08:46] Takahashi: Just one more, I just wanted to uh, confirm, I think, uh, we have our uh, celebration uh, uh, next week, and I believe are 2 uh, uh, members, Stephen and uh, uh, are going to be there. So hopefully we will see you next week at the city event. Yeah,

[01:09:04] Unknown Speaker: fantastic. We

[01:09:06] Stephen: will be there, thank you.

[01:09:08] Takahashi: Yeah, we haven't had a chance recently to have those in person events, so it'll be great to see you guys in person.

[01:09:14] Unknown Speaker: Yeah, definitely.

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