Download Finding Value Beyond Money Market Instruments

Bridgebay
SM
Investment Consulting Services
Finding Value Beyond
Money Market Instruments
October 20, 2011
Nancy Mar
Senior Treasury Analyst
Alt
Altera
C
Corporation
ti
Linda Ruiz-Zaiko
Bridgebay
IInvestment
t
t Consultant
C
lt t Services
S
i
www.bridgebay.com
925-743-0200
1
Scott Warner
VP - Senior Portfolio
M
Manager
Northern Trust
Where to Find Value beyond MMF?
Nancy Mar, Ph.D.
Altera Treasury
© 2011 Altera Corporation
Overview of Altera Corporation
A market leader in the development of programmable logic
d i
devices
Headquartered in San Jose, CA
Employs ~ 2,600
2 600 people worldwide
Annual revenue of $2.17B and total cash of $3.27B as of July
1, 2011




Where can a firm, such as Altera, find value beyond the MMF universe?
© 2011 Altera Corporation
2
Questions to Ask Yourself First…
1. Disregarding yield, where is the value in MMF?
2. Are Money Market Funds actually “safe”?
3 How are they compatible with the “cardinal rules” of
3.
Treasury, i.e., preserve capital and ensure liquidity?
© 2011 Altera Corporation
3
Value in Money Market Funds




Satisfy operational cash needs
Relatively simple to maintain in a “normal”
economic environment
High levels of overnight and 7-day liquidity
Subject to SEC regulations
 Reactive regulatory body
© 2011 Altera Corporation
4
Disadvantages/Risks in Money Market Funds

Disadvantages
 Relatively
y costlyy with typical
y
expense ratios of 15-20 bps
 A MMF that “breaks the buck” leads to a breaking of the cardinal rules
of corporate treasury
 Current economic environment requires frequent due diligence
reviews of portfolio holdings

Risks
 C
Capital Preservation
 Lack of real time transparency in holdings
 No control over investment guidelines/policy
 No
N control
t l over credit
dit approved
d lilists
t
 All assets reported at amortized cost—any indicative unrealized losses
are “hidden”
 Liquidity
Li idit
 Generally highly liquid, but….
 Subject to the actions of all other investors
 A “run”
run would lead to high illiquidity
illiquidity—no
no control
 Always want to be in front of the “herd”, but impossible to time
© 2011 Altera Corporation
5
So where can we find value?
© 2011 Altera Corporation
6
© 2011 Altera Corporation
7
VALUE CANNOT BE MEASURED
IN DOLLARS ALONE!
© 2011 Altera Corporation
8
Separately Managed Accounts


External Managers
In-house Managed
© 2011 Altera Corporation
9
Advantages of Separately Managed Accounts

Capital Preservation
 Real time transparency
 Control over investment guidelines/policy
 Set
S t duration
d ti and
d maximum
i
lif
life
 Create operational cash, strategic cash and/or core cash portfolios
depending on cash flows
 Set asset allocation
 Set allowable investments
 Some control over credit approved list via established guidelines
 e.g. Explicitly prohibit certain issuers
© 2011 Altera Corporation
10
Advantages of Separately Managed Accounts

Liquidity
 Liquidity profile determined by client
 Not subject to the actions of all other investors
 No fire sales of securities necessary to satisfy mass redemptions
 Securities are allowed to mature out of the portfolio
© 2011 Altera Corporation
11
External Managers
Additional Benefits

Access to credit research and expertise
p
of p
portfolio managers
g

Assets are in the name of the client and cannot be seized in
the event of default of management firm

Investment Managers have a fiduciary responsibility to the
client

Potentially less costly than MMF due to tiered pricing structure
of investment managers

Higher yield relative to MMF since guaranteed overnight
liquidity is not required
© 2011 Altera Corporation
12
In-house Portfolio Management

Advantages
d a tages
 Total control
 No fees

Disadvantages
 Requires some in-house expertise
 Requires development of credit approved list
 Maintenance and periodic review are necessary
y time consuming
g
 Potentially
© 2011 Altera Corporation
13
Disadvantages of Separately Managed
A
Accounts
t

Hi hl d
Highly
dependent
d t on risk
i k ttolerance
l
off B
Board
d
 Guidelines reflect risk tolerance

Accounting becomes more complicated
 External/SEC reporting considerations
 FAS 157 implications
 Potential FAS 115-2 issues
 Impact to AOCI

Additional fees from custodial bank and external
consultants if contracted to run RFP processes in
finding custodian and managers
© 2011 Altera Corporation
14
Necessary Infrastructure

Custodial bank
 To safeguard assets
 Client assets are separate from the bank’s balance sheet
 To settle trades
 To p
provide accounting
g information,, reporting,
p
g, compliance
p
checks,,
portfolio analytics and risk assessment
 Bank’s platform or other service provider (e.g. Clearwater Analytics)

A internal
An
i t
l iinvestment
t
t committee
itt
 To review guidelines/policy on a periodic basis
 To review internal credit approved list on a periodic basis if running
an in-house
i h
portfolio
tf li

A roster of broker dealers to trade for in-house
portfolio to get best execution and largest selection
© 2011 Altera Corporation
15
Summary
Where can a corporation find value beyond the MMF universe?
Answer: Separately managed accounts
Why?
y
Answer: There is tremendous value in control.
© 2011 Altera Corporation
16
Thank you
Nancy Mar, Ph.D.
Altera Treasury
© 2011 Altera Corporation
NORTHERN TRUST
Fi di
Finding
Value
V l
B
Beyond
d Money
M
Market
M k t Instruments
I t
t
Current Appropriate Strategies for Customized, Short Duration, Separately Managed Accounts
S
San
FFrancisco
i
Treasury
T
Symposium
S
i
- October
O t b 2011
Scott B. Warner
Senior Portfolio Manager – Enhanced Cash and Ultra Short Funds
[email protected]
312.557.2690
18
Northern Trust Corporation Overview
Founded
F
d d in
i Chicago
Chi
in
i 1889,
1889 Northern
N th
Trust
T
t Corporation
C
ti is
i a global
l b l market
k t leader
l d off
asset management and asset servicing solutions for institutions and private clients.
Focus, stability and progress define us, a claim we support with key measures of success:
Financial strength and stability1
A unique business focus
Corporate & Institutional Services (C&IS)
worldwide institutional investors
Asset
Servicing
Assets under management
US$662 billion
Assets under custody
US$4.4 trillion
Assets under administration2
Asset
Management
Employees3
Personal Financial Services (PFS)
U.S. and European private clients
US$943.8 billion
13, 350
Offices in
20 global locations
Clients in
40+ countries
Tier 1 capital ratio4
S&P long-term debt rating
13.5%
AA-
Selected industry recognition
Best Bank for Pension Solutions Treasury Management International (Dec. 2009)
Investment Management Firm of the Year – Offshore award ACQ Finance Mag (2009)
11th Largest Manager of Worldwide Institutional Assets Pensions & Investments (May 2010)*
Global Custodian of the Year FT Pension & Investment Provider Awards (May 2008 and 2009)
1 As
of March 31, 2011 (updated quarterly) Source: Northern Trust
Includes US$ 135 billion defined contribution funds (as of September 30, 2010) (updated on a quarterly lag basis) Source: Northern Trust
3 Total employees, 13,000 of which are permanent (as of March 31, 2011) (updated quarterly) Source: Northern Trust
4 As of March 31, 2011 (updated quarterly) Source: Northern Trust
2
Rankings based on total worldwide assets under management of $627
$627.2
2 billion as of December 31
31, 2009
2009. The above rankings are not indicative of future performance.
performance Source:
*Rankings
Pensions & Investments 2010 Special Report on Money Managers which appeared in the publication's May 31, 2010 issue and online at www.pionline.com/managers. Ranking
information reprinted with permission.
19
Northern Trust Global Investments
Overview
“Balancing the conflicting demands of liquidity and yield with
risks and opportunities”
 Introduction
Introd ction
Current
Economic Environment and Market Risks
Decisions
Changes
in the Money Market Fund Environment
Spectrum
of Choices in Short-Term Fixed Income
 Portfolio
Considerations
 Portfolio
Strategies in a Low Interest Rate Environment
 Conclusion
20
Facing Investors
and Questions
Northern Trust Global Investments
Bridgebay
SM
Investment Consulting Services
Finding Value Beyond
M
Money
M k t IInstruments
Market
t
t
Linda Ruiz-Zaiko
Bridgebay
I
t
tC
lt t Services
S
i
Investment
Consultant
www.bridgebay.com
925-743-0200
41
Bridgebay
SM
www.bridgebay.com
Investment Consulting Services
Bridgebay Financial, Inc.
Founded in 1987
Registered investment advisor under Investment Advisor Act of 1940
Licensed to provide investment advice
Each consultant has over 25 years experience
Corporate Liquidity
I
Investment
t
t Consulting
C
lti








Strategic investment plans
Investment policy statements
Money manager selection
Manager peer comparisons
Custom benchmarks
Custodian evaluations/searches
Performance evaluation
Attribution analysis
401(k)
( ) Plan Services Consulting
g
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




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
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401(k) plan and performance monitoring
Investment evaluation, analysis, selection
Investment watch list
ERISA 404 ( c ) compliance review
Fiduciary reviews
Benchmark plan costs
Provider searches
C
Committee
itt fiduciary
fid i
education
d
ti
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Improve Your Yield and
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Bridgebay
SM
Municipal Markets
Investment Consulting Services
► Municipal issuance for 2010 ~ $433 B
● 2011 expected ~$200 B
► 2011 municipal bond issuance down across all sectors
● State & county
y issuance down >50%
● Electric power issuance down 69%
● Transportation down 54%
● General purpose down 46%
● Healthcare down 43%
● Utilities down 35%
● Housing
H
i d
down 23%
● Short term notes YTD $16 B down >25%
► Municipal bond fund assets plummeted in December 2010
● Investor panic - Meredith Whitney said expect defaults in 2011
p fund inflows returned 2Q2011
► Municipal
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SM
Municipal Market
Investment Consulting Services
► American Jobs Act of 2011
● $447 billion proposal – surprise
● Limits the tax exemption on municipal bond interest
● From current 35% to 28% for high income taxpayers
● Applies to all municipal bonds, outstanding & newly issued
Beginning in 2013
p bond interest exemption
p
has existed for 98 yyears
● Municipal
● Consensus is that the municipal interest provision is unlikely
● Would raise borrowing costs for cash-strapped issuers
● Increases uncertainty and may cause spreads to widen
► Municipal market is still liquid, active, with stable prices
● Tax treatment change more negatively impact longer maturities
● Impact more mutual funds and crossover buyers
● Municipal yields are more attractive than taxables across the yield curve
(without the tax advantage)
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SM
Investment Consulting Services
High Quality Municipal Bond Sectors
► State
S
&L
Locall G
Generall Obli
Obligations
i
- GOs
GO
● Backed by the Taxing Authority
► Revenue
R
B
Bonds
d
● Essential Services
Electric
El t i & G
Gas
Water & Sewer
● University
U i
it & Hi
Higher
h Ed
Education
ti
● Transportation
► Pre-Refunded
P R f d dB
Bonds
d
● Escrowed to Maturity
46
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Bridgebay
SM
State Budgets
Investment Consulting Services
► State revenues - vulnerable to weak economy
● ~ 40% revenue from income & sales taxes
● Total budget shortfall in 2012 ~$102.9 B
● Largest budget gaps: Illinois, New Jersey, New York, Texas
► States addressed budget gaps
● Spending reserve funds
● Targeted broad-based budget cuts
● Personnel layoffs and pay cuts
● Increased taxes and fees
● Changed pension and retiree health benefits
● Privatized revenue sources
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SM
Investment Research - GOs
Investment Consulting Services
► Official Statement of Bond
● Legal provisions
Unlimited tax GO
Limited – check millage rate
► Review Economics and Demographics of Issuer
● Diverse
Di
economic
i b
base – types off employers
l
● Wealth – Per Capital Income vs. regional / national trends
● Population
P
l ti and
d employment
l
t ttrends
d
● Property tax trends
► Budget
B d t and
d llegislative
i l ti process
► Reserves available
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Bridgebay
Investment Research – GOs
Financial Condition of Issuer
SM
Investment Consulting Services
► General Fund
● Operating surplus / deficit
● Fund balance and trend
● Actual vs.
vs budget,
budget future projections
► Sources of Revenues
● Income,
Income sales / excise,
excise property taxes,
taxes fees,
fees etc
etc.
● Stability or volatility of revenues
● Top tax payers and employers
► Expenses and Liabilities
● Services provided and ability to reduce costs
● Mandatory spending increases and ability to restrict costs
● Pension liabilities and benefits (healthcare)
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Bridgebay
Investment Research – GOs
Debt Levels
SM
Investment Consulting Services
► Debt Burden, Contingent
g
and Unfunded Liabilities
● Outstanding debt and trend
● Debt service as % of budget
● Debt per capita
● Debt / Assessed Value – debt ratio
● Indirect and overlapping debt
● Capital programs and funding plans
● Pension plan funding status
● Unfunded pension liabilities and post-retirement benefits (healthcare)
► Measures to Control Debt
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50
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SM
Credit Research Intensive Bonds
Investment Consulting Services
► Airport revenue
► Housing
H
i
► Healthcare
► Hospital
H
it l
► Lease
► Private
Pi t U
University
i
it
► Pollution Control Revenue
► Special
S
i lA
Assessmentt
► Stadium / Convention Center Revenue
► Tobacco
T b
► Transportation
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Bridgebay
SM
Investment Consulting Services
Investment Research of Revenue Bonds
► Official Statement of Revenue Bond
● Review legal covenants
Limits on additional debt
Rate covenants
Fund flows
Reserve fund requirements
► Financial
● Debt coverage - cashflow
● Debt to capital ratios
a a ce sheet
s eet liquidity
qu d ty ((higher
g e educat
education,
o , healthcare)
ea t ca e)
● Balance
Maintain high cash balances > outstanding debt
p
g margins
g
● Stable operating
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Bridgebay
SM
Investment Consulting Services
Investment Research of Revenue Bonds
► Essential services
● Revenues / expenditures separate from general government operations
● Professional management (not politicized)
● Ability to raise rates and fees per bond covenants
► Regulatory oversight, rate setting ability (utilities)
► Competitive services to issuer (universities, healthcare)
► Frequent and candid disclosures
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Bridgebay
Research Pre-Refunded Bonds
Collateral in Escrow
SM
Investment Consulting Services
► Review escrow document to confirm coupon, maturity, bond series, CUSIP
g y defeased or economicallyy
► Legally
► Amendments require approval of all bondholders
► Revocable or irrevocable escrow
● Irrevocable pledge of collateral to pay bonds at specific dates
p
and distinct escrow from escrow agent
g
and issuer
● Separate
● Bondholders must have perfected lien on escrow account
y verification that deposited securities
► Third party
● Are not “arbitrage bonds” per IRS rules
● Cash flows sufficient to make full / timely payment - interest & principal
► Substitution of original securities only with escrow -eligible
● Need new legal opinion, cashflow analysis, verify not “arbitrage bond”
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Research Pre-Refunded Bonds
Collateral in Escrow
Investment Consulting Services
► Defined Eligible Securities per Escrow
● Non-call US Treasury direct obligations, strips
● Non-call direct, unconditional guaranteed by US Treasury – full and
timely principal and interest payment, strips
● US State
St t and
d Local
L
l Government
G
t Series
S i (SLGS)
● REFCORP – Resolution Funding Corp
► Excluded
E cl ded Sec
Securities
rities
● Money Market Funds, Repos, CDs
● GICs
● Municipal and Pre-refunded Bonds
● Mutual funds
55
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Improve Your Yield and
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