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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 42 42 401(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 Bridgebay Improve Your Yield and Invest in America SM Investment Consulting Services 43 43 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 44 44 Bridgebay 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) 45 45 Bridgebay 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 46 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 47 47 Bridgebay 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 48 48 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) 49 49 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 50 50 Bridgebay 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 51 51 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 52 52 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 53 53 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” 54 54 Bridgebay SM 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 55 Bridgebay Improve Your Yield and Invest in America SM Investment Consulting Services 56 56