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Investment Options for Illinois
Community Colleges in Today’s Market
ICCCFO Conference
October 13, 2016
222 N. LaSalle, Suite 910
Chicago, IL 60601
www.pfm.com
© 2015 PFM Asset Management
Agenda
I.
Current Economic and Interest Rate Environment
II. Investment Options Permitted Under the Illinois Public
Funds Investment Act
III. Implementation of Applicable Investment Strategies
IV. CFOs’ Economic and Interest Rate Forecasts
© 2016 PFM Asset Management LLC
1
Current Economic and
Interest Rate Environment
Current Market Themes
 Moderate U.S. economic conditions:
– Lackluster GDP growth rate
– Labor market approaching full employment
– Inflation picking up, but still below target
 Treasury yield curve remains flat by historic standards,
although rates ended the third quarter significantly higher
 Central banks continue to accommodate markets
 Global headwinds have dissipated
© 2016 PFM Asset Management LLC
3
U.S. Economy on Moderate Growth Track

U.S. GDP growth increased at an annual rate of 1.4% in the second quarter of 2016, according to the Bureau of
Economic Analysis; this was revised up from 1.1%, but still paints the same picture of moderate growth in the U.S.

Second quarter GDP reflected positive contributions from personal consumption, which contributed the most to GDP
since the 4th quarter of 2014; business investment detracted from GDP for the third quarter in a row, the most since the
2nd quarter of 2009, amid a significant decline in inventories
QoQ % Change; Seasonally Adjusted Annualized Rate
U.S. Real GDP
6.0%
Bloomberg
Survey of
Economists
5.0%
4.0%
3.0%
3.0%
2.5%
2.0%
1.3%
1.4%
1.0%
0.0%
-1.0%
2012
2013
2014
2015
2016
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
-2.0%
2017
Source: Bureau of Economic Analysis; Bloomberg survey results as of 10/03/16. Orange is average over last 12 months.
© 2016 PFM Asset Management LLC
4
Labor Market Nears Full Employment

The U.S. labor market added 156,000 jobs in September, short of the 172,000 expectations, while the prior month’s number
was revised up to 167,000

Both the unemployment rate and labor force participation rate ticked up 0.1% to 5.0% and 62.9% respectively, suggesting
that more people are re-entering the work force as the labor market approaches full employment

Average hourly earnings inched up by 0.2% in August while rising 2.6% year-over-year
Monthly Change in Nonfarm Payrolls
Unemployment Rate
Nonfarm Payrolls
10.0%
12-Month Moving Average
350K
9.0%
300K
8.0%
250K
7.3%
200K
7.0%
150K
6.0%
6.0%
100K
5.1%
5.0%
5.0%
50K
Sep '16
Mar '16
Sep '15
Mar '15
Sep '14
Mar '14
Sep '13
Mar '13
Sep '12
Mar '12
Sep '11
Sep '16
Mar '16
Sep '15
Mar '15
Sep '14
Mar '14
Sep '13
Mar '13
Sep '12
Mar '12
4.0%
Sep '11
0K
Source: Bureau of Labor Statistics, as of 10/07/16
© 2016 PFM Asset Management LLC
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Inflation Rising Slowly

The core personal consumption expenditures (“PCE”) price index, the Fed’s preferred gauge of core inflation, inched up to
1.7% year-over-year through August, but continues to undershoot the 2.0% target

Some regional Fed Presidents, such as Cleveland’s Mester and Richmond’s Lacker, have urged for a pre-emptive interest
rate increase to prevent the economy from overheating, stating that “the Fed should be looking ahead and not just waiting”
Inflation Measures
Consumer Price Index vs. Personal Consumption Expenditures
Core CPI
Core PCE
Fed's Long Term Inflation Target
3.0%
YoY % Change
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Aug '06
Aug '07
Aug '08
Aug '09
Aug '10
Aug '11
Aug '12
Aug '13
Aug '14
Aug '15
Aug '16
Source: Bloomberg as of 08/31/2016
© 2016 PFM Asset Management LLC
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Economic Backdrop: Areas of Weakness
ISM Manufacturing PMI
Capacity Utilization
60
80
78
55
76
Expansion
50
Contraction
45
Sep '11
Sep '12
Sep '13
Sep '14
Sep '15
Sep '16
72
Aug '11
Construction Spending YoY
Aug '12
64.5%
12%
64.0%
8%
63.5%
4%
63.0%
0%
62.5%
Lowest Since 2011
-4%
Aug '11
Aug '12
Aug '13
Aug '14
Aug '15
Aug '13
Aug '14
Aug '15
Aug '16
Labor Force Participation Rate
16%
(SAAR)
Lowest Since 2010
74
Lowest Since 1977
Aug '16
62.0%
Aug '11
Aug '12
Aug '13
Aug '14
Aug '15
Aug '16
Source: Bloomberg. As of 09/30/16. SA is seasonally adjusted.
© 2016 PFM Asset Management LLC
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Economic Backdrop: Areas of Strength
Total U.S. Job Openings
Consumer Confidence
7
120
Highest Since 2007
Record High
100
Millions (SA)
6
80
5
60
4
40
3
2
Jul '11
20
Jul '12
Jul '13
Jul '14
Jul '15
Jul '16
0
Sep '11
Sep '12
New Home Sales
Sep '13
Sep '16
20
Highest Since 2007
Near Record High Levels
18
Millions (SA)
600
Thousands (SA)
Sep '15
Total U.S. Auto Sales
700
500
400
300
200
Aug '11
Sep '14
16
14
12
Aug '12
Aug '13
Aug '14
Aug '15
Aug '16
10
Sep '11
Sep '12
Sep '13
Sep '14
Sep '15
Sep '16
Source: Bloomberg. As of 09/30/16. SA is seasonally adjusted.
© 2016 PFM Asset Management LLC
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U.S. Equities Near Record Highs
Cumulative 5-Year Total Return in Key U.S. Equity Indices
S&P 500
Dow Jones
NASDAQ
160%
140%
Total Return as of 09/30/16
120%
100%
80%
Year-to-Date
5-Year
(Annualized)
S&P 500
7.8%
16.4%
Dow Jones
7.2%
13.8%
NASDAQ
7.2%
18.7%
Index
60%
40%
20%
0%
-20%
Sep '11
Sep '12
Sep '13
Sep '14
Sep '15
Sep '16
Source: Bloomberg, as of 09/30/16
© 2016 PFM Asset Management LLC
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U.S. Treasury Yields

Treasuries have had a rough ride so far this year: Yields fell to begin the year amid concerns over China’s slowing economy;
a dovish Fed in March led to a decline in yields, before recovering following the April meeting’s minutes and stronger
economic data – yields fell substantially again following the Brexit vote, but have since stabilized as fears abated and
investors looked ahead to a possible rate hike by year-end
Yield History Past 12 Months
2-Year Treasury
5-Year Treasury
10-Year Treasury
2.50%
2.00%
1.50%
1.00%
0.50%
Sep '16
Aug '16
Jul '16
Jun '16
May '16
Apr '16
Mar '16
Feb '16
Jan '16
Dec '15
Nov '15
Oct '15
Sep '15
0.00%
Source: Bloomberg, as of 09/30/16
© 2016 PFM Asset Management LLC
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U.S. Treasury Curve Remains Flat

Longer maturity yields have fallen substantially this year over concerns about global growth and higher global demand for
U.S. Treasuries given negative yields abroad

On the shorter end of the curve, rates continued to rise in September, as market expectations for a rate hike this year inched
up following speeches by regional Fed officials and the FOMC seeing a stronger case for increasing rates by year-end
Yield Curve History
U.S. Treasury Yield Curve
September 30, 2016
September 30, 2015
09/30/16
09/30/15
1-Mo.
0.19
-0.02
3-Mo.
0.28
-0.02
6-Mo.
0.43
0.07
1-Yr.
0.59
0.31
2-Yr.
0.76
0.63
3-Yr.
0.88
0.90
5-Yr.
1.15
1.36
7-Yr.
1.42
1.74
10-Yr.
1.60
2.04
30-Yr.
2.32
2.85
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
361 2 3
mmy y y
5
y
7
y
10
y
15
y
20
y
30
y
Source: Bloomberg
© 2016 PFM Asset Management LLC
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CP / CD Offer Wide Yield Spread over Treasuries

Yields on Commercial Paper and negotiable bank CDs remain very attractive alternatives to Treasury Bills and short-term
Agencies; money market reforms, effective 10/14/2016, have driven spreads apart: yields on these government securities
fell due to increased demand while CP yields kept rising as investors continued to move from prime to government money
market funds
Money Market Yield Curves
September 30, 2016
1.60%
CD/CP Range
1.40%
1.20%
Very wide
spreads
Yield
1.00%
0.80%
Federal
Agencies
0.60%
0.40%
U.S. Treasuries
0.20%
0.00%
1
2
3
4
5
6
7
Maturity in Months
8
9
10
11
12
Source: Bloomberg, PFMAM. Information on CD/CP ranges are estimates based on independently compiled data. CP/CD rates vary by issuer, credit quality and structure.
© 2016 PFM Asset Management LLC
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Investment Options Permitted Under the
Illinois Public Funds Investment Act
Investments Currently Allowed by State Statutes
Investment Type
Allowed By the Illinois Public Funds
Investment Act
U.S. Treasury Obligations
Yes
Federal Agency Obligations
Yes
Agency Mortgage-Backed Securities
Yes
Government Money Market Funds
Yes
Repurchase Agreements
Yes
FDIC-Insured Certificates of Deposit
Yes
Negotiable Certificates of Deposit
Yes
Municipal Bonds
Yes. Must be rated within the four highest
general classifications.
Commercial Paper
Yes. No more than 1/3 of the portfolio.
Must also be rated within the three highest
general classifications.
Short-Term Corporate Bond Funds
Yes
Local Government Investment Pools
Yes
© 2016 PFM Asset Management LLC
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Value Added Through Diversification in the Portfolio
Sample Diversified Portfolio Asset Allocation*
Commercial
Paper
20%
MBS
5%
Municipals
5%
Treasuries
15%
Agencies
15%
Short-Term
Corporate
Bond Fund…
CDs
15%
Agency
Floaters
5%
Callable
Agencies
10%
* Sample diversified portfolio asset allocation is within the Illinois Public Funds Investment Act
© 2016 PFM Asset Management LLC
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1 – 3 Year Index Returns by Sector
1-3 Year Index1Returns
– 3 Year Index Returns
Year-to-Date (12/31/15 - 10/07/16)
k (09/30/16 - 10/07/16)
U.S. Treasury
1.16%
Agency
1.17%
Corp A-AAA
1.97%
Corp AAA
1.43%
Corp AA
1.76%
Corp A
2.05%
Corp BBB
%
3.51%
MBS 0 - 3
0.02%
1.46%
ABS 0 - 3
%
1.54%
Taxable Municipals
0.00%
Return
0.50%
1.00%
0.00%
2.64%
0.50%
1.00%
1.50%
2.00% 2.50%
Return
3.00%
3.50%
4.00%
Source: Bank of America Merrill Lynch
© 2016 PFM Asset Management LLC
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Implementation of Applicable
Investment Strategies
CP / CD Offer Wide Yield Spread over Treasuries

Yields on Commercial Paper and negotiable bank CDs remain very attractive alternatives to Treasury Bills and short-term
Agencies; money market reforms, effective 10/14/2016, have driven spreads apart: yields on these government securities
fell due to increased demand while CP yields kept rising as investors continued to move from prime to government money
market funds
Money Market Yield Curves
September 30, 2016
1.60%
CD/CP Range
1.40%
1.20%
Very wide
spreads
Yield
1.00%
0.80%
Federal
Agencies
0.60%
0.40%
U.S. Treasuries
0.20%
0.00%
1
2
3
4
5
6
7
Maturity in Months
8
9
10
11
12
Source: Bloomberg, PFMAM. Information on CD/CP ranges are estimates based on independently compiled data. CP/CD rates vary by issuer, credit quality and structure.
© 2016 PFM Asset Management LLC
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The Benefit of “Roll Down”
U.S. Treasury Yield Curve
October 6, 2016
1.50%
1.28%
Total Return = Income + Market Appreciation
1.20%
Total Return = 1.18% + 0.55% = 1.73%
1.18%
0.99%
0.90%
0.85%
As securities age, they are re-priced along
the yield curve. That “roll down” enhances
return, especially for longer maturities.
0.64%
0.60%
0.32%
0.30%
0.00%
Liquidity
1 Year
2 Year
3 Year
4 Year
5 Year
Maturity
© 2016 PFM Asset Management LLC
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Be Wary of Callable Securities
“I’ve got an October 2022 FNMA for
you. It has a Yield-to-Maturity of
2.24% and a Yield-to-Call of 1.40%.
This will go fast.”
© 2016 PFM Asset Management LLC
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When Does a Security Get Called?

The issuer will always act in their own best interest – which will be
to the investor’s detriment
Possible
Outcome
Why?
Agency gets
called
Rates are
lower
Investor is forced to
reinvest, but now at
lower yields.
Rates are
higher
Investor retains
ownership, locked in until
maturity, but in a market
environment where rates
are now higher (and they
wish they did not own it).
Agency does
not get called
Impact on Investor
Investor
loses
either way
Question: “Was it worth the small amount of extra yield?”
© 2016 PFM Asset Management LLC
21
Investment Strategy Considerations

Setting the target duration of the portfolio is a critical component of the
investment strategy

Duration is often the greatest determinant of the expected rate of return
and volatility of a fixed income portfolio
Duration
©©2015
2016PFM
PFMAsset
AssetManagement
Management LLC
Sector
Allocation
Issue
Selection
22
Benchmark Consideration
Risk/Return of Various Benchm arks
10 Years Ended 6/30/2016
Merrill Lynch Index
Duration
Average
Annual
Cum ulative
Quarters With
Value of
Negative
Return
$125,000,000
Returns
3-Month Treasury Bill
0.25 Years
1.03%
$138,458,130
0 out of 40
6-Month Treasury Bill
0.50 Years
1.40%
$143,682,765
0 out of 40
1 Year Treasury Index
0.99 Years
1.68%
$147,747,441
5 out of 40
1-3 Year Treasury Index
1.90 Years
2.47%
$159,545,791
6 out of 40
1-5 Year Treasury Index
2.74 Years
3.23%
$171,844,343
10 out of 40
1-10 Year Treasury Index
3.89 Years
4.17%
$188,213,676
11 out of 40
* Source: Bloomberg, Bank of America / Merrill Lynch Indices
© 2016 PFM Asset Management LLC
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Disclaimers
This material is based on information obtained from sources generally believed to be reliable and available to the public; however,
PFM Asset Management LLC (PFMAM) cannot guarantee its accuracy, completeness, or suitability. This material is for general
information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will
or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation.
Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our
control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a
guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.
This presentation is only intended for institutional and/or sophisticated professional investors. This material is intended for
informational purposes only and should not b relied upon to make an investment decision, as it was prepared with out regard to any
specific objectives or financial circumstances. It should not be construed as an offer to purchase/sell any investment. Any investment
or strategy referenced may involve significant risks, including but not limited to risk of loss, illiquidity, unavailability within all
jurisdictions, and may not be suitable for all investors. To the extent permitted by applicable law, no member of the PFM Group, or
any officer, employee, or associate accepts any liability whatsoever for any direct or consequential loss arising from any use of this
presentation or its contents, including for negligence. This material is not intended for distribution to, or use by, any person in a
jurisdiction where delivery would be contrary to applicable law or regulation, or it is subject to any contractual restriction. No further
distribution is permissible without prior consent.
The views expressed within this material constitute the perspective and judgment of PFMAM at the time of distribution and are
subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income
markets are based upon current opinion as of the date if issue, and are also subject to change. Opinions and data presented are not
necessarily indicative of future events or expected performance. Information contained herein is based on data obtained from
recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. No representation is
made as to its accuracy or completeness.
© 2016 PFM Asset Management LLC
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Economist Survey Forecasts
Actual
U.S. Indicator
Forecast
Q4-15
Q1-16
Q2-16
Q3-16
Q4-16
Q1-17
Q2-17
GDP QoQ % (saar)
0.9
0.8
1.4
2.9
2.4
2.1
2.2
CPI YOY %
0.5
1.1
1.0
1.2
1.6
2.1
2.1
Core PCE YOY %
1.4
1.6
1.6
1.6
1.8
1.7
1.8
Unemployment Rate %
5.0
4.9
4.9
4.9
4.8
4.7
4.7
Budget % of GDP
-2.6
-2.5
-2.8
-2.9
-2.9
-3.1
-2.8
Fed Funds Target Rate
0.50
0.50
0.50
0.50
0.70
0.75
0.90
3-Month LIBOR
0.61
0.63
0.65
0.85
0.89
0.98
1.11
2-Year Treasury
1.05
0.72
0.58
0.76
0.92
1.01
1.11
10-Year Treasury
2.27
1.77
1.47
1.60
1.76
1.84
1.95
Source: Bloomberg Survey of Economists. As of 10/03/2016.
© 2016 PFM Asset Management LLC
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