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Developing A Plan: Preliminary Inputs To The Investment Program. February 2006 CSMFO Annual Conference Kay Chandler, CFA. Establish Policy Objectives, Constraints. Evaluate Plan and Execution, Changes. Identify Strategies, Benchmarks. Execute the Plan.

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slide1

Developing A Plan:PreliminaryInputs To The Investment Program

February 2006

CSMFO Annual Conference Kay Chandler, CFA

the cycle of portfolio management

Establish Policy

Objectives,

Constraints

Evaluate Plan and

Execution,

Changes

Identify Strategies,

Benchmarks

Execute the Plan

The Cycle of Portfolio Management
objectives constraints policy

Establish Policy

Objectives,

Constraints

Evaluate Plan and

Execution,

Changes

Identify Strategies,

Benchmarks

Execute the Plan

Objectives + Constraints = Policy
establishing objectives
Establishing Objectives
  • Safety—maintain appropriate level of exposure to risk
  • Liquidity
    • Sufficient short-term investments
    • Marketable securities
    • Targeted maturities
    • Extra layer
  • Yield (Return,Growth)
    • Income
    • Long-term growth
safety the relationship between risk and return1
Safety: The Relationship Between Risk and Return

Market Risk

Higher Duration Portfolios Have Greater Volatility of Return

safety assuming credit risk can improve returns
Treasuries are the safest, considered to have ZERO credit risk

Federal agency securities considered next safest

AAA and AA

A

No credit research necessary

Monitor agency news, rating agency actions

Understand the business—risks and opportunities; monitor news and rating agency watch lists

With greater diligence--understand the business—risks and opportunities; monitor news and rating agency watch lists. Be quick to act on credit changes

Safety: Assuming Credit Risk Can Improve Returns

…When resources are available to monitor credit quality appropriately.

slide8

Liquidity: Having cash when you need it.

  • Liquidity risk (I)

1. The risk that the portfolio won’t provide adequate cashflow for the agency

      • Match maturities to known cash needs
      • Prepare cash flow forecasts
      • LAIF
      • Readily marketable securities
      • Extra layer of short-term investments
slide9

Liquidity: Having cash when you need it.

  • Liquidity risk (II)

2. The risk that a security is not readily marketable, that is, can’t be sold, if necessary, at a good price

      • Often measured by the difference between the price at which you can buy (offer or ask) and the price at which you can sell (bid)
      • Treasuries, large agency issues, large corporate issues are most liquid
      • Small issue sizes, securities with unusual features, are least liquid
yield developing investment strategies

Establish Policy

Objectives,

Constraints

Evaluate Plan and

Execution,

Change

Identify Strategies,

Benchmarks

Execute the Plan

Yield: DevelopingInvestment Strategies
yield strategy two components for liquidity and growth
Liquidity Component

Meets specific liquidity needs

Invests in short-term securities

Average maturity short

Very low volatility

Cash flow matching

LAIF

Growth Component

Targeted to highest suitable duration

Longer-term securities

Normally not used for liquidity, but invested in highly marketable securities, in case

Greater volatility

Total Portfolio

Growth

Liquidity

Yield Strategy: Two components for Liquidity and Growth
passive management
Passive Management
  • Buy and Hold
    • Money is invested when it is available to a date when cash is needed.
    • There is no further activity with that investment, except for reinvestment of income
  • Maturity Ladder
    • Funds are invested in equal amounts to staggered maturity dates
    • When securities reach maturity, the funds are reinvested into the longest permitted maturity
active portfolio management
Active Portfolio Management
  • Creating and maintaining a portfolio structure with acceptable exposure to risk.
  • Striving to achieve a “better” return using one or more of the following strategies:
    • Duration management
    • Yield curve placement
    • Sector weighting decisions
    • Individual security selection
    • Timing
  • Relative to a chosen market benchmark, or to some other comparative measure
resource for public fund investing in california
Resource for Public Fund Investing in California

CALIFORNIA PUBLIC FUND

INVESTMENT PRIMER

Published by the State Treasurer

California Debt and Investment Advisory Commission

http://www.treasurer.ca.gov/cdiac/invest/primer.pdf

on to plan execution and evaluation

Establish Policy

Objectives,

Constraints

Evaluate Plan and

Execution,

Change

Identify Strategies,

Benchmarks

Execute the Plan

On to Plan Execution and Evaluation