LGIP Quarterly Newsletter |
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| Market Summary |
ince our last
market summary on April 27, the financial markets have continued to focus on the
strength of the domestic economy. The long awaited slowdown has not materialized
and, although they maintain a neutral bias, the FOMC is vigilant and ready to raise rates
at any indication of inflationary pressures.
April’s Consumer Price Index rose 0.7%, the largest gain in the core since January 1995. Although this was not enough to cause the FOMC to raise rates at their May 18 meeting, they did announce that the Fed had moved to a tightening bias. Rates continued to rise in expectation of a Fed tightening, which did occur at the June 30 meeting. The targeted federal funds rate now stands at 5.00%, up 25 basis points since our last update.
Although the Fed announced a neutral bias at the June 30 meeting, in the July Humphrey-Hawkins address to Congress, Chairman Greenspan left little doubt that the Fed would tighten again this year if they perceived inflationary risks. They will be focusing on two economic measures: the employment report and the retail sales report. These reports give the Fed a good indication of the tightness in the labor market and consumer demand. The markets interpreted the Chairman’s testimony as hawkish and that the Fed would tighten again at their next meeting on August 24.
Since our last update, the yield curve has continued to steepen with yields rising 17 to 64 basis points across the curve, as shown in the Historical Yield Curve graph (see Figure 1, below). Throughout this period, the Dow Jones Industrial Average rallied to close at 11,209 on July 16 but has been unable to remain above 11,000, closing at 10,979 on July 27.
The net return on the LGIP during the second quarter of 1999 ranged from 4.76% to 4.82%. The LGIP has maintained a defensive stance due to the threat of the Fed tightening. Since this threat is still imminent, the LGIP is positioned to re-price quickly in response to a Fed move.
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| Summary of Advisory Committee Meeting |
he
LGIP Advisory Committee met on June 11, 1999, in the State Treasurer’s Office in
Olympia. A brief discussion of the LGIP returns for the last quarter was
given. The net return of the LGIP versus the Donoghue benchmark has been very solid
and outperformed the benchmark by 50 basis points. The LGIP is maintaining a
defensive stance due to the threat of the Fed tightening on June 30 and is positioned to
re-price quickly in response to a Fed move.
A brief update of the Treasury Management System (TM$) project was given. Phase 1 was completed as scheduled and within the budget allotment. Phase 2 is scheduled to begin in November 1999. Advisory committee members inquired as to specific information that could be accessed from the Web-client.
A brief history was given regarding the Request for Proposal (RFP) process for selection of a firm to perform the LGIP independent audit. Three proposals were received. A committee appointed by the Treasurer will evaluate these proposals and make a recommendation as to which firm should be selected. Cristin Wilson, Stan Finkelstein, and Dick Hughes agreed to serve on the review committee.
A brief update on the Intermediate Investment Pool was given. A chart was distributed to committee members, which compared the total return portfolio with the LGIP. There is potential for loss of principal with the intermediate fund. The size of the intermediate fund would directly affect the administrative fee that would be charged. On a net basis, the intermediate fund may not outperform the LGIP, with its low fee of 3.5 basis points.
A brief update on the statewide custody contract legislation was given and the survey questionnaire was reviewed. The survey will be sent to potential participants to ascertain interest and desired services. The deadline to return completed surveys is July 9, 1999. Input from the surveys will be used to develop the RFP.
The proposed changes to the LGIP Investment Policy were reviewed. It was agreed to increase the maximum amount for Commercial Paper and Bankers Acceptances to 25% and 20%, respectively, of the total daily portfolio balance. It was also agreed that the aggregate amount for Commercial Paper and Bankers Acceptances not exceed 35% of the portfolio.
The proposed change to the month-end processing was explained which would involve performing month-end operations on the first business day of the month rather than the last day of the month. This procedural change will prevent inaccurate earnings calculations, therefore, interest allocation would be based on actual deposits, not expected deposits. Committee members agreed that this would be more efficient, and notification of this change will be sent to all LGIP participants.
It was agreed that e-mail be used to more efficiently communicate with advisory committee members regarding meeting minutes, meeting notifications, agendas and RSVPs.
| LGIP Holiday Schedule for 1999 |
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| WFOA 1999 Public Finance Track “Seeds for the Future” |
he
Washington Finance Officers Association (WFOA) is having its annual conference in Yakima,
Washington, from September 21-24. The Office of the State Treasurer is coordinating
the Public Finance track for the conference. In addition to the other educational
opportunities at the conference, below are the classes slated for the Public Finance
Track:
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| Wednesday, September 22 |
Thursday, September 23 |
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| Local Government Investment Pool |
It Is Not Your Parent’s Business
Cycle |
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| Basics of Investing |
Fixed Income Investment Options |
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| Eligible & Appropriate
Investments |
Investment Analysis |
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| Custody Issues |
Investment Analysis (part 2) |
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| Active Portfolio Management |
Lease Option Capital Asset Lending |
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| Cash Management |
Debt Policies |
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| Cash Management (part 2) | Debt Issuance |
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Washington State Local Government
Investment Pool
Position and Compliance Report
as of June 30, 1999
LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 937,462,000 28.44% U.S. Treasury Securities 203,287,259 6.17% U.S. Agency Bullets 119,982,187 3.64% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 1,665,392,849 50.55% Certificates of Deposit 46,700,000 1.38% Banker’s Acceptances ------ 0.00% Commercial Paper 323,749,390 9.82% Reverse Repos ------ 0.00% *Total Excluding Security Lending $ 3,296,573,685 100.00% Security Lending Holdings
Cost Repurchase Agreements $ ------ Banker’ Acceptances ------ Commercial Paper ------ Bonds Borrowed 94,418,750 Total Security Lending $ 94,418,750 Total All Assets
$ 3,390,992,435 Policy Limitations
The policy limitations include investment of cash collateral by a securities lending agent calculated as percentages of the portfolio holdings Total Excluding Security Lending.*
Size Limitations Holdings Percentage
of PortfolioPolicy Limitations
PercentageCertificates of Deposit $ 46,700,000 1.42% 10% Banker’s Acceptances (BA) ------ 0.00% 20% Commercial Paper (CP) 323,749,390 9.82% 25% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days ------ 0.00% 30% Aggregate BA & CP Holdings $ 323,749,390 9.82% 35%
Leverage (30% total Limit)Securities on Loan (dollars out on loan) $ 94,418,750 Reverse Repos ------ Total Leverage $ 94,418,750 2.86%
Maturity Limitations Currently Policy Limitations Portfolio Average Life 50 days 90 days Maximum Maturity 336 days 397 days Maximum Maturity of Repo 19 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 0 days 14 days
Repo Limits Per Dealer June 30, 1999 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
07/01/1999Projected
Position
07/01/1999BancAmerica $ 222,462,000 7% 0% $ 222,462,000 ------ Bear Stearns & Co. ------ 0% 0% ------ ------ CS First Boston ------ 0% 0% ------ ------ Chase ------ 0% 0% ------ ------ DLJ 200,000,000 9% 0% 290,000,000 ------ HSBC Markets ------ 0% 0% ------ ------ Lehman Brothers Inc. ------ 0% 0% ------ ------ Merrill Lynch Pierce Fenner 290,000,000 9% 0% 290,000,000 ------ Morgan Stanley ------ 0% 0% ------ ------ Paine Webber Inc. ------ 0% 0% ------ ------ Prudential Securities ------ 0% 0% ------ ------ SalomonSmith Barney 225,000,000 7% 7% ------ $ 225,000,000 State Street Bank ------ 0% 0% ------ ------ Total $ 937,462,000 $ 712,462,000 $ 225,000,000
Issuer Limitations
**Commercial Paper Cost Percentage
(5% limit)Rating
(A1/P1 or Better)Altair Funding $ 24,881,236 0.8% A1+/P1 Variable Funding 69,758,078 2.1% A1/P1 Park Avenue Rec 64,744,694 2.0% A1/P1 Bavaria TRR Corp 24,919,340 0.8% A1+/P1 Corp Rec Corp 24,905,688 0.8% A1+/P1 Bavaria Univ Funding 64,735,576 2.0% A1+/P1 Corp Asset Funding 49,804,778 1.5% A1+/P1 Total
$ 323,749,390 Banker’s Acceptances No Banker’s Acceptance holdings as of 06/30/1999.
** These are the limitations of the formal Investment policy. However, operating guidelines place limits of 3% per issuer.
Local Government Investment Pool
STATEMENT OF NET ASSETS
June 30, 1999
Assets Investments, at amortized cost:
Securities purchased under agreements to resell$ 937,462,000 U.S. Agency securities 1,785,375,037 U.S. Treasury securities 203,287,259 Commercial Paper 323,749,390 Total excluding Securities Lending &
Securities Purchased But Not Settled$ 3,249,873,686 Securities Lending Investments, at amortized cost: ------ Total Securities Lending ------ Total Investments (Settlement Date Basis) $ 3,249,873,686 Due from Brokers - Securities Purchased But Not Settled, at amortized cost: U.S. Agency securities 397,229,083 Total Due from Brokers $ 397,229,083 Total Investments (Trade Date Basis) 3,647,102,769 Certificates of Deposit 46,700,000 Cash 1,841,215 Interest receivable 10,105,095 Total Assets
$ 3,705,749,079 Liabilities Accrued expenses $ 197,937 Obligations under securities lending agreement ------ Due to Brokers 397,229,083 Total Liabilities
$ 397,427,020 Net Assets $ 3,308,322,059 Participant Net Asset Value, Price per Unit $ 1.00 Total Amortized Cost - Settlement Date Basis $ 3,296,573,686
| Total investment purchases:* | $ | 18,064,229,795 | ||
| Total investment sales: | $ | 671,812,357 | ||
| Total investment maturities: | $ | 17,213,033,178 | ||
| Total net income: | $ | 41,507,011 | ||
| Net of realized gains and losses: | $ | 61,155 | ||
| Net Portfolio yield (360-day basis): | ||||
| April | 4.8196% | |||
| May | 4.7642% | |||
| June | 4.7736% | |||
| Average weighted days to maturity: | 50 days | |||
* Includes $397,229,083.34 in securities purchased but not settled.
| Net Rate of Return Fiscal Years 1995 – 1999 (to date)  |
Average Net Rate of Return of Government Only/Institutional Only Money Market Funds, Money Market Insight, IBC Donoghue, Inc., Ashland, MA
NOTE: Rates are calculated on a 360-day basis.
The above comparison shows how the LGIP has performed relative to its benchmark since July 1994. This benchmark is the IBC Donoghue Government Only/Institutional Only Money Market Funds, which is comprised of privately managed money market funds similar in composition and investment guidelines to the LGIP.
The LGIP net rate of return has outperformed its benchmark since July 1994 by an average of 44.5 basis points. This translates into the LGIP earning $45.86 million over what the average comparable private money fund would have generated.
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© 1999 [Updated: August 13, 1999] |
