o ffice of the a rizona s tate t reasurer january 16, 2015 gfoaz - january 2015

OFFICE OF THE ARIZONA STATE TREASURER

January 16, 2015

GFOAz - January 2015

ARIZONA STATE TREASURER JEFF DEWIT

AGENDA

What the State Treasurer does.Controls in place. Investing in funds like the LGIP.Advantages of the LGIP.LGIP Performance. Interest rate outlook. Questions?


STATE TREASURER DUTIES

One of six statewide elected officials Serves a term of 4 years, and can be re-

elected once for a total of 8 years in office Third in line in succession to the Governor Manages Arizona’s $13 billion investment

portfolio Fiduciary of taxpayer money Directs the state’s banking services Serves as:

- Chairman of Arizona’s State Board of Investment

- Chairman of Arizona’s State Loan Commission

- Arizona’s Surveyor General

- Member of the State Land Selection Board


INVESTMENTS

More than $12.9 Billion in 25 different investment pools spread across 1,300 separate accounts broken into three major sources:

1.Over $5 Billion in State Agency Funds (generated from taxes, fees and other revenues)

2.Over $5 Billion in State Land Endowment Funds

3.Over $2 Billion Local Government Investment Pools (LGIP)


GOVERNANCEArizona Constitution

Arizona Revised Statutes

Arizona Board of Investment (BOI)

Investment Risk Management Committee (IRMC)

Investment Policy (approved by IRMC and BOI)

Pre/Post Trade Compliance

Internal Compliance


FUND RISKWhat should I know about investing in funds

like the LGIP?

Credit Risk – Can impact share price Interest Rate Risk – Can impact share price

Duration

Neither your principal nor interest are guaranteed Generally there are two ways a fund manager can

get higher yield: Cut expenses Take on more risk


CHANGES IN INTEREST RATES Changes in the value of a bond are inversely related to

changes in the rate of return. Rates up = Price down.

Long-term bonds have greater interest rate risk than short-term bonds.

Low coupon (Yield) bonds have greater interest rate sensitivity than high coupon (Yield) bonds. (Longer Duration)

Generally; Bad news makes US Treasury bonds more valuable, (prices higher, yield lower) and interest rates go down.

Generally; Good news makes US Treasury bond prices fall and yields rise, and interest rates rise.

The NAV (net asset value) or Market Value of a fund is impacted by the interest volatility of each bond it holds.


2 YEAR NOTES EXAMPLEWhat if the LGIP held all 2y notes?

Today I buy a new issue 2 year note that market yield to me 1.00%;

T 1.00% 1/15/2017 @ 100 (Par)

Tomorrow the FOMC expectantly announces it will raise rates. And the interest rate on the 2Y moves to 1.50%

What is my bond worth? $99.018472


DURATIONDuration is a measure of risk quoted in years.

Duration is the approximate “percentage change” in price for a 100 basis point change in rates. – Then why is it reported as years?

Short definition: The weighted average life of all of the cash flows based on the market price. Duration of a fund can and will change.

As the fund (bond) yield/coupon increases, its duration decreases and the fund becomes less sensitive to interest rate changes.


10 YEAR DURATION EXAMPLE10 year note with a 5% coupon at Par (100

dollar price) Duration = 7.989 years at purchase.

10 year note with a 1% coupon at Par (100 dollar price) Duration is 9.541 years at purchase.

Because the pre maturity cash flows (semi quarterly interest payments) are less.


ADVANTAGES OF THE LGIP Convenience and Compliance - Participants own shares of a

diversified portfolio managed in compliance with Arizona’s statutes as well as required Governmental Accounting Standards Board reporting standards.

Cash Management - Same day liquidity (10:30AM) permits flexibility and fine-tuning of cash management needs in pools 5 and 7.

Costs – All administrative and management fees are deducted from the LGIP earnings accrual each day prior to distribution of the earnings to participants; therefore, fees are totally transparent to participants. Fees are currently 5.5bps, and those fees stay here in Arizona.

Online access to Account Information – Account information can be viewed 24/7 through a secure online web site.

Statements - Monthly statements include all transactions, the earnings rate, and the monthly dividend.

Competitiveness – The LGIP offers a competitive rate of return, which should enhance the rates offered to you on alternative investments.

Experience – The Treasurer’s Office has run the LGIP since 1980.


INVESTMENT TEAM Jeff DeWit – State Treasurer

- 22 years Investment Industry Experience

- 14 years as CEO of an Investment Company

Patricia Humbert – Chief Investment Officer- 30 years Investment Industry Experience

- 15 years at the State Treasurer’s Office

- LGIP Manager

Tim White – Senior Portfolio Manager- 23 years at the State Treasurer's Office

- Former LGIP Manager

Dale Stomberg – Manager of Investment Accounting - 22 years at the State Treasurer’s Office


LGIP

Pool 5: Similar to a money market fund – rated AAAf by Standard & Poor’s. Same day liquidity.

Pool 7: Similar to a money market fund – invests only in assets with the full faith and

credit of the United States. Same day liquidity.

Pool 500: Medium-term bond fund used for longer-term investing. Monthly liquidity.

Pool 700: Medium-term bond fund used for longer- term investing. Invests only in assets with the full faith and credit of the United States. Monthly liquidity.


Pool 5 – LGIPSAFETY: Distribution of Holdings

(Moody's Ratings)

LIQUIDITY: 83% of Assets Mature Within 90 Days YIELD: .10% (November 2014)

Rated AAAf (Highest Rating Available)

$1.2 Billion in Assets as of 11/30/2014

100% Duration Inside 1 year

Diversified Highly Rated Investments Including Repurchase Agreements, Commercial Paper, and Government Securities

83% of the Assets are Cash Equivalent Securities


Pool 7 – Gov’t LGIPSAFETY: Distribution of Holdings

(Moody's Ratings)


$1 Billion in Assets as of 11/30/2014


100% of the Assets are Guaranteed by the Full Faith and Credit of the United States of America

92% of the Assets are Cash Equivalent Securities

AAA0%

20%

40%

60%

80%

100%

120%


Pool 500 – Medium Term LGIPSAFETY: Distribution of Holdings

(Moody's Ratings)


$257 Million in Assets as of 11/30/2014

Net Asset Value (share price) of $1.0352 as of 11/30/2014

Over 55% Duration Inside 1 year

100% of the Assets are Investment Grade or Better (60% are rated AAA)

Well Diversified Portfolio of Assets With No More Than 2.5% Exposure to Any Single Corporate Asset


Pool 700 – Gov’t Medium Term LGIP

SAFETY: Distribution of Holdings (Moody's Ratings)

LIQUIDITY: 28% of Assets Mature Within 90 Days YIELD: (November) 1.02%

$145 Million in Assets as of 11/30/2014

Net Asset Value (Share Price) of $1.0104 as of 11/30/2014


100% of the Assets are Guaranteed by the Full Faith and Credit of the United State of America

Well Diversified Portfolio of Assets Across All available U.S. Full Faith and Credit Securities


INTEREST RATE OUTLOOKFOMC – When will FOMC raise rates? “When the Committee decides to begin to remove policy

accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” SOURCE: Federal Reserve Board December 17, 2014 Minutes.

OFFICE OF THE ARIZONA STATE TREASURER

QUESTIONS?

o ffice of the a rizona s tate t reasurer january 16, 2015 gfoaz - january 2015

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