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Home My WebLink AboutResolution No. 2012-03the dty al KENAI.ALA SKA Suggested by: Administration CITY OF KENAI RESOLUTION NO. 2012 -03 A RESOLUTION OF THE COUNCIL OF THE CITY OF KENAI, ALASKA, PERTAINING TO THE AUTHORIZED INVESTMENTS OF, THE INVESTMENT ALLOCATIONS OF, AND ESTABLISHING APPROPRIATE BENCHMARKS TO MEASURE PERFORMANCE OF THE CITY'S PERMANENT FUNDS. WHEREAS, the City of Kenai Council is authorized to establish investment policies for the City's Permanent Funds; and, WHEREAS, the KMC 7.30.020 (b) permits investment of the Permanent Funds in various asset classes and the Council believes that establishing asset allocation criteria for these various asset classes is in the best interest of the City of Kenai; and, WHEREAS, the Council intends to annually review the asset allocations and performance of the Permanent Funds; and, WHEREAS, providing benchmarks to measure the performance of the fund is prudent. NOW, THEREFORE, BE IT RESOLVED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, that the Council designates the following investments for the City's Permanent Funds: AUTHORIZED INVESTMENTS FOR THE AIRPORT PERMANENT FUND (1) Investments authorized by KMC 7.22.030 (2) Corporate obligations of investment grade quality as recognized by a nationally recognized rating organization. If, after purchase, these obligations are downgraded below investment grade, they shall be sold in an orderly manner within ninety days of downgrading. (3) Domestic Equities, which taken as a whole, attempt to mirror the characteristics or replicate the Standard & Poor's 500 Index, including both mutual funds and exchange traded funds (ETF's). (4) Domestic Equities, which taken as a whole, attempt to replicate the Standard & Poor's 400 Mid -Cap Index, including both mutual funds and exchange traded funds ( ETF's). (5) Domestic Equities, which taken as a whole, attempt to replicate the Standard & Poor's 600 Small -Cap Index, including both mutual funds and exchange traded funds (ETF's). (6) International Equities, which taken as a whole, attempt to replicate the Vanguard Europe, Australasia, Far East (EAFE) Index, including both mutual funds and exchange traded funds (ETF's). (7) Equities, which taken as a whole, attempt to replicate the universe of domestic real- estate investment trusts as represented by the Vanguard REIT composite index, including both mutual funds and exchange traded funds (ETF's). Resolution No. 2012 -03 Page 2 of 3 (8) Emerging Market Equities, which taken as a whole, attempt to replicate the Vanguard Emerging Market Index including both mutual funds and exchange traded funds (ETF's). BE IT FURTHER RESOLVED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, that the Council adopts the asset allocations and performance measurement standards as follows: AIRPORT PERMANENT FUND ASSET ALLOCATION PLAN AND PERFORMANCE MEASUREMENT TARGETS Section 1: The Asset Allocation Plan and Target Weightings with range restrictions are as follows: ASSET CLASS TARGET % WEIGHTING RANGE % Fixed Income 45 40 -65 Large -Cap Domestic Equity 20 15 -25 International Equity 10 5 -15 Mid -Cap Equities 10 5 -15 Small -Cap Equities 5 0 -10 International Emerging Markets 5 0 -10 Real- estate equities 5 0 -10 Section 2: The performance of the Fund and investment managers will be measured as follows: Performance measurement of the Fixed Income allocation will be measured against the Target weighting, using the Barcleys Intermediate Government /Credit Index for the benchmark. Performance measurement of the Large -Cap Domestic Equity allocation will be measured against the Target weighting, using the Standard & Poor's 500 Index for the benchmark. Performance measurement of the International Equity allocation will be measured against the Target weighting, using the Vanguard Europe, Australia, Far East (EAFE) Index for the benchmark. Performance measurement of the Mid -Cap Equity allocation will be measured against the Target weighting, using the Standard & Poor's 400 Mid -Cap Index as the benchmark. Performance measurement of the Small -Cap Equity allocation will be measured against the Target weighting, using the Standard & Poor's 600 Small -Cap Index as the benchmark. Resolution No. 2012 -03 Page 3 of 3 Performance measurement of the International Emerging Markets allocation will be measured against the Target weighting, using the Vanguard Emerging Markets Index as the benchmark. Performance measurement of the Real- Estate Equities allocation will be measured against the target weighting, using the Vanguard REIT Composite Index as the benchmark. PASSED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, this 18th day of January 2012. PAT PORTER, MAYOR A Sandra o igh, Ci Clerk Approved by Finance: KENAI, A SKA rH To: Rick Koch, City Manager /From: Terry Eubank Date: January 12, 2012 Re: Permanent Fund Authorized Investments and Asset Allocation Plan for CY2012. 'Ulaye with a Past, Gc y with a Future" FINANCE DEPARTMENT 210 Fidelgo Avenue, Kenai, Alaska 99611 -7794 Telephone: 907 - 283 -7535 ext 221 / FAX: 907 - 283 -3014 Pursuant to KMC 7.30.020 the Council shall annually designate by resolution the authorized investments and allocation plan for the City's Permanent Funds. Resolution 2012 -03 reauthorizes the authorized investments and allocation plan used by the Fund since inception in September 2008. In April 2011, the City's General Land Sale Permanent Fund's investment methodology was changed to mirror that of the Airport Permanent Fund and $2,526,702 was transferred into the peinianent fund account. $17,281,883, the Airport Permanent Fund Balance was invested in September 2008 and since the fund has transferred $2,174,288 to the Airport Special Revenue Fund for operations and had a market value of $20,920,217 at December 31, 2011. The portfolio has returned nearly 9.52% since September 2008. In contrast the City's investment portfolio has yielded between 3.0% and 0.34% for the same period. When originally adopted the investment model being used was projected to return 8.0% annually. Due to depressed rates in the fixed income portion of the portfolio (which constitutes 40 -65% of the portfolio's value) the current projected rate of return for the portfolio is 7.1% annually. This is the same rate of return that was projected this time last year. Risk of the portfolio is measured in standard deviation from the expected rate of return. One standard deviation is equal to about 66% of all possible outcomes and two standard deviations is equal to about 95% of all possible outcomes. 66% (one standard deviation) of the time, the portfolio is expected to return between (5.0) and 19.2 %, with an average return of 7.1 %. 95% (two standard deviations) of the time, the portfolio is expected to return between (12.3) and 26.5 %. At this time it is not being recommended to change the portfolio's investments or their allocations. Over time it is expected that the fixed income markets will return to historic rates of return and should return the portfolios performance to the 8% level. INVESTMENT RE,VIEW City of Kenai Airport Endowment Fund for period ending December 31, 2011 ALASKA APCM GAP1AL MANAGEMENT Agenda ➢ Portfolio Review & Performance ➢ Appendix — Economy & Financial Markets — Expenses Matter — Portfolio Appraisal P PERMANENT APCM CAPITAL MANAGEMENT 1 Portfolio Review ➢ The account was established in September of 2008 with a deposit of $17.4 million in securities and cash. ithdra June 2009: $289,136 June 2010: $891,268 June 2011: $999,976 April 2011: $2,526,702 ➢ Market value of the fund as of December 31, 2011: $23,348,815 ➢ Average annual return since inception: +9.52% ➢ 2011 was a very volatile year. Equities had large price movements as political events, natural disasters, international turmoil, and the European situation all unsettled the markets. ➢ The fixed income markets were impacted by the above, with a "flight to safety" move in U.S. Treasury securities driving very low rates even lower. The 10 year Treasury now yields less than 2 %. ALASKA ' f PERMd1N APCM CAPITAL MANAGEMENT 2 Portfolio Review Asset Allocation for City of Kenai Airport Endowment Fund as of December 31, 2011 M U.S. Bonds '?_ Mid Cap Equity as International Equity Real Estate Equity ALASKA PERMANENT' APCM CAPITAL MANAGEMENT: fixed Income U.S. Bonds Equities Large Cap Equity Mid Cap Equity Small Cap Equity International Equity Emerging Markets Equity as Large Cap Equity Real Estate Equity 'I Small Cap Equity tt Emerging Markets Equity RAW 42.2% 57.8% 24.5% 8.9%/% 4.5% 9.7% 5.9% 4.4% 45% 40-65 55% 20% 15-25 10%% 5-15 5% 0-10 10% 5-15 5% 0-10 5% 0-10 $9,849,456 $13,499,359 $5,710,752 $2,079,073 $1,056,533 $2,259,483 $1,369,064 $1,024,454 $23, + =:,815 3 Portfolio Review Total Return ALASKA PERMANEhiT APCM CAPITALMANACEMENT 15% 5% -5% -15% -25% 1.45 -0.14 5.80 4.49 Account Performance Previous Year as of December 31, 2011 2.07 2.11 -2.08 -1.73 0.54 1.02 - 1.97 42.14 8.57 8.48 48.85-18.42 Total Account Fixed Income Large Cap Equity Mid Cap Equity Small Cap Equity Intl Equity Emerging Markets Real Estate Barclays Int G/C S &P 500 S &P 400 S &P 600 Performance is gross of fees. MSCI EAFE MSCI Emerging S &P U.S. REIT III Kenai Airport Benchmark 4 Portfolio Review 15% 10% ALASKA PERMANENT APCM CAPITAL MANAGEMENT 0% -5% 1.45 -0.14 1 Year Account Performance as of December 31, 2011 9.29 9.85 3 Year A Kenai Airport Benchmark Performance is gross of fees and annualized for periods greater than one year. Inception performance begins September 30, 2008. 9.52 10.04 Since Inception 5 Portfolio Review ➢ Despite the high volatility, the overall portfolio ended the year approximately unchanged on a return basis. ➢ On a relative basis, we did not perform well in 2011. In hindsight, our biggest shortfall was being worried about rising interest rates and watching them fall even further. ➢ The fixed income portfolio was positioned below benchmark duration and underweight U.S. Government securities which hurt relative performance. ➢ Equity allocations were overall a detractor (overweight to emerging markets). ➢ For 2012, we believe equities will outperform fixed income. With the U.S. Treasury 10 -year note below 2% and the 2 -year at 1/4 of 1 %, the pricing appears very expensive. Corporate securities have ASKA relative value, offering higher yields and good supporting financials. PERMANE APCM CAPITAL MANAGEMENT 6 ASKA P I-RMAN E\ CAPI I AL MANAGEMEN I COMPANY IS RELATIONSHIP DRIVEN AND VIEWS ITSELF AS A LONG -TERM PARTNER WITH ITS CLIENTS YOUR BUSI NESS IS IMPOR IAN I 0 US! VISIT US AT OUR WEBSITE: APCM.NET PERMANENT APCM CAPITAL MANAGEMENT Appendix ALASKA PERMME APCM CAPITAL MANAGEMENT ALASKA CAPITAL MANAGUA Economy & Financial Markets 9% 6% 3% 0% -3% -6% -9% Q3 2008 01 Bloomberg $160 Gross Domestic Product Q3 2009 Q1 Q3 2010 Q1 Q3 2011 Oil Price - West Texas Intermediate Dec 31st $98.83 Bloomberg 1999 2001 2003 2005 2007 2009 2011 600 400 200 0 -200 -400 Job Growth and Unemployment Rate 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% -600 8.0% Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 r ^- Change in Payrolls (000's) gifacfmUrempleyment Rate Bureau of Labor Statistics Consumer Price Index (YoY) Through Nov 30th -4% 2001 2003 2005 2007 2009 2011 All Items - Less Food and Energy Bureau of Labor Statistics 9 Economy & Financial Markets otal Return (%) as of Decemberi31, 20 Q4. ... , . 201] Domestie Egditiz Large Cap S&P 500 Mid Cap 5 &P 400 Small Cap SAP 600 International Equities Developed MSCI CAPE Emerging MSC/ tmergl her 1.8 13.0 17.2 2.1 -1.7 1.0 4.1 19.6 17.0 -0.3 3.5 1.9 CIT Commaditles Df -ueS Commodity Fixed Income 'I. Total Bond Market Barclays Aggregate 1 -3 Yr U.S. Treasury /Agency Baretays Int'I Treasury 6orclelrc Glohot Toy ex OS Returns areonnvallxed to[perEods gtealetlhnn olnoyear 21.5 -1.6 0.4 -13.3 6.4 -2.1 7.8 6.8 6.5 1.6 1.8 3.8 4.3 5.3 7.2 S &P 500 Earnings Yield vs. Baa Bond Yield 10% 9 %. 7% tt twd p St 3 i_ 6% 4% 3%, '94 '96 '00 '02 Moody's Boa Yield: 5,3% '06 '08 '10 '12 Sources: Standard & Poor's, Moody's, J.P. Morgan Asset Management P AN Data as of 12/31/2011. APCM CAl1At MANAGEMENT S &P 500 Index 1996 1998 2000 2002 2004 2006 2008 2010 2012 Bloomberg 20 -year Annualized Returns by Asset Class (1491 - 2010) Source: J.P. Morgan Asset Management Average asset allocation investor return is based on an analysis by Dalbar Inc. All returns are annualized (and total return where applicable) and represent the 20 -year period ending 12/31/10 to match Dalbar's most recent analysis. 10 ALASKA APCM CAPITAL MANAGEMENT Economy & Financial Markets Yield Curve Comparison Bloomberg 16% 12% 8% 4% 0% Barclays 9.81% 5 10 15 20 Bond Maturity (Years) 12/31/2010 12/31/2011 2011 Bond Total Return as of December 31, 2011 13.56% Treasuries TIPS Agencies MBS 10.14% 25 30 is Corporates CMBS 7% 6% 5% 4% 3% 2% 10 Year Treasury Note Yield 1% 2000 2002 2004 2006 2008 2010 2012 Bloomberg Corporate A Spread /10 Year Treasury 1994 1996 1998 Bloomberg 2000 2002 2004 2006 Dec 31st 252 bps 2008 2010 2012 11 PERMME' APCM OAPI@4MANAGEMENT Current Outlook Economic Outlook The U.S. economy is expanding modestly, but still faces major headwinds from the ongoing deleveraging of consumer and financial balance sheets. The unemployment rate dropped to 8.5% last month. Job gains jumped to +200,000 in December. Both the residential and commercial property markets remain sluggish. GDP growth was +1.8% in Q3, up from +1.3% in Q2. Q4 growth may be in the +3-4% range. The consensus outlook calls for about +2-3% growth and a moderation of inflation in 2012. Fears of a double dip recession in the U.S. have receded. Worldwide GDP declined -0.7% in 2009 and was +5.1% in 2010. The IMF forecasts (September 2011) world growth of +4.0% for 2011. This growth will likely be led by the emerging markets — many of which have had economies that continued to grow throughout the financial crisis. The OECD (November 2011) said that growing doubts about the survival of Europe's monetary union has caused global growth to stall and represents the main risk to the world economy. It expects the 34 OECD nations to grow +1.9% in 2011 and +1.6% in 2012, down from its +2.3% and +2.8% prediction in May. Europe may experience a mild recession in 2012. Inflation Outlook Inflation is up +3.4% year-over-year and the "core" rate is +2.1 %. Still, inflationary pressures are likely to be muted given substantial unused capacity in the labor and product markets. However, volatile oil and commodity prices are a threat to the inflation outlook. WTI crude increased $7 last year and finished 2011 near $100 per barrel. Commodity prices have been range bound for the past few months, but the Dow Jones UBS Commodity Index lost -13.3% in 2011. Policy Actions The Federal Reserve is worried about slow economic growth and is maintaining a ZIRP (zero interest rate policy), committing to a federal funds rate close to zero until 2013. The Fed ended its $600 billion QE2 bond buying program in June. They initiated "Operation Twist" in September to keep long rates low and announced that maturing MBS would be reinvested back into the mortgage market. The debt ceiling was raised this summer, but not before a downgrade by S &P of U.S. debt to AA +. The congressional "super committee" failed to achieve a consensus on reducing the deficit, so $1.2 trillion of "automatic" cuts will begin in 2013. Congress and the President extended last year's "temporary" payroll tax cuts and more unemployment benefits through February. This election is going to be a doozy fought over the economy and debt. Overseas, Europe continues to grapple with a banking system that was more levered than the U.S. The ECB (extending 3 year loans at 1 %) and the IMF have taken significant steps to shore up confidence and provide liquidity to EU governments struggling with deficit /debt problems. Greece, Ireland, and now Portugal have accepted bailouts. Italy is now in the crosshairs as bond yields have shot up. Many countries have undertaken "austerity" measures to close their budget gaps, but the market remains skeptical. Europe remains the major "wildcard" in the outlook! Bond Outlook Interest rates have traded in a narrow range for several months as signs of better economic growth offset a safe haven bid for high quality bonds. For the year, Treasuries were the best performers posting a +9.8% return, while the gains of spread product were in the +6-7% range. We remain short our benchmarks and overweight spread product. Treasuries are unattractive. Equity Outlook The equity markets recovered in the fourth quarter. For 2011, the S &P500 gained +2.1% while developed international stocks (EAFE) lost - 12.1 %. Volatility remains high. We generally like domestic large company stocks over smaller names. Globally we favor emerging markets over developed international (EAFE). REITs have performed well, but they are overvalued in our judgment. Very low interest rates and reasonable valuations (the S &P 500 trades at 12x forward earnings) offset uncertainties in the Middle East, Europe, and budget pressures in the U.S. January 2012 12 Matter ➢ APCM costs the City of Kenai 30 basis points on the first $10 million ➢ And 25 basis points on any amount over $10 million ➢ On a $20 million dollar portfolio: 30 bp x $10 million 25 bp x $10 million Paid monthly in arrears ALASKA PERMANEtldl Apcm CAPITAL MANAGEMENT $30,000 $25,000 $55,000 per year 13 Portfolio Appraisal CITY OF KENAI - AIRPORT PERMANENT FUND December 31, 2011 ALASKA PERMANENT APCM CAPITAL MANAGEMENT' Yield Average Total Market Pct. Annual Accrued to Quantity Security Cost Average Cost Price Value Assets Income Interest Maturity U.S. TREASURY 600,000 US TREASURY NOTES 100.52 603,141 100.47 602,812 2.58 3,750 10 0.16 0.625% Due 12 -31 -12 400,000 US TREASURY NOTES 98.15 392,586 102.56 410,252 1.76 5,000 852 0.57 1.250% Due 10 -31 -15 1,075,000 US TREASURY NOTES 101.12 1,087,030 107.66 1,157,302 4.96 28,219 3,644 1.69 2.625% Due 11 -15 -20 Accrued Interest 4,506 0.02 2,082,756 2,174,872 9.31 4,506 AGENCIES 500,000 PNC FUNDING CORP - FDIC GUARANTEED 100.82 504,100 101.00 504,982 2.16 11,500 287 0.20 2.300% Due 06 -22 -12 500,000 FNMA 102.07 510,339 104.80 523,977 2.24 14,375 799 0.40 2.875% Due 12 -11 -13 500,000 FHLB 110.35 551,726 118.60 592,996 2.54 26,875 3,210 1.02 5.375% Due 05 -18 -16 250,000 FNMA 100.00 250,000 99.98 249,947 1.07 1,875 167 0.75 0.750% Due 11 -29 -16 450,000 FHLMC 110.66 497,970 120.49 542,214 2.32 21,937 1,097 1.53 4.875% Due 06 -13 -18 Accrued Interest 5,560 0.02 2,314,135 2,419,677 10.36 5,560 FNMA & FHLMC 211,834 FHLMC 4.00% POOL 614203 4.000% Due 04 -01 -26 Accrued Interest 104.56 221,499 104.98 222,388 0.95 8,473 706 2.06 706 0.00 221,499 223,094 0.96 706 CORPORATE BONDS 200,000 JOHN DEERE CAPITAL CORP 93.99 187,988 104.18 208,351 0.89 9,900 385 0.58 4.950% Due 12 -17 -12 200,000 BERKSHIRE HATHAWAY INC 100.16 200,312 101.69 203,390 0.87 4,250 1,653 0.59 2.125% Due 02 -11 -13 200,000 GLAXOSMITHKLINE CAP INC 93.74 187,474 105.83 211,666 0.91 9,700 1,239 0.57 4.850% Due 05 -15 -13 200,000 TOYOTA MOTOR CREDIT 101.03 202,052 100.93 201,860 0.86 2,750 1,062 0.79 1.375% Due 08 -12 -13 200,000 BARRICK GOLD FINANCE CO. 111.45 222,898 108.07 216,138 0.93 12,250 3,607 1.32 6.125% Due 09 -15 -13 Portfolio Appraisal CITY OF KENAI - AIRPORT PERMANENT FUND December 31, 2011 ALASKA PERMANENT APCM CAPITAL MANAGEMENT Yield Average Total Market Pct. Annual Accrued to Quantity Security Cost Average Cost Price Value Assets Income Interest Maturity 200,000 IBM CORP 103.71 207,422 110.28 220,560 0.94 13,000 2,744 0.70 6.500% Due 10 -15 -13 200,000 MERRILL LYNCH & CO 98.47 196,946 99.16 198,314 0.85 10,900 5,026 5.80 5.450% Due 07 -15 -14 200,000 JP MORGAN CHASE & CO 88.88 177,764 106.36 212,714 0.91 9,500 3,167 2.64 4.750% Due 03 -01 -15 200,000 MORGAN STANLEY 84.00 168,000 100.17 200,348 0.86 12,000 2,100 5.93 6.000% Due 04 -28 -15 200,000 HSBC FINANCE CORP 96.28 192,568 102.33 204,656 0.88 11,000 4,950 4.86 5.500% Due 01 -19 -16 250,000 BRITISH COLUMBIA PROV OF 99.98 249,952 104.05 260,120 1.11 5,250 627 1.15 2.100% Due 05 -18 -16 200,000 CONOCOPHILLIPS CDA FDG FDG CO 89.87 179,748 116.75 233,506 1.00 11,250 2,375 1.94 5.625% Due 10 -15 -16 200,000 STATOIL ASA 101.11 202,212 105.47 210,940 0.90 6,250 2,326 2.09 3.125% Due 08 -17 -17 200,000 WACHOVIA CORP GLOBAL MEDIUM 85.50 171,000 113.60 227,204 0.97 11,500 4,792 3.26 5.750% Due 02 -01 -18 200,000 MCDONALDS CORP M /T /N 104.35 208,698 119.49 238,980 1.02 10,700 3,567 1.98 5.350% Due 03 -01 -18 200,000 GENERAL ELECTRIC CAP CORP. 84.71 169,416 112.00 224,000 0.96 11,250 1,875 3.49 5.625% Due 05 -01 -18 500,000 GOLDMAN SACHS GROUP INC. 116.51 582,570 110.44 552,205 2.37 37,500 14,167 5.69 7.500% Due 02 -15 -19 Accrued Interest 55,662 0.24 DOMESTIC LARGE CAP EQUITY FUNDS /ETF 45,504 SPDR S &P 500 ETF TRUST DOMESTIC MID CAP EQUITY FUNDS /ETF 23,731 !SHARES S &P MIDCAP 400 DOMESTIC SMALL CAP EQUITY FUNDS /ETF 15,469 !SHARES S &P SMALLCAP 600 INDEX INTERNATIONAL FUNDS /ETF 73,767 VANGUARD MSCI EAFE ETF EMERGING MARKET FUNDS /ETF 35,830 VANGUARD EMERGING MARKET ETF 3,707,020 4,080,614 17.48 55,662 98.88 4,499,556 125.50 5,710,752 24.46 NA 54.42 1,291,545 87.61 2,079,073 8.90 NA 47.91 741,084 68.30 1,056,533 4.52 NA 29.15 2,149,994 30.63 2,259,483 9.68 NA 28.67 1,027,402 38.21 1,369,064 5.86 NA Portfolio Appraisal CITY OF KENAI - AIRPORT PERMANENT FUND December 31, 2011 ALASKA P Rnn4NENT APCM CAPITAL MANAGEMENT Yield Average Total Market Pct. Annual Accrued to Quantity Security Cost Average Cost Price Value Assets Income Interest Maturity REAL ESTATE 17,663 VANGUARD REIT ETF TREASURY RILLS 500,000 US TREASURY BILLS 0.000% Due 05 -31 -12 31.37 99.83 554,025 58.00 499,165 99.98 1,024,454 4.39 NA 499,915 2.14 NA 0 0.04 CASH AND EQUIVALENTS CASH RECEIVABLE 1,875 1,875 0.01 NA Dividend Accrual 36,461 36,461 0.16 Wells Fargo Secured MoneyMarket Account 412,948 412,948 1.77 451,284 451,284 1.93 TOTAL PORTFOLIO 19,539,465 23,348,815 100 310,955 66,433