Report to: General Committee Finance & Administrative           Date of Meeting: June 12, 2006

 

 

SUBJECT:                          2006 First Quarter Investment Performance Review

PREPARED BY:               Mark Visser, Manager of Strategy, Innovation & Investments, Corporate Services

 

 

 

RECOMMENDATION:

THAT the report dated June 12, 2006 entitled “2006 First Quarter Investment Performance Review” be received.

 

1. Purpose                2. Background         3. Discussion             4. Financial         5. Environmental

 

6. Accessibility       7. Engage 21st             8. Affected Units       9. Attachment(s)

 

 

PURPOSE:

Pursuant to Regulation 74/97 Section 8, the Municipal Act requires the Treasurer to “prepare and provide to the Council, each year or more frequently as specified by Council, an investment report”.

 

The investment report shall contain,

 

(a) a statement about the performance of the portfolio of investments of the municipality during the period covered by the report;

 

(b) a description of the estimated portion of the total investments of a municipality that are invested in its own long-term and short-term securities to the total investment of the municipality and a description of the change, if any, in that estimated proportion since the previous year’s report;

 

(c) a statement by the Treasurer as to whether or not, in her opinion, all investments were made in accordance with the investment policies and goals adopted by the municipality;

 

 (d) a record of the date of each transaction in or disposal of its own securities, including a statement of the purchase and sale price of each security;

 

(e) such other information that the Council may require or that, in the opinion of the Treasurer, should be included.

 

BACKGROUND:

For the three months ending March 31, 2006, the Town of Markham’s Income Earned on Investments was $1.54 million, compared to a budget of $1.747 million, representing a $212,000 unfavourable variance.  As will be discussed later in the report, given the current market, it is expected that the Town will be on target with its Investment Income by mid year and have a favourable variance by year end. 

 

The 2006 budget assumes an average general fund portfolio balance of $184 million to be invested at an average rate of return of 3.85%. The actual average portfolio balance was well below the budgeted levels while the average rate of return was higher than budgeted levels.  The details of these two factors will be discussed below.

 

 Interest Rate

At the beginning of 2006, the Canadian Bank Rate was 3.50%.  This rate increased to 4.00% by the end of the quarter.  During the first quarter of 2006, the Town’s investments had an average interest rate of 4.18%; 33 basis points higher than budget.  Furthermore, through active bond trading, the Town realized $144,000 of Capital Gains in the quarter, thereby increasing the actual rate of return to 4.61%; 76 basis points over the budgeted rate.  The difference in the rate of return accounts for a favourable variance of $253,000. 

Portfolio Balance

The budgeted average portfolio balance for 2006 is $184 million.  The actual average general fund portfolio balance (including cash balances) for the first quarter of 2006 was $135 million, resulting in $49 million less that was available for investment purposes throughout the first quarter.  The lower portfolio balance accounts for an unfavourable variance of $465,000.  NOTE: The budget for the year is allocated on an even basis throughout the year.  The average portfolio balance for the first quarter is always lower than in subsequent periods due to the timing of the inflow of tax payments.  This negative portfolio balance will be significantly reduced by the end of Q2 and should be much closer to the forecasted target by year end.

 

Portfolio Composition

All investments made in the first quarter of 2006 adhered to the Town of Markham investment policy.  At March 31, 2006, 33% of the Town’s portfolio was comprised of government issued securities.  The remaining 67% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 63% and 4% of the portfolio, respectively.   All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

 

The March 31, 2006 investment portfolio was comprised of the following instruments:  Banker’s Acceptances 31%, Bonds 35%, Banker’s Deposit Notes 23%, T-Bills 6%, and Certificates of Deposit 5% (Exhibit 2).

 

At March 31, 2006, the Town’s portfolio balance for all funds was $337.8 million.  DCA investments represented $63.6 million of this amount.  The Town’s portfolio (all funds excluding DCA) of $274.2 million was broken down into the following investment terms (Exhibit 3):

           


                                                                                                Q1 2006          Q4 2005

Under 1 month                                                   20.4%              21.2%

1 month to 3 months                                                       26.5%              30.3%

3 months to 1 year                                                          32.5%              16.9%

Over 1 year                                                                    20.6%              31.5%

 

            Weighted average investment term                                652.1 days       882.2 days

Weighted average days to maturity                                402.6 days       555.6 days

Money Market Performance

The Town of Markham uses the 3-month T-bill rates to gauge the performance of investments in the money market.  The average 3-month T-bill rate for the first quarter of 2006 was 3.67% (source: Bank of Canada).   Non-DCA Fund money market investments held by the Town of Markham during the first quarter of 2006 had an average return of 3.75%.  Therefore, the Town’s money market investments outperformed 3-month T-Bills by 8 basis points.  See Exhibit 4 for all Money Market securities held by the Town of Markham in the first quarter of 2006.

Bond Market Performance

2006 marks the fifth year of the bond trading strategy.  The 2006 YTD highlights of the program are as follows:

 

 

The first quarter of 2006 saw a steady increase in interest rates (most significantly in the shorter term bond yields).  There was a flattening of the yield curve to the point where there was only a 40 bps difference between 6 month and 10 year Canada bonds.  Because of this, the strategy has been to purchase bonds with durations of less than 5 years until the longer rates become more attractive. 

 

Reserve Funds

$846,000 of interest was earned in the first three months of 2006 on the Town’s $100 million of Reserve Funds.

 

Outlook

There have been two further interest rate hikes that occurred in April and May.  Given the high Canadian dollar, it is expected that there will be no further increases in the near future.  With the rates that are already in place, it is expected that the Town will be on target with its Investment Income by mid year and have a favourable variance by year end.  For the remaining 9 months of 2006, the Town average return on investments is expected to be in the 4.25-4.75% range.

 

 

 

OPTIONS/ DISCUSSION:

 

 

 

FINANCIAL TEMPLATE (Separate Attachment):

 

 

 

 

RECOMMENDED

                            BY:    ________________________          ________________________

                                      Barb Cribbett, Treasurer                     Andy Taylor, Commissioner

                                                                                                Of Corporate Services

 

 

 

ATTACHMENTS:

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2006 Q1 Money Market Investments

Exhibit 5 – 2006 Q1 Bond Market Investments

Exhibit 6 – 2006 Q1 DCA Fund Investments