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 year ending December 31, 2007, the Town of Markham’s Income Earned on Investments was $7.26 million, compared to a budget of $7.08 million, representing a $175,000 favourable variance.

The 2007 budget assumes an average general fund portfolio balance of $168.67 million to be invested at an average rate of return of 4.20%. The actual average portfolio balance was 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

The Bank Rate was 4.50% for the first half of 2007. The Bank of Canada increased the rate by 25 basis points at the end of June and then reduced it back to 4.50% in early December.

In 2007, the Town’s investments had an average interest rate of 4.32%, 12 basis points higher than budget. Furthermore, through active bond trading, the Town has realized $153,000 of Capital Gains, thereby increasing the actual rate of return to 4.41%; 21 points higher than the 4.20% budgeted rate. The difference in the rate of return accounts for a favourable variance of $344,000.

Portfolio Balance

The budgeted average portfolio balance for 2007 was $168.67 million. The actual average general fund portfolio balance (including cash balances) for 2007 was $164.64 million, resulting in $4 million less that was available for investment purposes. The lower portfolio balance accounts for an unfavourable variance of $169,000.

Portfolio Composition

All investments made in 2007 adhered to the Town of Markham investment policy. At December 31, 2007, 29% of the Town’s portfolio was comprised of government issued securities. 58% of the portfolio was made up of instruments issued by Schedule A Banks, while the remaining 13% was made up of instruments issued by Schedule B Banks. All of these levels are within the targets established in the Town’s Investment Policy. Note: The yield spreads between government-issued securities and bank instruments were particularly wide in Q4. As a result, the Town’s Federal/Provincial holdings dipped down to 26% of the total portfolio (target = 30%). As there was a wide spread between bank and government instruments in Q4, the strategy was to take advantage of the higher rates in the bank sector. The Town’s Investment Policy does allow for deviations of +/- 5% of all thresholds in order to allow flexibility to take advantage of prevailing market conditions. (Exhibit 1).

The December 31, 2007 general investment portfolio was comprised of the following instruments: Banker’s Acceptances 27%, Bonds 49%, Banker’s Deposit Notes 22%, and Accrual Notes 2% (Exhibit 2).

At December 31, 2007, the Town’s portfolio balance for all funds was $303.4 million. DCA investments represented $83.7 million of this amount. The Town’s portfolio (all funds excluding DCA) of $219.7 million was broken down into the following investment terms (Exhibit 3):

Under 1 month 11.3%

1 month to 3 months 24.0%

3 months to 1 year 36.2%

Over 1 year 28.4%

Weighted average investment term 848.3 days

Weighted average days to maturity 528.0 days

Since December 31, 2006, the weighted average days to maturity has increased from 459.2 days to 528.0 days in an attempt to lock into more favourable interest rates that were available in certain parts of 2007.

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 2006 was 4.16% (source: Bank of Canada). Non-DCA Fund money market investments held by the Town of Markham in 2007 had an average return of 4.50%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 34 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in 2007.

Bond Market Performance

2007 marks the sixth year of the Town’s bond strategy. The 2007 highlights of the program are as follows:

20 bonds were purchased with a face value of $41.7 million
4 bonds were sold with a combined face value of $6.8 million
$154,000 of Capital Gains were realized

The strategy in the first quarter of 2007 was to sell some short term bonds with high yields to take advantage of higher short term rates. For the last few quarters, the long bond yields have declined significantly (i.e. 2 year Canada bonds are currently at 3.10% and 10 year Canada bonds at 3.85%). As a result, the strategy during this period was to try and maximize return on investment by capitalizing on higher rates of return with structured bonds (i.e. step up bonds that can be called by the issuer at certain dates but have much higher yields to reflect this feature). Looking forward to 2008, it is not predicted that bond yields will go much lower than current levels (as a result some profit taking occurred in January 2008). The strategy for Q1 2008 will be to put a hold on bond purchases until the rates begin to come back up over 4%.

At December 31, 2007, the Town held 71 bonds (up from 57 in 2006) in the general fund portfolio. The amortized value of these bonds at year-end was $139.2 million (an increase of $27.8 million over 2006). The market value of these bonds at December 31, 2007 was $138.2 million. This translates into $996,000 of unrealized losses. The justification of the unrealized loss is that during the last few years while bond yields have been low, the strategy was to purchase more short term municipal and structured bonds (i.e. callable set up bonds). While these bonds have higher average yields, they are also far less liquid and therefore have lower market values. However since these bonds were purchased as part of a buy-and-hold strategy, the unrealized loss is simply a function of the market value at year end and not representative of the profitability to the Town. See Appendix 5 for all 2007 bond transactions.

Reserve Funds and Other Interest

The following table outlines the interest on investments for all major Town funds and reserves.

	Average Balance	Interest Earned	Average Rate
General Portfolio	$164,636,000	$7,259,000	4.41%
Reserve Funds/Varley Trust	$114,134,000	$5,140,000	4.50%
Powerstream Promissory Note	$67,866,000	$3,787,000	5.58%
MEC/District Energy Loans	$16,800,000	$785,000	4.67%
Development Charges Reserve	$85,243,000	$3,834,000	4.50%

Outlook

The forecast for 2008 is that interest rates are expected to decline in the early part of the year by 75-125 basis points. This will result in much lower returns on money market instruments. However, as a significant portion of the general portfolio is invested in longer term instruments, the investment income forecast for 2008 will remain unchanged from the 2007 level of $7.1 million.

Interest Rate

Portfolio Balance

Money Market Performance

Bond Market Performance

Exhibit 4 – 2006 Money Market Investments