Report to: General Committee                                                          Report Date: May 5, 2008

 

 

SUBJECT:                          2008 First Quarter Investment Performance Review

PREPARED BY:               Mark Visser, Manager of Financial Strategy & Investments

 

 

 

RECOMMENDATION:

 

THAT the report dated May 5, 2008 entitled “2008 First Quarter Investment Performance Review” be received.

 

EXECUTIVE SUMMARY:

 

Not applicable

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

 

5. Others (Environmental, Accessibility, Engage 21st, Affected Units)  6. 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, 2008, the Town of Markham’s Income Earned on Investments was $1.761 million, compared to a budget of $1.346 million, representing a $415,000 favourable variance. 

 

The 2008 investment income budget is $7.084 million which assumes an average portfolio balance of $168.67 million and an average interest rate of 4.2%.  The monthly budget allocation has been modified to reflect the changing portfolio balances throughout the year.

 

Period

Avg. Balance

Avg. Rate

Budget

Q1

$130.00m

4.20%

$1,346301

Q2

$189.67m

4.20%

$1,986,081

Q3

$185.72m

4.20%

$1,966,061

Q4

$168.67m

4.20%

$1,785,557

2007 Total

$168.67m

4.20%

$7,084,000

 

The first quarter always has the lowest average portfolio balances as the Town makes payment to the Region and School Board on December 15th and tax payments don’t start flowing in again until late February.  As a result, the Q1 2008 budget assumes an average general fund portfolio balance of $130 million to be invested at an average rate of return of 4.20%. The actual average portfolio balance and the average rate of return were above budgeted levels.  The details of these two factors will be discussed below.

Interest Rate

In the first quarter 0f 2008, the Bank of Canada cut interest rates by 75 basis points.  At March 31, the target overnight rate was 3.50% (the lowest it has been since early 2006).   During the first quarter of 2008, the Town’s investments had an average interest rate of 4.52%; 32 basis points higher than budget.  However, through active bond trading, the Town realized $139,000 of Capital Gains, thereby increasing the actual rate of return to 4.92%; 72 basis points over the budgeted rate.  The difference in the rate of return accounts for a favourable variance of $251,000. 

Portfolio Balance

The budgeted average portfolio balance for Q1 2008 is $130.0 million.  The actual average general fund portfolio balance (including cash balances) for the first quarter of 2008 was $141.5 million.  The higher portfolio balance accounts for a favourable variance of $119,000. 

 

Portfolio Composition

All investments made in the first quarter of 2008 adhered to the Town of Markham investment policy.  At March 31, 2008, 29% of the Town’s portfolio was comprised of government issued securities.  The remaining 71% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 56% and 15% of the portfolio, respectively.   All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

 

The March 31, 2008 investment portfolio was comprised of the following instruments:  Banker’s Acceptances 38%, Bonds 39%, Banker’s Deposit Notes 11%, Accruals 2%, T-Bills/ Provincial Promissory Notes 7%, and Certificates of Deposit 3% (Exhibit 2).

 

At March 31, 2008, the Town’s portfolio balance for all funds was $393.5 million.  DCA and MEC investments represented $77.6 million of this amount.  The Town’s portfolio (all funds excluding DCA and MEC) of $315.9 million was broken down into the following investment terms (Exhibit 3):

 

Under 1 month                                                 24.2%

1 month to 3 months                                                     34.6%

3 months to 1 year                                                        23.9%

Over 1 year                                                                  17.2%

 

            Weighted average investment term                                654.6 days

Weighted average days to maturity                                399.5 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 2008 was 2.96% (source: Bank of Canada).   Non-DC/MEC Fund money market investments held by the Town of Markham during the first quarter of 2007 had an average return of 4.23%.  Therefore, the Town’s money market investments outperformed 3-month T-Bills by 127 basis points.  See Exhibit 4 for all Money Market securities held by the Town of Markham in the first quarter of 2008.

Bond Market Performance

2008 marks the seventh year of the bond trading strategy.  The 2008 YTD highlights of the program are as follows:

 

  • 9 bonds were purchased with a face value of $18.5 million
  • 4 bonds were sold with a combined face value of $2.3 million
  • $139,000 of Capital Gains were realized

 

The strategy in the first quarter of 2008 was to take advantage of the large spread in yields between banks and most government instruments.  Due to the asset-backed securities scare, the prices of federal and provincial bonds have been extremely high (therefore low yields).  As a result, bank bonds looked much more attractive in comparison.  In the first three months, the Town sold 4 government-backed bonds which netted capital gains of $139,000.  The proceeds were reinvested into bank bonds and some structured provincial product at even higher yields.      

 

Outlook

The Bank of Canada cut interest rates by another 50 basis points on April 22.  Fortunately, the Town of Markham has a large percentage of its general portfolio balances investment in bonds and therefore this impact will be reduced as much as possible.

 

OPTIONS/ DISCUSSION:

Not Applicable

 

 

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

 

Not Applicable

 

ENVIRONMENTAL CONSIDERATIONS:

 

Not Applicable

 

ACCESSIBILITY CONSIDERATIONS:

 

Not Applicable

 

 

ENGAGE 21ST CONSIDERATIONS:

 

Not Applicable

 

 

BUSINESS UNITS CONSULTED AND AFFECTED:

 

Not Applicable

 

 

RECOMMENDED

                            BY:    ________________________          ________________________

                                      Barb Cribbett, Treasurer                     Andy Taylor, Commissioner,

                                                                                                Corporate Services

 

 

 

 

ATTACHMENTS:

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2008 Q1 Money Market Investments

Exhibit 5 – 2008 Q1 Bond Market Investments

Exhibit 6 – 2008 Q1 DCA Fund Investments