Report to: General Committee Report Date: Nov 17, 2008

SUBJECT: 2008 Third Quarter Investment Performance Review

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

RECOMMENDATION:

THAT the report dated November 17, 2008 entitled “2008 Third 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 nine months ending September 30, 2008, the Town of Markham’s Income Earned on Investments was $6.48 million, compared to a budget of $5.30 million, representing a $1.18 million 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

As of Q3 2008, 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

The Bank Rate was 4.50% as at January 1, 2008. The Bank of Canada cut the Bank Rate by 125 basis points throughout the first four months of the year. Despite the dramatic cuts to interest rates, the Town was well protected with a large portion of its investments in longer term securities. As a result, during the three quarters of 2008, the Town’s investments had an average interest rate of 4.23%; 3 basis points higher than budget. However, through active bond trading, the Town realized $244,000 of Capital Gains, thereby increasing the actual rate of return to 4.40%; 20 basis points over the budgeted rate. The difference in the rate of return accounts for a favourable variance of $289,000.

Portfolio Balance

The budgeted average portfolio balance for the first three quarters of 2008 is $168.7 million. The actual average general fund portfolio balance (including cash balances) for the first three quarters of 2008 was $197.2 million. The higher portfolio balance accounts for a favourable variance of $896,000.

Portfolio Composition

All investments made in the first three quarters of 2008 adhered to the Town of Markham investment policy. At September 30, 2008, 36% of the Town’s portfolio was comprised of government issued securities. The remaining 64% of the portfolio was made up of instruments issued by Banks, with Schedule I Banks and Schedule II Banks representing 58% and 6% of the portfolio, respectively. All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

The September 30, 2008 investment portfolio was comprised of the following instruments: Banker’s Acceptances 19%, Bonds 39%, Banker’s Deposit Notes 26%, Accruals 3%, T-Bills/ Provincial Promissory Notes 7%, and Certificates of Deposit/Term Deposits 6% (Exhibit 2).

At September 30, 2008, the Town’s portfolio balance for all funds was $357.0 million. DCA investments represented $86.5 million of this amount. The Town’s portfolio (all funds excluding DCA) of $270.5 million was broken down into the following investment terms (Exhibit 3):

Sept 2008 Sep 2007

Under 1 month 10.5% 24.2%

1 month to 3 months 37.4% 34.6%

3 months to 1 year 21.3% 23.9%

Over 1 year 30.8% 17.2%

Weighted average investment term 999.2 days 654.6 days

Weighted average days to maturity 675.9 days 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 three quarters of 2008 was 2.66% (source: Bank of Canada). Non-DCA money market investments held by the Town of Markham during the first three quarters of 2008 had an average return of 3.49%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 83 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in the first three quarters 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:

• 29 bonds were purchased with a face value of $84.0 million
• 8 bonds were sold with a combined face value of $21.5 million
• $244,000 of Capital Gains were realized

The strategy in 2008 was to take advantage of the large spread in yields between banks and most government instruments. Due to the asset-backed securities scare and the recent economic downturn, 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 2008, the Town sold 8 government-backed bonds which netted capital gains of $244,000. The proceeds were reinvested into bank bonds and some structured provincial product at much higher yields.

Outlook

The Town will continue to take advantage of the high yields being offered by Canadian Banks on longer term investments. The Town will continue to ensure at least 30% of its portfolio is invested in government securities, however the duration of those investments will be kept shorter. For the remaining three months of 2008, the Town should continue to see a 4.4% return on investment, although the portfolio balances will be lower (as typically occurs in Q4). Therefore, it is estimated that the year end surplus will be in the $800,000 to $1,00,000 range.

OPTIONS/ DISCUSSION:

Not Applicable

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

Not Applicable

ENVIRONMENTAL CONSIDERATIONS:

Not Applicable

ACCESSIBILITY CONSIDERATIONS:

Not Applicable

ENGAGE 21^ST 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 Q3 Money Market Investments

Exhibit 5 – 2008 Q3 Bond Market Investments

Exhibit 6 – 2008 Q3 DCA Fund Investments