Report to: General Committee Report Date: April 23, 2010

SUBJECT: 2010 First Quarter Investment Performance Review

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

RECOMMENDATION:

THAT the report dated April 23, 2010 entitled “2010 First Quarter Investment Performance Review” be received.

EXECUTIVE SUMMARY:

Not applicable

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 his 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, 2010, the Town of Markham’s Income Earned on Investments was $2.238 million, compared to a budget of $2.042 million, representing a $196,000 favourable variance.

The 2010 investment income budget is $9.2 million (an increase of $1.0 million over 2009) which assumes an average portfolio balance of $222.22 million and an average interest rate of 4.14%. The monthly budget allocation has been modified to reflect the changing portfolio balances throughout the year.

Period	Avg. Balance	Avg. Rate	Budget
Q1	$200.00m	4.14%	$2,041,644
Q2	$250.00m	4.14%	$2,580,411
Q3	$239.57m	4.14%	$2,499,879
Q4	$199.14m	4.14%	$2,078,066
2010 Total	$222.22m	4.14%	$9,200,000

The first quarter typically has low average portfolio balances as the Town makes payment to the Region and School Board on December 15^thand tax payments don’t start flowing in again until late February. As a result, the Q1 2010 budget assumes an average general fund portfolio balance of $200 million to be invested at an average rate of return of 4.14%. The actual average portfolio balance was below the budgeted level, while the average rate of return was above the budgeted level. The details of these two factors will be discussed below.

Interest Rate

In the first quarter 0f 2010, interest rates continued to be at a historical low with the prime rate at 2.25%, with money market rates in the 0.25% range. During the first quarter of 2010, the Town’s investments had an average interest rate of 4.30%; 16 basis points higher than budget. However, through active bond trading, the Town realized $230,000 of Capital Gains, thereby increasing the actual rate of return to 4.79%; 65 basis points over the budgeted rate. The difference in the rate of return accounts for a favourable variance of $302,000.

Portfolio Balance

The budgeted average portfolio balance for Q1 2010 is $200.0 million. The actual average general fund portfolio balance (including cash balances) for the first quarter of 2010 was $189.6 million. The lower portfolio balance accounts for an unfavourable variance of $106,000.

Portfolio Composition

All investments made in the first quarter of 2010 adhered to the Town of Markham investment policy At March 31, 2010, 55% of the Town’s portfolio (not including bank balances) was comprised of government issued securities. The remaining 45% of the portfolio was made up of instruments issued by Schedule 1 Banks. All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

The March 31, 2010 investment portfolio (not including bank balances) was comprised of the following instruments: Bonds and similar instruments 68%, T-Bills/ Provincial Promissory Notes 15%, Certificates of Deposit/Term Deposits 2%, and GICs 15% (Exhibit 2).

At March 31, 2010, the Town’s portfolio balance for all funds was $432.4 million (including bank balances). DCA investments represented $74.5 million of this amount. The Town’s portfolio (all funds excluding DCA) of $357.9 million was broken down into the following investment terms (Exhibit 3):

Under 1 month 38.7%

1 month to 3 months 13.2%

3 months to 1 year 3.6%

Over 1 year 44.5%

Weighted average investment term 1,173.9 days

Weighted average days to maturity 920.8 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 2010 was 0.19% (source: Bank of Canada). Non-DC Fund money market investments held by the Town of Markham during the first quarter of 2010 had an average return of 0.50%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 31 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in the first quarter of 2010.

Bond Market Performance

2010 marks the eighth year of the bond trading strategy. The 2010 YTD highlights of the program are as follows:

3 bonds were purchased with a face value of $13.4 million
1 bond was sold with a face value of $4.0 million
$230,000 of Capital Gains were realized

In Q1, there began to be indications that short term interest rates might start to rise. As a result, the Town’s buying activities slowed down and one short term bond was sold. The interest rate trend will be monitored in Q2 to determine the best buying and selling opportunities.

Outlook

As of mid April, the Bank of Canada has still not changed the Prime Rate. Although mortgage rates have begun to rise, which is a good indication that the Bank of Canada will soon follow. As a result, in the upcoming months, the Town will begin to invest the money it currently has in the bank in longer term investments.

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:

ATTACHMENTS:

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2010 Q1 Money Market Investments

Exhibit 5 – 2010 Q1 Bond Market Investments

Exhibit 6 – 2010 Q1 DCA Fund Investments