Transcript WHAT WOULD YOU DO WITH A MILLION DOLLARS?

LOCAL GOVERNMENT
INVESTMENT
STRATEGIES
PUT NON-PERFORMING ASSETS IN YOUR GENERAL FUND
TO WORK
R. Strand Kramer, Jr. Ruth H. Webb
First Kentucky Securities Corporation
February 14, 2014
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KRS 66.480 allows these investments:
*Obligations of the US, its agencies and corporations
*FDIC-insured or collateralized certificates of deposit
or interest- bearing bank accounts
*Uncollateralized CDs issued by highly rated banks
*Banker’s acceptances for highly rated banks
*Highly rated Commercial Paper
*Bonds or certificates of the Commonwealth or its
agencies
*Securities issued by highly rated state or local
government
*Mutual funds of an eligible company
INVESTING PUBLIC FUNDS:
KENTUCKY LAW
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Bond Ratings
Standard & Poor’s (also Fitch)
Moody’s
Interpretation
Bank-grade (investmentgrade) bonds
AAA
Aaa
Highest rating. Capacity to repay
principal and interest judged high.
AA
Aa
Very strong. Only slightly less secure
than the highest rating.
A
A
Judged to be slightly more
susceptible to adverse economic
conditions.
BBB
Baa
Adequate capacity to repay principal
and interest. Slightly speculative.
Speculative (noninvestmentgrade bonds)
BB
Ba
Speculative. Significant chance
that issuer could miss an
interest payment.
B
B
Issuer has missed one or more
interest or principal payments.
C
Caa
No interest is being paid on
bond at this time.
D
D
Issuer is in default. Payment of
interest or principal is in arrears. 3
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INVESTMENT POLICY
The governing body
adopts a written
policy and designates
those authorized to
invest. It sets
standards and
procedures for
making and
monitoring
investments and
qualifications for
agents.
MANAGING RISKS
Concentration of
credit risk
• Custodial credit risk
• Issuer credit risk
• Interest rate
• Inflation
• Call
• Prepayment
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LOCAL DECISIONS
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U.S. TREASURY SECURITIES
Low risk
Low return
Sold at public auction
Liquid– may be sold in the market before
maturity
Interest earned is federally taxed, exempt
from state and local taxes
ALLOWED INVESTMENTS
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TREASURY BILLS
TREASURY NOTES
Maturity less than one
year (4, 13, 26 wks)
 Sold at a discount;
mature at par (face
value)
 Difference between
purchase price and par
is the interest earned
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Maturity between 1
year and 10 years
(currently issued at
2, 3, 5, 7, and 10
years)
 Pay interest every six
months
U.S. Treasuries
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TREASURY BONDS
Maturities over 10
years
 Pay interest semiannually
 Mature at par
 Auctions are held
quarterly
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TREASURY INFLATIONPROTECTED SECURITIES
(TIPS)
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Offered for 5, 10 and 30 years
Principal increases with
inflation and decreases with
deflation, as measured by the
CPI
At maturity, investor is paid
the greater of the inflationadjusted principal or original
principal
Pay interest every 6 months
Interest is federally taxable
when received
U.S. Treasuries
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SEPARATE TRADING OF REGISTERED
INTEREST AND PRINCIPAL OF
SECURITIES (STRIPS)
 Investors may buy and sell the interest
and principal components of eligible
Treasury notes and bonds as separate
securities. Each interest payment and
each principal payment becomes a “zerocoupon” security which does not pay
periodic interest payments.
U.S. Treasuries
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Issued by a state or local government to
finance capital expenditures
Investors receive fixed principal and interest
payments (generally semi-annually) for the
life of the bond.
Reliable income stream
Safety of principal (be alert to credit ratings)
Income may be federally tax exempt and
state tax exempt in the state of issue unless
private purpose (e.g., football stadium)
MUNICIPAL BONDS
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Investment in a pool of mortgages
• Investor receives monthly payments which may
include some principal as well as interest
• Backed by U.S. government-sponsored
corporations (GNMA, FHLMC, FNMA). Only GNMA
is backed by “full faith and credit” of the U.S.
• Safety, income, possible capital appreciation
• May be sold before maturity in the market
• Interest is higher than Treasuries; is taxable
• Mortgages may be prepaid, so monthly income
may vary. Prepayments are passed to investors.
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MORTGAGE-BACKED SECURITIES
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Fixed-income securities with short-term
maturities (one year or less)
 Highly liquid
 High degree of safety
 Suitable if invested in authorized
instruments
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MONEY MARKET SECURITIES
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Commercial Paper
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Unsecured loan
Issued by a highly
rated corporation
Maturity less than 9
months
Issued in $100,000 and
higher denominations
Sold at a discount and
matures at par
Banker’s Acceptance
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Secured by a bank
letter of credit
Issued by a highly
rated corporation
Used between foreign
trading partners
Actively traded in the
secondary market
Sold at a discount and
matures at par
MONEY MARKET SECURITIES
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Repurchase Agreement
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One bank or dealer sells
securities to another with
agreement to repurchase
at a set time and price.
Interest is the difference
between sale and
repurchase prices
Similar to a fully
collateralized loan
Lender can sell the
securities if the issuer
defaults
Negotiable Certificate
of Deposit
Offered by a bank in
large denominations
($1 mm up)
 Interest rate and
maturity date are
negotiated
 Unsecured promissory
note of the bank
 May be traded in
secondary market
before maturity
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MONEY MARKET SECURITIES
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Each fund pools investor resources to purchase a
number of securities
Each fund has a different strategy and investment
objective (Low risk funds have lower returns)
A load fund charges for shares, plus a sales fee
A no-load fund does not have a sales fee, but has
management fees
Instant diversification
May add to account any time
Professional managers make investment decisions
Fees are charged regardless of success
MUTUAL FUNDS
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Your investment policy includes reporting guidelines:
to whom the financial advisor reports, how often, and
essential information to report.
 At a minimum, you want to know: (1) Are we
investing in authorized instruments? And (2) How are
our investments performing?
 The report should include a list of every investment
with price, yield and maturity; monthly income, fees
and expenses; performance comparisons with market
benchmarks.
 Routine reporting will allow officials to monitor trends
over multiple reporting periods.
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MONITORING YOUR PORTFOLIO
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U.S. growth reached a 3.2% annual rate
last quarter on strong consumer
spending.
Dow Jones Industrial Average was up
26% in 2013, best since 1996.
Average unemployment improved to
7.43% for 2013, compared to 8.08% for
2012.
A Congressional budget deal in January
2014 lessened the sequestration cuts and
policy gridlock that were a drag in 2013.
UK and Eurozone pulled out of their
recessions and China’s growth stabilized.
Long-term unemployment and stagnant
pay rates in the U.S. are cause for
concern.
Manufacturing, construction and home
sales remain below optimal.
The Dow lost 5.6% during January 2014
due to weakness in emerging markets,
the Federal Reserve taper of economic
support, and profit taking.
The Global
Economy 2014
“Most
economies are
doing better than they
were a year ago. They
should be able to
improve further in
2014. It is unlikely the
U.S. will slide back into
recession in the next
12-18 months. Most
stock markets will
deliver positive returns
and bond yields will
move somewhat
higher.”
Global Insight2014 Outlook
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ENERGY DEVELOPMENT
Shale oil extraction is ramping up so quickly,
the U.S. is on track to become the world’s
leading oil producer by 12/15.
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MANUFACTURING RESURGENCE
Foreign wages growing faster than foreign
productivity and lower relative energy costs allow
U.S. corporations to expand capacity at home.
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RECOVERY IN HOUSING
Home prices have risen for 22 months
straight.
Three Catalysts Drive U.S. GDP in
2014
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During the 2007-2010
recession, Kentucky lost
120,000 non-farm jobs.
At the present rate of growth, it
will take 4 more quarters to
regain pre-recession peak
employment.
Kentucky’s labor market is
shrinking due to baby boomers
retiring and individuals without
skills leaving the job market.
Transportation sector grew
4.2% in 2013 and remains the
state’s top industrial sector,
employing 44,613.
Kentucky exported $23 Billion
in products and services in
2013; 2nd best growth in U.S.
Kentucky
Economy in 2014
“Unemployment
in the
Commonwealth should
continue to fall from the
8.2% rate recorded in
November 2013. The
service sector is
projected to show the
most growth.
Manufacturing and
construction will increase
as Kentucky automobile
manufacturers enjoy the
rebound in the U.S.
market.”
Governor’s Office for
Economic Analysis
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In 2013, with nearly ideal
growing conditions across the
state, ag sales topped $6 billion,
a record.
Livestock led the growth due to
strong equine, poultry and cattle
markets. Profitability should
continue with strong prices and
lower feed costs.
Tight supplies of quality burley
tobacco and demand for
smokeless should keep tobacco
value near post-buyout highs.
There are new markets and
growing demand for local fruits
and vegetables.
Kentucky is among the top 3
leading producers of hardwood
sawlogs in the nation.
Kentucky
Economy in 2014
“The
Kentucky
agricultural outlook is
more favorable than
the national farm
projections, especially
if the equine market
remains firm and if
stored surplus grain
from 2013 sells well in
2014.”
University of
Kentucky
Cooperative
Extension Service
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Average 10-year AAA municipal bond yield for 2013
was 2.42%.
Slow, steady progress for the U.S. economy in 2014
means reasonable rate targets of 2.5% to 3.0%.
Default rate for munis rated by Moody’s over past 5
years is .03%.
Revenue bonds may be tied to an issuer’s revenue
stream. They have high credit quality, low default
rate, attractive yields.
Focus on high credit quality. Ladder maturities to
match cash-flow needs. Be patient to take advantage
of higher yields when special situations arise.
FIXED INCOME INVESTING FOR
2014
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R. Strand Kramer, President
Ruth H. Webb, Public Finance Associate
First Kentucky Securities Corporation
Main and Ann Streets, Frankfort, KY
40601
502-875-4611
[email protected] or [email protected]
www.firstky.com
CONTACT US
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