Transcript Presentation - Fresno County

FRESNO COUNTY EMPLOYEES
RETIREMENT ASSOCIATION
May 3, 2006
Peter Palfrey, CFA
Vice President, Portfolio Manager
Ken Johnson
Vice President, Client Portfolio Manager
CONTENTS
Guideline Summary / Investment Results
Portfolio Characteristics
Market Review & Outlook
Account Team
Appraisal of Holdings
2
Fresno County Employees Retirement Association
GUIDELINE SUMMARY
3

Benchmark: Lehman Brothers US Aggregate Index

Position Limits: 5% per issuer (excluding Governments and GSE’s)

Below Investment Grade: up to 20% permitted

Minimum Quality: “B3” by Moody’s or Standard & Poor’s

Non-Investment Grade EMG: not permitted

Duration: +/- 30% to the Benchmark

Non-Dollar: not permitted
INVESTMENT RESULTS
1st Qtr.
2006
1-Year
2-Year
3-Year
Annualized
Since
Inception
Fresno County Employees Retir. Assn. - Gross
-0.08%
2.96%
2.34%
4.30%
3.50%
Fresno County Employees Retir. Assn. - Net
-0.14%
2.70%
2.11%
4.06%
3.25%
Lehman Aggregate Bond Index
-0.65%
2.26%
1.70%
2.92%
4.86%
Inception 07/31/2001
Adjusted Benchmark: Benchmark changed from Lehman Universal Index to Lehman Aggregate Index: 7/1/03
4
Characteristics
CHARACTERISTICS SUMMARY AS OF 03/31/2006
Fresno County
Employees
Lehman Aggregate
Retirement Assn.
Bond Index
5.81%
7.23 years
4.68 years
5.61%
Aa2
5.48%
6.66 years
4.67 years
5.25%
Aa1
Yield to Maturity
Average Maturity
Effective Duration
Coupon Rate
Average Quality
Duration used is: Effective
Data source: Lehman Brothers Research
5
Portfolio Overview
FIXED INCOME PORTFOLIO STATISTICS: Period ending 03/31/2006
Fresno County Employees Retirement Assn.
US Credit
22%
Asset-backed
7%
Lehman Aggregate Bond Index
US Credit
23%
High Yield
12%
CMBS
5%
Cash
3%
Asset-backed
1%
CMBS
5%
Treasury
25%
Treasury
10%
Mortgage-backed
35%
6
Agency
6%
Mortgage-backed
35%
Agency
11%
Portfolio Overview
FIXED INCOME PORTFOLIO STATISTICS: Period ending 03/31/2006
Maturity Distribution
50%
45%
40%
35%
41% 43%
30%
25%
20%
15%
10%
5%
19%
23%
18%
13%
6%
1%
1%
Under 1 Year
7
Lehman Aggregate Bond Index
8%
0%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
21%
Fresno County Employees Retirement Assn.
67%
1-3 Years
3-5 Years
5-10 Years
10-20 Years
6%
Over 20 Years
Quality Distribution
79%
Fresno County Employees Retirement Assn.
Lehman Aggregate Bond Index
16%
3%
AAA
5%
AA
8%
4%
8%
10%
0%
A
BAA
BA & Below
Bond Market Environment
Yield (%)
HISTORICAL US TREASURY YIELD CURVES
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
03/31/06
03/31/05
0
5
10
15
20
25
30
Maturity (years)
3 Months
3/31/05
3/31/06
Yield Change (bps.)
6 Months
1 Year
2 Year
5 Year
10 Year
30 Year
2.74%
4.63%
2.98%
4.82%
3.20%
4.88%
3.59%
4.82%
3.99%
4.81%
4.36%
4.85%
4.71%
4.90%
189
184
168
124
82
50
19
3.55
3.54
3.01
2.08
0.45
0.40
0.37
Total Return (%)
03/31/05 -03/31/06
8
Data source: Lehman Brothers
Bond Market Environment
BOND MARKET SECTOR RETURNS
12.27
EMG (USD)
HY
2.74
US Corp
2.43
US Agg.
2.79
Treasury
2.61
US
US
1.68
MBS
12.00
9.00
6.00
3.00
0.00
Corporate
Return (%)
2005
YTD 2006
Return (%)
3.46
3.00
2.00
1.00
0.00
-1.00
-2.00
2.27
-0.07
-1.17
US
Corporate
-1.23
MBS
US
Treasury
9
Data Source: Lehman Brothers Fixed Income Research
-0.65
US Agg.
US. Corp
HY
EMG (USD)
-3.0
10
Monthly Data
Source: Lehman Brothers; History Through March 2006
U.S. Corporate
(Hedged USD)
-0.52
Global Aggregate
-0.07
Global Aggregate
Dollar)
2.0
Emerging Markets (U.S.
U.S. Convertibles: Busted
3.0
U.S. Corporate High Yield
-1.23
Investment Grade
-0.65
CMBS: Erisa Eligible
0.25
Asset-Backed Securities
Backed Securities
-0.20
Fixed Rate Mortgage
Municipal Bond
U.S. Agency
U.S. Treasury: U.S. TIPS
U.S. Treasury
1.0
3 Month Treasury Bills
-1.0
U.S. Aggregate
Bond Market Environment
SECTOR YTD TOTAL RETURNS through March 2006
Percent
Percent
5.0
4.22
5.0
4.0
4.0
2.89
3.0
1.62
2.0
1.03
0.25
1.0
0.0
-0.10
0.0
-1.17
-0.67
-2.0
-1.0
-2.0
-2.25
-3.0
Bond Market Environment
SECTOR YTD EXCESS RETURNS through March 2006
Basis Points
Basis Points
400
400
383
338
300
300
200
200
100
100
44
31
29
38
0
0
U.S. Agency
Fixed Rate Mortgage
Backed Securities
Monthly Data
Source: Lehman Brothers; History Through March 2006
11
Asset-Backed
Securities
U.S. Corporate
U.S. Corporate High Emerging Markets
Investment Grade
Yield
Bond Market Environment
US CORPORATES: INVESTMENT GRADE OAS
Option Adjusted Spread (bps)
Option Adjusted Spread (bps)
250
250
U.S. Corporate Investment Grade
225
225
200
200
175
175
150
150
125
125
100
100
75
75
50
50
96
12
97
98
Monthly Data
Source: Lehman Brothers; History Through March 2006
99
00
01
02
03
04
05
06
Bond Market Environment
US CORPORATES: HIGH YIELD OAS
Option Adjusted Spread (bps)
Option Adjusted Spread (bps)
1100
1100
U.S. Corporate High Yield
1000
1000
900
900
800
800
700
700
600
600
500
500
400
400
300
300
200
200
01
13
02
Monthly Data
Source: Lehman Brothers; History Through March 2006
03
04
05
06
Bond Market Environment
HIGH YIELD CREDIT QUALITY TRENDS
450
# of Upgrades & Downgrades Each Year
409
400
370
350
336
Downgrades
317
Upgrades
325
300
252258
241
250
175
167
150
109
50
246
226
201
200
100
272
86
75
37
75
57
48
97 92
90 84
50
64
123
94 10097
167
178
153
137
114
100
115
92
64
43
34
14
Yearly Data
Source: Moodys; History Through March 2006
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
0
Bond Market Environment
US DEFAULT TRENDS
Billions of Dollars
Percent
14%
14%
Trailing 12-month Issuer Default Rates
Forecast
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
72
15
12%
74
76
78
80
82
84
86
Monthly Data
Source: Moodys; History Through Mar-2006, Moodys Forecast Through: Mar-2007
88
90
92
94
96
98
00
02
04
06
Bond Market Environment
MBS: ZV OAS Through March 2006
200.5
180.5
160.5
140.5
cc spr
120.5
1std
100.5
1std
104wk Avg
80.5
Avg
60.5
40.5
20.5
16
Source: Lehman Brothers; History Through 3/31/2006
3/31/06
3/31/05
3/31/04
3/31/03
3/31/02
3/31/01
3/31/00
3/31/99
3/31/98
3/31/97
3/31/96
3/31/95
3/31/94
0.5
Bond Market Environment
PORTFOLIO THEME
REAL GDP
Quarterly Change Annualized
Percent
Current Situation and Outlook
Inflation
• Overall CPI inflation increased 3.6% year-toyear in February. Relatively stable energy
prices should trim inflation in 2006 and 2007.
Employment
• The labor market improved as the disruptions
from the hurricane faded. Initial jobless claims
have dropped to pre-recession levels.
Monetary Policy
• The Federal Reserve has tightened by 375 bp since
June 2004 to a funds rate of 4.75% on March 28.
Expect Fed Chairman Ben Bernanke to tighten two
more times by 25 bp each.
Investment Conclusions and Concerns
17
• The 10-year Treasury yield has trended up since
mid-January 17 as economic prospects seemed to
improve. The current yield is about 5.00%, our
target for the end of June and the highest since June
2002.
Updated as of 04/10/06 by LS Economics 8
Percent
8%
8%
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
98
99
00
01
02
03
04
05
06
07
Chain-Weighted, Seasonally-Adjusted, Quarterly Data; Shaded Areas Denote NBER-Designated Recessions
Source: Commerce Department; History Through Q4:2005
01Q-02B
INITIAL UNEMPLOYMENT CLAIMS
Four-Week Moving Average
Seasonally Adjusted; Weekly Data
500
500
450
450
400
400
350
350
300
300
250
250
90
91
92
93
94
95
Four-Week Moving Average; Seasonally Adjusted; Weekly Data
Source: Department of Labor; History Through April 1, 2006
96
97
98
99
00
01
02
03
04
05
06
07
03W-01
Bond Market Environment
ECONOMIC FORECAST
• According to revised estimates, real GDP rose a sluggish 1.7% in
Q4:2005, seemingly because of hurricane disruption and an energy
shock. Rebuilding in the Southeast and lower energy prices should
boost growth in early-2006. The budget deficit will remain huge.
Inflation should ease in 2006 and 2007 as energy prices stabilize.
2004
2005
2006
2007
Real GDP Growth
4.2%
3.5%
3.6%
3.3%
CPI Inflation
2.7%
3.4%
3.0%
2.3%
Current Account Balance
(billion)
-$668
-$805
-$912
-$942
Federal Budget Balance, NIPA
Definition (billion)
-$406
-$323
-$334
-$387
Unemployment Rate
5.5%
5.1%
4.7%
4.9%
18
Calendar year – Average basis. 2006 & 2007 are projected by LS Economics as of 04/10/06.
Bond Market Environment
PORTFOLIO THEME – NON US DOLLAR
The current account deficit points to long-term weakness in the US dollar.
U.S. CURRENT ACCOUNT
Billions of Dollars
200
Percent of GDP
History
Forecast
2.0
100
1.0
0
0.0
-100
-1.0
-200
-2.0
-300
-400
Level (Left Scale)
Percent of GNP (Right Scale)
-3.0
-4.0
-500
-5.0
-600
-6.0
-700
-7.0
-800
-8.0
-900
-9.0
-1000
-10.0
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Seasonally Adjusted, Quarterly Data; Shaded Areas Denote NBER-Designated Recessions
Source: Commerce Department; Loomis Sayles; History Through Q4:2005; Forecast Through Q4:2007
07Q-12F
• The currencies of countries that run current account deficits greater than 5% of
GDP often depreciate significantly. The U.S. deficit was 6.4% of GDP in 2005 and
is forecasted to be 6.9% in 2006 and 6.7% in 2007.
19
Updated by LS economics as of 04/10/06
Bond Market Environment
FOREIGN OFFICIAL HOLDINGS OF U.S. TREASURY SECURITIES
Billions of Dollars
Billions of Dollars
Break in Data
1300
1250
1250
1200
1200
1150
1150
1100
1100
1050
1050
1000
1000
950
950
900
900
850
850
800
800
750
750
700
700
650
650
600
600
550
550
1999
20
1300
2000
2001
Source: Department of the Treasury; History Through January 2006
2002
2003
2004
2005
2006
2007
07M-18
Bond Market Environment
PORTFOLIO THEMES – CORE PLUS
Sector
Security/Industry
Specific
Duration/Yield Curve
21
• Reduced underweight to Government market.
• Reduced overweight to corporate bonds
– Yield advantage versus Treasurys approaching fair value
– Emphasis within the credit allocation is to higher yielding BBB-rated
and HY securities that have stable to improving credit trends and/or
deleveraging situations
• Approximately market-neutral weight to mortgages
– Mortgages currently offer an attractive nominal yield advantage
versus cash and Treasurys.
– Potential extension/prepayment risk needs to be managed through
security and maturity sector selection
• Overweight to AAA-rated ABS and CMBS sectors
• Shifting exposure to those industries that we believe will perform
best in the present “mid-economic cycle” environment
• We are maintaining duration at 100% of benchmark, reflecting our
expectation that yields on longer maturities are likely to remain rangebound over the near term. The Federal Reserve Bank has already raised
short rates by 375 basis points since the most recent monetary tightening
process began in June, 2004, and is expected to tighten an additional 2550 basis points in 2006. The FOMC has indicated that it is nearing the
end of the current tightening cycle, and will likely become more “data
dependent” regarding future FOMC actions.
• Our emphasis on a combination of shorter and longer maturities
(barbelled) remains in place, in anticipation of some additional curve
flattening, or potentially, yield curve inversion.
• Tactical use of TIPS (recently exited position)
Contact Information
ACCOUNT TEAM
Kenneth M. Johnson
Vice President, Client Portfolio Manager
Email [email protected]
Phone 312-346-9750
Fax 312-346-4061
Patricia Bednarek
Administrative Assistant
Email [email protected]
Phone 312-346-9750
Fax 312-346-4061
22
Peter W. Palfrey, CFA
Vice President, Portfolio Manager
Email [email protected]
Phone 617-482-2450
Fax 617-542-1358