MINUTES FROM MEETING OF IVESTMENT SUBCOMMITTEE
OF THE CASH MANAGEMENT POLICY BOARD
OFFICE OF THE STATE TREASURER, CONFERENCE ROOM
March 31, 2015
A meeting of the Investment Subcommitteeof the Cash Management Policy Board was held on Tuesday, March 31st, 2015 at 10:00AM in the Conference Room of the Office of the State Treasurer
Located at 820 Silver Lake Blvd., Suite 100, Dover, Delaware.
Board Members in Attendance:
Mr. John Flynn, Chairman, Cash Management Policy Board (telephonically)
Mr. Dave Marvin, Chair, Investment Subcommittee of the Cash Management Policy Board (telephonically)
Mr. Mike Karia, Co-Chair, Investment Subcommittee of the Cash Management Policy Board (telephonically)
The Honorable Ken Simpler, State Treasurer
Board Members Not in Attendance:
The Honorable Tom Cook, Secretary, Department of Finance
Others in Attendance:
Mr. Chip Kurtzman, Director, Credit-Suisse North America (telephonically)
Mr. Bill Lane, Vice President, Credit-Suisse North America (telephonically)
Mr. Steve McVay, Director of Finance & Investment Services, Office of the State Treasurer
Mr. Jeff Hoover, Investment Manager, Office of the State Treasurer
Ms. Martha Sturtevant, Executive Assistant to the State Treasurer
CALLED TO ORDER
Mr. Simplercalled the meeting to order at approximately 10:05 AM
Mr. Marvin began by thanking Mr. Simpler for contacting him in advance of the meeting to prepare him with an executive summary.
Mr. Simpler stated that he worked with the portfolio managers to prepare the proposals being presented, and that while those being presented were within his risk tolerance, he defers to the board’s collective guidance.
Mike Karia added that it was a refreshing change in the OST administration, and thanked him for respecting the experience of the subcommittee.
LAND & WATER RFP
Mr. Simpler asked Mr. Hoover to update the Board on the RFP responses. Mr. Hoover said the cutoff date for submissions was 3/30/2015, and OST has received 16 responses. OST is in the process of putting a review committeemade up of OST staff, Mike Karia, and representatives from DNREC to put together some rankings by next Friday. Mr. McVay added that Credit-Suisse will also be on the committee.
CASH MANAGEMENT POLICY BOARD POLICY GUIDELINE PROPOSALS
Mr. Simpler asked Mr. Laneto review the PowerPoint that was distributed before the meeting.
Mr. Lane began with stating there were two mandates for the tactical recommendations for theinvestment guideline modifications to increase return and simultaneously control for risk by allowingfor increased diversification.
In addition to such tactical recommendations, Mr. Lane indicated he will be working with OST to derive structural recommendations to this committee. He indicated that such recommendations require significantly greater undertaking in the study of the state’s cash flow needs and will be evaluated over the next 12 months for future recommendations.
Mr. Lane noted the volatile market in terms of short-term interest rates this past year and stated that as the rates begin to rise from near zero, there would be a great deal of more volatility and we needed to position the portfolio appropriately.
He summarized the 4 proposals:
Proposal #1 Permit longer maturity floating rate securities. He believes this can add 2-5 bps.
Proposal #2 Increase limit on structured securities to 20%. He believes this can add 3-5 bps.
Proposal #3 Allow credit quality to include Single-A securities. He believes this can add 8-12 bps.
Proposal #4 Align Commercial Paper standard to Single-A credit quality. He believes this can add 4-8 bps.
Proposal #1: Mr. Lane reviewed a sample portfolio of current and proposed portfolio metrics based on indices.
Referring to Mr. Lane’s sample, Mr. Flynn asked what the difference was between the return and the yield. Mr. Lane explained that his chart looks at the total return of the portfolio which is made up of yield-the cash flow that the bond pays on a regular basis, plus the expected price appreciation.
Mr. Marvin stated that a yield to maturity metric is more accurate. Mr. Lane added that his example is a yield to maturity metric, agreeing much of the fixed income market is trading at premium, so the actual coupon payment is larger, but the premium reduces your yield to maturity expectation.
Proposal number #1 allows the portfolio to benefit from a rising rate environment, and with rates at a low level to begin with it, limits the downside risk. Managers can buy paper in a less crowded market, and sell to a well-known bid and capitalize on the roll down opportunity.
Mr. Flynn asked if it was well accepted in the market. Mr. Lane confirmed stating the main difference in this proposal is that the current limitation is 2 years, and as a result, since most of the new issues are coming in at the three year mark, there is not a significant amount of paper for managers to purchase that meets the guidelines.
Mr. Karia asked for a qualitative and quantitative review of the activity. Mr. Lane assured Mr. Karia they have a qualitative review on a quarterly basis but he could introduce a more quantitative metric to look at, specifically to each of the managers, measuring the turnover solely related to roll-down. Mr. Karia agreed.
Proposal #2: Increases the portfolio limit on structured securities from 10% to 20%. Mr. Lane gave the context of 2014 legislation under Dodd-Frank that required additional risk analysis, and as a result the AAA securities issued today have a significantly higher level of due diligence then AAA issued in the past.
Mr. Marvin said in his opinion it would take a while for him to be comfortable with what he considers derivative securities, or assetbacked and he was not comfortable with the agency ratings. He noted that markets usually don’t repeat the same mistakes, but he would be against raising the limitations put in this area.
Mr. Flynn asked Mr. Marvin if we should consider flexibility in the asset backed only, rather than the mortgage backs. Mr. Marvin said he didn’t feel it was worth the time to pick up a few bps. Mr. Karia stated he agrees we let this go for now and see how the markets unfold and table for discussion in a few years.
Mr. Simpleragreed with Mr. Marvin that he would never put his confidence solely in the rating agencies. He felt that the correlation aspect, in addition to the marginal bps, was why OST kept proposal #2 in the mix.
Proposal #3: Under the context that A- rated securities default rates are only marginally higher than A rated securities, Mr. Lane states that the addition of A- and split ratings will significantly expand the options available to managers, especially industrial, transportation, utilities and healthcare sectors.
Mr. Marvin said he didn’t have any problem with this, and Mr. Flynn concurred.
Proposal #4: Mr. Lane reviewed the credit description comparison for A2/P2 Commercial Paper and with A rated long term debt allowing these rated securities would give managers access to more non-financial credits.
Mr. Marvin stated he didn’t have any problem with this proposal either.Mr. Simpler noted he would not have presented the Board with the four proposals if his own risk tolerance wasn’t calibrated to accept them.
Mr. Karia asked OSTto work on the language and modify the guidelines, but to take out #2, and present only proposals 1, 3 & 4. Mr. Flynn and Mr. Marvin agreed.
PUBLIC COMMENTS
There was no public present for comment.
NEW BUSINESS
Mr. Simpler addedhe would be sending the committee a scope of services that would be used to go to RFP for the role of an advisor going forward. He announced that Credit-Suisse agreed to extend their contract through the end of the year at a greatly reduced rate and would be adding a simple 1 or 2 page amendment to the contract.
Mr. Simpler stated one of his frustrations attending CMPB as a member of the public was the lack of information on the OST website about the portfolio, and that OST has been working internally to reconcile historic data and making sure the presentation in consistent. OST’s goal is to get up the data for the public on the Treasurer’s website, starting with the historical data.
Mr. Flynn announced that Mr. Cook and Mr. Simpler have had a discussion regarding CMPB responsibilities and that they would be returning to the OST.
ADJOURNMENT
A MOTION was made by Mr. Flynn and seconded by Mr. Kariato adjourn the meeting at 11:10 PM
MOTION ADOPTED UNANIMOUSLY
Respectfully submitted,
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David Marvin
Chair for the Investment Subcommittee, Cash Management Policy Board
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Mike Karia
Co-Chair for the Investment Subcommittee, Cash Management Policy Board
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