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HomeMy WebLinkAboutItem No. 9 Presentation 02-09-2022 Administration Committee - Chandler Presentation.pdfCHANDLER ASSET MANAGEMENT, INC. | 800.317.4747 | www.chandlerasset.com INVESTMENT REPORT Period Ending December 31, 2021 Orange County Sanitation District SECTION 1 Firm Overview SECTION 2 Economic Update SECTION 3 Account Profile Table of Contents As of December 31, 2021 1 SECTION |Section 1 |Firm Overview 2 Specializing in Investment Management for Public Agencies “We believe if we do what is right for our clients, our own success will follow.” ▪Independent & Employee-Owned •Fixed income specialist since 1988 •Founded by public investment professionals •Serve institutions with public sector focus •Headquartered in San Diego, CA ▪Custom Investment Programs •Investment solutions based on your risk profile and return goals •Strategies for operating, short-, and long-term reserves •Direct contact with investment management team ▪Stable Team of Investment Professionals •Team of investment professionals average over two decades portfolio management experience •Disciplined, repeatable investment philosophy and process •Proprietary investment analysis Chandler Asset Management Assets as of December 31, 2021. Assets Under Management $25.8 Billion Corporate <1% Non Profit 1% Healthcare 17% Sub-advisory 1% Public 81% 3 Lasting Partnerships with Neighbors and Peers Local Water District, Sanitation District, and Utilities Clients Client Name AUM Orange County Sanitation District $973 M Coachella Valley Water District $372 M Rancho California Water District $330 M Western Municipal Water District $241 M Elsinore Valley Muni. Water District $205 M Alameda County Water District $170 M San Diego County Water Authority $146 M Moulton Niguel Water District $91 M Vallecitos Water District $53 M West Basin Municipal Water District $50 M San Bernardino Municipal Water Department $42 M East Orange County Water District $36 M Walnut Valley Water District $34 M Neighboring Public Agency Clients Client Name AUM Transportation Corridor Agencies $1.4 B Orange County Sanitation District $973 M Orange County Transportation Authority $490 M City of Newport Beach $284 M City of Brea $94 M Moulton Niguel Water District $91 M City of San Clemente $81 M City of Buena Park $73 M City of Costa Mesa $63 M City of Tustin $46 M City of Fountain Valley $43 M City of San Juan Capistrano $40 M East Orange County Water District $36 M Chandler’s water agency clients and sampleInland Empire area clients as of December 31,2021.Both lists only include clientsthat have given permission tobe listed.It is not known whether the clients listed approve or disapprove of Chandler Asset Management and the advisory services provided.Includes discretionary and non-discretionary relationships. 4 Our Experienced Team is a Resource for the District Investment Professionals Responsibility Industry Experience Firm Tenure Martin Cassell, CFA CEO Leads the investment team, firm oversight and strategy 1987 1991 William Dennehy II, CFA Co-Chief Investment Officer Implements portfolio strategies, performs credit analysis; Co-Chair of Credit Committee and Economic and Market Analysis Committee 1992 2011 Scott Prickett, CTP Co-Chief Investment Officer Implements portfolio strategies, monitors alignment with client objectives; Co-Chair of Economic and Market Analysis Committee 1987 2014 Jayson Schmitt, CFA Co-Chief Investment Officer Implements portfolio strategies, performs credit analysis; Co-Chair of Quantitative Analysis Committee, Sector Committee and Multi-Asset Class Committee 1994 1995 Dan Delaney, CFA Senior Portfolio Manager Implements portfolio strategies, performs credit analysis 2006 2021 Genny Lynkiewicz, CFA Senior Portfolio Manager Implements portfolio strategies, performs credit analysis; Co-Chair of Sector Committee 2000 2015 Ted Piorkowski, CFA Senior Portfolio Manager Implements portfolio strategies, performs credit analysis 1987 1999 Julie Hughes Senior Portfolio Strategist Implements portfolio strategies and monitors alignment with client objectives and policies 1993 2014 Christopher McCarry, AIF Senior Portfolio Strategist Implements portfolio strategies and monitors alignment with client objectives and policies 2001 2013 Carlos Oblites Senior Portfolio Strategist Implements portfolio strategies and monitors alignment with client objectives and policies; Co-Chair of Multi-Asset Class Committee 1995 2017 Shelly Henbest, CFA Senior Credit Analyst Research and credit analysis; Co-Chair of Credit Committee 2000 2009 Charlotte Powell Associate Portfolio Manager Assists with implementation of portfolio strategies 2020 2021 Client Service and Operations Responsibility Industry Experience Firm Tenure Nicole Dragoo, JD, IACCP President Leads the firm’s administration, compliance, operations, and human resources.2000 2001 Don Penner Director of National Accounts Client Service and Relationship Management 2001 2010 Ryan Tauber Managing Director, Business Development Leads the marketing and relationship management team 1999 2020 Mia Corral Brown Senior Relationship Manager Client Service and Relationship Management 1997 2004 Kara Raynor-Sanchez Client Service Director Leads Client Service Team, reporting, onboarding 2012 2012 5 Section 2|SECTION |Section 2 |Economic Update 6 Source: US Department of Labor Source: US Department of Labor Employment The January employment report was remarkably strong.US nonfarm payrolls grew by 467,000 in January, well above the consensus forecast of 125,000. Payrolls in the prior two months were revised significantly higher and on a trailing 3-month and 6-month basis, payrolls have increased an average of 541,000 and 540,000 per month, respectively. The unemployment rate edged slightly higher to 4.0%in January from 3.9%in December as more workers entered the laborforce. The laborparticipation rate increased to 62.2%in January from 61.9%in December but remains lower than the pre-pandemic level of 63.4%. The employment-population ratio increased to 59.7%in January from 59.5%in December,but also remains below the pre-pandemiclevel of 61.2%. The U-6underemployment rate, which includes those who are marginally attached to the laborforce and employed parttime foreconomicreasons, declined to 7.1%in January from 7.3%in December, and is very close to its pre-pandemic level (7.0%in February 2020). Average hourly earnings rose 0.7% month-over-month and were up 5.7% year-over-year in January versus 4.9% in December. -22,000 -18,000 -14,000 -10,000 -6,000 -2,000 2,000 6,000 MO M C h a n g e I n ( 0 0 0 ' s ) Nonfarm Payroll (000's) Non-farm Payroll (000's) 3 month average (000's) 0.0% 4.0% 8.0% 12.0% 16.0% 20.0% 24.0% Unemployment Rate Underemployment Rate (U6) Unemployment Rate (U3) Ra t e ( % ) 7 Source: US Department of Labor Source: US Department of Commerce Inflation The ConsumerPrice Index (CPI) was up 7.0% year-over-year in December, versus up 6.8% year-over-year in November. Core CPI (CPI less food and energy) was up 5.5% year-over-year in December, versus up 4.9%in November. Pricing pressures were widespread in December, with notable gains for used cars and trucks, new vehicles, food, and rent. The Personal Consumption Expenditures (PCE) index was up 5.8% year- over-year in December,up from 5.7%in November. Core PCE was up 4.9% year-over-year in December, versus up 4.7%in November. Current inflation readings continue to run well above the Fed’s longer-run target of around 2.0%. While we believe year-over-year inflation may be at or near a peak, and pricing pressures are likely to abate as we move through the year,we expect inflationary pressures will remain elevated over the near-term. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Personal Consumption Expenditures (PCE) PCE Price Deflator YOY % Change PCE Core Deflator YOY % Change YO Y ( % ) C h a n g e 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Consumer Price Index (CPI) CPI YOY % Change Core CPI YOY % Change YO Y ( % ) C h a n g e 8 Market Based Measure of Longer-Term Inflation Source: Bloomberg 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 10 Year Nominal and Break Even Inflation Rates 10y 10y TIP TIP Lower TIP Upper 9 Source: US Department of Commerce Source: US Department of Commerce -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Gross Domestic Product (GDP) GDP QOQ % Change GDP YOY % Change Gross Domestic Product (GDP) According to the advance estimate, fourth quarter GDP grew at an annualized rate of 6.9%, versus the consensus forecast of 5.7%. Economic growth reaccelerated in the fourth quarter after slowing to a pace of 2.3% growth in the third quarter. While third quarter growth was held back by the outbreak of the Delta variant in the US,we anticipate the recent surge of omicron cases in the US will hamper current quarter economic growth. The consensus estimate calls for 2.8% GDP growth in the current quarter. 3/21 6/21 9/21 12/21 7.4% 7.9% 1.4% 2.3% -0.4% -0.7% 2.1% 5.2% -1.6% -0.2% -1.3% 0.0% 0.8% -0.4% -0.4% -0.3% 0.0% 0.0% 0.5% -0.2% 6.3% 6.7% 2.3% 6.9% Components of GDP Federal Government Expenditures State and Local (Consumption and Gross Investment) Net Exports and Imports Total Gross Private Domestic Investment Personal Consumption Expenditures 10 Source: Bloomberg Source: Bloomberg 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% US Treasury Yield Curve Jan-22 Oct-21 Jan-21 Yi e l d ( % ) Bond Yields At the end of January, the 2-year Treasury yield was about 107 basis points higher, and the 10-Year Treasury yield was about 71 basis points higher, year-over-year. The spread between the 2-year Treasury yield and 10-year Treasury yield was 60 basis points at January month-end compared to the average historical spread (since 2003) of about 130 basis points. 11 Rising Interest Rates Impact on Total Return Source: Bloomberg Benchmark Yields 12/31/19 12/31/20 03/31/21 06/30/21 09/30/21 12/31/21 01/31/22 Fed IOER 1.55 0.10 0.10 0.15 0.15 0.15 0.15 2 year 1.57 0.12 0.16 0.25 0.28 0.73 1.18 3 year 1.61 0.17 0.35 0.46 0.51 0.96 1.38 5 year 1.69 0.36 0.94 0.89 0.97 1.26 1.61 OC San Liquidity 3 mo 12 mo 2 yrs 3 yrs 5 yrs Portfolio 0.00%0.08%0.47%1.12%1.23% Benchmark*0.01%0.05%0.36%0.99%1.14% +/--0.01%0.03%0.11%0.13%0.09% *ICE BofA 3-Month US Treasury Bill Index OC San Long Term 3 mo 12 mo 2 yrs 3 yrs 5 yrs Portfolio -0.63%-0.92%1.70%2.67%2.14% Benchmark*-0.69%-1.00%1.68%2.65%2.09% +/-0.06%0.08%0.02%0.02%0.05% *ICE BofA 1-5 Yr AAA-A US Corp & Govt Index Total Returns as of 12/31/21 12 SECTION |Section 3 |Account Profile 13 Portfolio Characteristics Orange County Sanitation District Liquid 12/31/2021 9/30/2021 Benchmark*Portfolio Portfolio Average Maturity (yrs)0.16 0.27 0.45 Average Modified Duration 0.15 0.27 0.45 Average Purchase Yield n/a 0.11%0.08% Average Market Yield 0.03%0.18%0.09% Average Quality**AAA AA+/Aaa AA+/Aaa Total Market Value 230,856,942 129,858,408 *ICE BofA 3-Month US Treasury Bill Index **Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively. As of December 31, 2021 14 Orange County Sanitation District Liquid Sector Distribution Commercial Paper 2.6% Corporate 3.5% Money Market Fund 3.5% Negotiable CD 4.8% US Treasury 85.6% December 31, 2021 September 30, 2021 Commercial Paper 6.2%Corporate 6.3% Money Market Fund 0.0% Negotiable CD 8.5% US Treasury 79.0% As of December 31, 2021 15 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 0 - 0.25 0.25 - 0.50 0.50 - 1 1 - 1.5 1.5 - 2 2 - 2.5 2.5 - 3 3+ Orange County Sanitation District Liquid ICE BofA 3-Month US Treasury Bill Index Portfolio Compared to the Benchmark as of December 31, 2021 0 -0.25 0.25 -0.50 0.50 -1 1 -1.5 1.5 -2 2 -2.5 2.5 -3 3+ Portfolio 48.2% 38.8% 13.0% 0.0% 0.0% 0.0% 0.0% 0.0% Benchmark*100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% *ICE BofA 3-Month US Treasury Bill Index Duration Distribution Orange County Sanitation District Liquid As of December 31, 2021 16 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 12 months 2 years 3 years 5 years 10 years Since Inception Orange County Sanitation District Liquid ICE BofA 3-Month US Treasury Bill Index Total Rate of Return Annualized Since Inception 11/30/2014 Annualized TOTAL RATE OF RETURN 3 months 12 months 2 years 3 years 5 years 10 years Since Inception Orange County Sanitation District Liquid 0.00%0.08%0.47%1.12%1.23%N/A 0.97% ICE BofA 3-Month US Treasury Bill Index 0.01%0.05%0.36%0.99%1.14%N/A 0.86% Total rate of return:A measure of a portfolio’s performance over time.It is the internal rate of return,which equates the beginning value of the portfolio with the ending value;it includes interest earnings,realized and unrealized gains and losses in the portfolio. Investment Performance Orange County Sanitation District Liquid As of December 31, 2021 17 Portfolio Characteristics Orange County Sanitation District Long Term 12/31/2021 9/30/2021 Benchmark*Portfolio Portfolio Average Maturity (yrs)2.69 2.58 2.78 Average Modified Duration 2.59 2.37 2.54 Average Purchase Yield n/a 1.38%1.45% Average Market Yield 0.93%0.82%0.50% Average Quality**AAA AA+/Aa1 AA/Aa1 Total Market Value 742,225,778 686,382,940 *ICE BofA 1-5 Yr AAA-A US Corp & Govt Index **Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively. As of December 31, 2021 18 Orange County Sanitation District Long Term Sector Distribution ABS 6.0% Agency 21.8% CMO 0.8% Corporate 22.6%Money Market Fund 2.0% Mortgage Pass Thru 0.1% Negotiable CD 2.4% Supranational 9.3% US Treasury 34.9% December 31, 2021 September 30, 2021 ABS 6.0% Agency 24.6% CMO 0.9% Corporate 23.6%Money Market Fund 0.3% Mortgage Pass Thru 0.1% Negotiable CD 2.5% Supranational 10.2% US Treasury 31.8% As of December 31, 2021 19 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 0 - 0.25 0.25 - 0.50 0.50 - 1 1 - 2 2 - 3 3 - 4 4 - 5 5+ Orange County Sanitation District Long Term ICE BofA 1-5 Yr AAA-A US Corp & Govt Index Portfolio Compared to the Benchmark as of December 31, 2021 0 -0.25 0.25 -0.50 0.50 -1 1 -2 2 -3 3 -4 4 -5 5+ Portfolio 4.4% 4.7% 7.9% 23.4% 25.0% 22.0% 12.7% 0.0% Benchmark*0.0% 0.0% 1.6% 33.4% 27.8% 20.1% 17.0% 0.0% *ICE BofA 1-5 Yr AAA-A US Corp & Govt Index Duration Distribution Orange County Sanitation District Long Term As of December 31, 2021 20 -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 12 months 2 years 3 years 5 years 10 years Since Inception Orange County Sanitation District Long Term ICE BofA 1-5 Yr AAA-A US Corp & Govt Index Total Rate of Return Annualized Since Inception 11/30/2014 Annualized TOTAL RATE OF RETURN 3 months 12 months 2 years 3 years 5 years 10 years Since Inception Orange County Sanitation District Long Term -0.63%-0.92%1.70%2.67%2.14%N/A 1.80% ICE BofA 1-5 Yr AAA-A US Corp & Govt Index -0.69%-1.00%1.68%2.65%2.09%N/A 1.76% Total rate of return:A measure of a portfolio’s performance over time.It is the internal rate of return,which equates the beginning value of the portfolio with the ending value;it includes interest earnings,realized and unrealized gains and losses in the portfolio. Investment Performance Orange County Sanitation District Long Term As of December 31, 2021 21 Important Disclosures 2022Chandler Asset Management,Inc,An Independent Registered Investment Adviser. Information contained herein is confidential.Prices are provided by IDC,an independent pricing source.In the event IDC does not provide a price or if the price provided is not reflective of fair market value,Chandler will obtain pricing from an alternative approved third party pricing source in accordance with our written valuation policy and procedures.Our valuation procedures are also disclosed in Item 5 of our Form ADV Part 2A. Performance results are presented gross-of-advisory fees and represent the client’s Total Return.The deduction of advisory fees lowers performance results.These results include the reinvestment of dividends and other earnings.Past performance may not be indicative of future results.Therefore,clients should not assume that future performance of any specific investment or investment strategy will be profitable or equal to past performance levels.All investment strategies have the potential for profit or loss.Economic factors,market conditions or changes in investment strategies, contributions orwithdrawals may materially alter the performance and results of your portfolio. Index returns assume reinvestment of all distributions.Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee,the incurrence of which would have the effect of decreasing historical performance results.It is not possible to invest directly in an index. Source ice Data Indices,LLC ("ICE"),used with permission.ICE permits use of the ICE indices and related data onan "as is"basis;ICE,its affiliates and their respective third party suppliers disclaim any and all warranties and representations,express and/or implied,including any warranties of merchantability or fitness for a particular purpose or use,including the indices,index data and any data included in,related to,or derived therefrom.Neither ICE data,its affiliates or their respective third party providers guarantee the quality,adequacy,accuracy,timeliness or completeness of the indices or the index data or any component thereof,and the indices and index data and all components thereof are provided on an "as is"basis and licensee's use it at licensee's own risk.ICE data,its affiliates and their respective third party do not sponsor,endorse,or recommend chandler asset management,or any of its products or services. This report is provided for informational purposes only and should not be construed as a specific investment or legal advice.The information contained herein was obtained from sources believed to be reliable as of the date of publication,but may become outdated or superseded at any time without notice.Any opinions or views expressed are based on current market conditions and are subject to change.This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as indicator of future results.Past performance is not indicative of future results.This report is not intended to constitute an offer,solicitation,recommendation or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest,credit and market risk.Interest rate risk:the value of fixed income investments will decline as interest rates rise.Credit risk:the possibility that the borrower may not be able to repay interest and principal.Low rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk.Market risk:the bond market in general could decline due to economic conditions,especially during periods of rising interest rates. Ratings information have been provided by Moody’s,S&P and Fitch through data feeds we believe to be reliable as of the date of this statement,however we cannot guarantee its accuracy. Security level ratings for U.S.Agency issued mortgage-backed securities (“MBS”)reflect the issuer rating because the securities themselves are not rated.The issuing U.S.Agency guarantees the full and timely payment of both principal and interest and carries a AA+/Aaa/AAA by S&P,Moody’s and Fitch respectively. As of December 31, 2021 22 Benchmark Disclosures ICE BofA 3-Month US Treasury Bill Index The ICE BofA US 3-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month.At the end of the month that issue is sold and rolled into a newly selected issue.The issue selectedat each month-end rebalancing is the outstanding Treasury Bill thatmatures closest to,but not beyond,three months from the rebalancing date. ICE BofA 1-5 Yr AAA-A US Corp & Govt Index The ICE BofA 1-5 Year AAA-A US Corporate &Government Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market,including US Treasury, US agency,foreign government,supranational,and corporate securities.Qualifying securities must be rated AAA through A3 (based on an average of Moody’s,S&P and Fitch).In addition,qualifying securities must have at least one year remaining term to final maturity and less than five years remaining term to final maturity,at least 18 months to final maturity at point of issuance,a fixed coupon schedule,and a minimum amount outstanding of $1 billion for US Treasuries and $250 million for all othersecurities. ICE BofA 1-5 Yr US Corp & Govt Index The ICE BofA 1-5 Year US Corporate &Government Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market,including US Treasury,US agency,foreign government,supranational,and corporate securities.Qualifying securities must have an investment grade rating (based on an average of Moody’s,S&P and Fitch).In addition,qualifying securities must have at least one year remaining term to final maturity and less than five years remaining term to final maturity,at least 18 months to final maturity at point of issuance,a fixed coupon schedule,and a minimum amount outstanding of $1 billion for US Treasuries and $250 million for all othersecurities. As of December 31, 2021 23