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Oregon Short-Term Fund

Oregon Short-Term Fund. 2008 OMFOA Spring Conference March 11, 2008 Linda Haglund – Deputy State Treasurer Perrin Lim – Sr. Fixed Income Investment Officer Office of the State Treasurer. Oregon Short Term Fund – Management structure and implementation.

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Oregon Short-Term Fund

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  1. Oregon Short-Term Fund 2008 OMFOA Spring Conference March 11, 2008 Linda Haglund – Deputy State Treasurer Perrin Lim – Sr. Fixed Income Investment Officer Office of the State Treasurer

  2. Oregon Short Term Fund – Management structure and implementation • Role of Oregon Investment Council (OIC) • Investment Process of OSTF • Sources of information • Forecasting • Research • Market analysis – pricing

  3. Role of OIC • Oversight of state financial assets and local government deposits in OSTF • Treasurer & staff implement directions of OIC • PERS, SAIF, Common School Fund, State Agency accounts and the OSTF • Current Assets under management: over $78 Billion • Establishes unique investment policy for each account • Total Portfolio Asset Class Allocation • Asset Class Specific • Manager or Fund Specific (OSTF)

  4. First step in policy development – Know your client • Purpose of funds • Volatility/Risk tolerance • Return objective • Liquidity Requirements For the OSTF, the OIC looks for input from the Oregon Short Term Fund Board.

  5. Common elements for all include: • Type of Securities • Governments, corporate, stocks, real estate, private equity, commercial paper, private placements. • Large cap vs. small cap • Domestic vs. International • Risk “of” the security’s characteristics • Emerging vs. Developed Market • Maturity limits and Duration target for Bonds • Security rating minimum/maximum • Prohibited Investments • Compliance/monitoring/reporting • Benchmark • Expected return over the benchmark • Time frame for evaluation • Longer term assets – market cycle 3-5 years • Short term assets –90 days, rolling, over time

  6. Total Portfolio Asset Class Allocation Policy Example – OPERF Sample Policy Mix and Return Expectations for OPERF Regular Account 1 Based on capital market forecasts developed by the Council’s investment consultant, SIS, for the next two to three market cycles. 2 Total Fund expected returns are simply the weighted averages of the asset class returns.

  7. Manager or Fund Specific Policy Example - OSTF SAMPLE ELEMENTS...... • Maturity Distribution of Portfolio • 50% of the portfolio must mature within 93 days. • A maximum of 25% of the portfolio may mature over one year. • No investment may mature in over 3 years as measured from settlement date.

  8. Sample OSTF Policy Elements… continued • Diversification and Limitations of Portfolio • Eligible Securities: • U.S. Treasury Securities • 100% of the portfolio may be in U.S. Treasury securities. • U.S. Government Agency Securities • 100% of the portfolio may be in U.S. Government Agency securities. • 33% maximum of portfolio per agency issuer. Additional Securities include: • Corporate Indebtedness • Negotiable Certificates of Deposit (NCD’s) • All portfolio investments will be denominated in US$ only. • 10% maximum of portfolio per issuer on all securities and support commitments with the exception of U.S. Treasury (100% maximum) and Government Agency securities (33% per issuer). • Bankers' Acceptances (BA’s) • etc, etc…

  9. Sample OSTF Policy Elements… continued • CREDIT QUALITY • Total weighted average credit quality of the portfolio shall be a minimum of AA or Aa2. • PORTFOLIO LIMITATION • No commitments to buy or sell securities may be made more than 14 business days prior to the…

  10. For OSTF, OIC hands this investment road map to Perrin’s team • Next step, develop a “process” to implement. • Many with solid policies in place, still stumbled. How did we miss the recent landmines?

  11. The Oregon Short-Term Fund (OSTF)… • Employs an active team managed strategy that incorporates a top-down economic and interest rate outlook combined with bottom-up security selection, seeking to add value while adhering to a disciplined risk control process.

  12. Staff’s Investment Objectives • Preservation of Principal • Liquidity • A Market Rate of Return

  13. Portfolio Construction • As detailed in OSTF Portfolio Rules, generally consists of: • High Quality, Top-Tier Commercial Paper • High Quality Corporate and Bank Obligations • US Agencies • US Treasuries

  14. Value can be added through three main strategies: • Sector Allocation Ongoing research, analysis, and evaluation of market sectors with respect to current market prices, i.e. spread or risk premium

  15. Value can be added through three main strategies: • Issue Selection Primarily a bottom-up process to uncover mispriced or undervalued credits and/or securities

  16. Value can be added through three main strategies: • Weighted Average Maturity (WAM) Exposure • Target WAM based on domestic (and international) macro-economic factors as well as the general political environment • Staff weighs its views vs. market expectations, increasing WAM as views diverge and vice versa as views converge • Goal is to add value based on the longer term trend and positioning the fund’s WAM accordingly, not timing the market

  17. Investment Outlook Implementation Interest Rate Exposure OSTF Sector Allocation OSTF Portfolio Rules Issue Selection Monitoring & Controls Internal Research External Manager Resources Third Party Research Ratings Agencies Street Research OSTF Investment Process

  18. How Did OST Staff Avoid Recent Landmines? • Investment Policy – Dictates all portfolio decisions • Always keep in mind investment objectives • Preservation of Principal • Liquidity • Yield

  19. How Did OST Staff Avoid Recent Landmines? • Staff Outlook – Results in general portfolio structure • Experience over past market cycles is a huge benefit! • Better to be lucky than good… • Learn from past mistakes…to help prevent them in the future • Not a “Black and White Science”

  20. Overview of Security Selection Process1 • Short Term or Long Term? • US Treasuries, Agencies or Credit? Always consider worst case scenario 1 The OSTF Investment and Security Selection Processes are appropriate for the OSTF only.

  21. Overview of Security Selection Process • Relative Value in Credit Why not buy all issues that fit portfolio guidelines? • Citigroup Inc. (C) versus CIT Group Inc. (CIT) • Credit Curves are an important indicator (fixed vs. float, 2 yr vs. 10 yr) • Balance Sheet Analysis • Debt Ratio Trends • Cash Flow Analysis • Near Term Maturities • Credit Facilities • Current Credit Profile, Ratings • 10-K Reports: Management’s Discussion and Analysis • Event Risk: LBO’s, Share Repurchases

  22. Credit Curves(spread versus Libor)2 2 Approximate spreads as of February 29, 2008

  23. Balance SheetAnalysis Liquidity – Cash & Near Cash Amounts

  24. Debt Ratio Trends

  25. Cash FlowAnalysis

  26. Near Term Maturities

  27. Related Securities, Credit Facilities (e.g. see Bank Loans)

  28. Credit Profile

  29. Summary: Take Aways • Investment Policy dictates investment of assets • Mistakes happen…Goal is to learn and minimize in the future • Know what one buys…Don’t rely only on ratings • Always consider Worst Case Scenario/Reaching for Yield – Sleep Factor • If 2-year US Treasuries bought and 2-year Treasuries increase 200 b.p.? • If credit bought and issuer experiences negative headlines

  30. OSTF Statistics & Compliance

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