Report to: General Committee Report Date: October 15, 2007

SUBJECT: 2007 Third Quarter Investment Performance Review

PREPARED BY: Mark Visser, Manager of Strategy, Innovation & Investments

RECOMMENDATION:

THAT the report dated October 15, 2007 entitled “2007 Third Quarter Investment Performance Review” be received.

EXECUTIVE SUMMARY:

Not applicable

1. Purpose 2. Background 3. Discussion 4. Financial

5. Others (Environmental, Accessibility, Engage 21st, Affected Units) 6. Attachment(s)

PURPOSE:

Pursuant to Regulation 74/97 Section 8, the Municipal Act requires the Treasurer to “prepare and provide to the Council, each year or more frequently as specified by Council, an investment report”.

The investment report shall contain,

(a) a statement about the performance of the portfolio of investments of the municipality during the period covered by the report;

(b) a description of the estimated portion of the total investments of a municipality that are invested in its own long-term and short-term securities to the total investment of the municipality and a description of the change, if any, in that estimated proportion since the previous year’s report;

(c) a statement by the Treasurer as to whether or not, in her opinion, all investments were made in accordance with the investment policies and goals adopted by the municipality;

(d) a record of the date of each transaction in or disposal of its own securities, including a statement of the purchase and sale price of each security;

(e) such other information that the Council may require or that, in the opinion of the Treasurer, should be included.

BACKGROUND:

For the nine months ending September 30, 2007, the Town of Markham’s Income Earned on Investments was $5.67 million, compared to a budget of $5.30 million, representing a $370,000 favourable variance.

The 2007 budget assumes an average general fund portfolio balance of $168.67 million to be invested at an average rate of return of 4.20%. The actual average portfolio balance and the average rate of return were higher than budgeted levels. The details of these two factors will be discussed below.

Interest Rate

Despite constant forecasts that the Bank of Canada was going to lower interest rates early in 2007, the Bank Rate remained unchanged at 4.50% for the first half of 2007. Near the end of June, the Bank of Canada increased rates by 25 basis points to 4.75% where it will probably remain at for the rest of the year.

During the first three quarters of 2007, the Town’s investments had an average interest rate of 4.36%; 16 basis points higher than budget. Furthermore, through active bond trading, the Town realized $128,000 of Capital Gains, thereby increasing the actual rate of return to 4.46%; 26 basis points over the budgeted rate. The difference in the rate of return accounts for a favourable variance of $327,000.

Portfolio Balance

The budgeted average portfolio balance for the first three quarters of 2007 was $168.67 million. The actual average general fund portfolio balance (including cash balances) for the first three quarters of 2007 was $170.04 million. The higher portfolio balance accounts for a favourable variance of $43,000.

Portfolio Composition

All investments made in the first three quarters of 2007 adhered to the Town of Markham investment policy. At September 30, 2007, 32% of the Town’s portfolio was comprised of government issued securities. The remaining 68% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 61% and 7% of the portfolio, respectively. All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

The September 30, 2007 investment portfolio was comprised of the following instruments: Banker’s Acceptances 20%, Bonds 43%, Banker’s Deposit Notes 29%, Accruals 2%, and Certificates of Deposit 6% (Exhibit 2).

At September 30, 2007, the Town’s portfolio balance for all funds was $317.8 million. DCA investments represented $83.7 million of this amount. The Town’s portfolio (all funds excluding DCA) of $234.1 million was broken down into the following investment terms (Exhibit 3):

Under 1 month 17.3%

1 month to 3 months 30.7%

3 months to 1 year 26.5%

Over 1 year 25.5%

Weighted average investment term 701.6 days

Weighted average days to maturity 413.4 days

Since March 31, 2007, the weighted average days to maturity has increased from 296.8 days to 413.4 days in an attempt to lock into more favourable interest rates for a longer period of time

Money Market Performance

The Town of Markham uses the 3-month T-bill rates to gauge the performance of investments in the money market. The average 3-month T-bill rate for the first three quarters of 2007 was 4.23% (source: Bank of Canada). Non-DCA Fund money market investments held by the Town of Markham during the first thee quarters of 2007 had an average return of 4.43%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 20 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in the first three quarters of 2007.

Bond Market Performance

2007 marks the sixth year of the bond trading strategy. The 2007 YTD highlights of the program are as follows:

• 17 bonds were purchased with a face value of $32.2 million
• 3 bonds were sold with a combined face value of $5.3 million
• $128,000 of Capital Gains were realized

With the recent problems in the market related to credit risk on asset-back securities and below-prime mortgages, the yields on bank instruments have peaked and the spread between bank bonds and government bonds have widened. Furthermore with the superior performance of the Canadian dollar in recent months, it does not appear that the interest rates will be increased in the foreseeable future. Therefore, the strategy over the past quarter was to take advantage of the high interest rates by purchasing bank bonds and increasing the weighted average to maturity.

Outlook

It is expected that over the next 3 months, the rate of return on investments will be approximately 20 basis points over the projected levels, while the average portfolio balance will be below projected levels. At year end, the surplus is projected to be approximately $300,000

OPTIONS/ DISCUSSION:

Not Applicable

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

Not Applicable

ENVIRONMENTAL CONSIDERATIONS:

Not Applicable

ACCESSIBILITY CONSIDERATIONS:

Not Applicable

ENGAGE 21^ST CONSIDERATIONS:

Not Applicable

BUSINESS UNITS CONSULTED AND AFFECTED:

Not Applicable

RECOMMENDED

BY: ________________________ ________________________

Barb Cribbett, Treasurer Andy Taylor, Commissioner,

Corporate Services

ATTACHMENTS:

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2007 Q3 Money Market Investments

Exhibit 5 – 2007 Q3 Bond Market Investments

Exhibit 6 – 2007 Q3 DCA Fund Investments