GENERAL COMMITTEE

 

 

 

 

 

TO:

Mayor and Members of Council

 

 

 

 

FROM:

Andy Taylor, Commissioner of Corporate Services

 

 

 

 

PREPARED BY:

Mark Visser, Manager of Strategy, Innovation & Investments, Corporate Services

 

 

 

 

DATE OF MEETING:

2006-Feb-20

 

 

 

 

SUBJECT:

2005 Investment Performance Review

 

 

 

 

 

RECOMMENDATION:

 

THAT the report dated February 20, 2005 entitled “2005 Investment Performance Review” be received.

 

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 year ending December 31, 2005, the Town of Markham’s Income Earned on Investments was $7.19 million, compared to a budget of $6.66 million, representing a $530,000 favourable variance. 

 

The 2005 budget assumed an average general fund portfolio balance of $180 million to be invested at an average rate of return of 3.70%.  The actual average portfolio balance was $180 million and therefore did not factor into the variance.  The higher realized rate of return on investments contributed to the $530,000 variance. 

 

Interest Rate

 

At the beginning of 2005, the Bank Rate was 2.75%.  It remained at this level until September.  A succession of rate hikes late in the year saw the Bank Rate close the year out at 3.50%.  During 2005, the Town’s investments (excluding Capital Gains) had an average rate of return of 3.59%; 11 basis points lower than budget.  However, through active bond trading, the Town realized $727,000 of Capital Gains, thereby increasing the actual rate of return to 3.99%; 29 basis points higher than budgeted.  The actual rate of return (including Capital Gains) accounts for the $530,000 favourable variance. 

 

Portfolio Balance

 

The average portfolio balance for 2005 was $180 million, which was on target with the forecast. 

 

The general portfolio balance is lower than in pervious years (2004 = $200 million) because as of April 1, 2005, interest began being allocated to over $60 million of additional reserve balances (primarily to the new “Life Cycle Replacement and Capital Reserve Fund”). 

 

Portfolio Composition

 

All investments made in the year 2005 adhered to the Town of Markham investment policy.  At December 31, 2005, 42% of the Town’s portfolio was comprised of government issued securities.  The remaining 58% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 45% and 13% of the portfolio, respectively.   All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

 

The year-end general investment portfolio was comprised of the following instruments:  Bonds 44%, Banker’s Acceptances 31%, Banker’s Deposit Notes 19% and Provincial Promissory Notes 6% (Exhibit 2).

 

The Town’s year-end portfolio (all funds excluding DCA) of $197.2 million was broken down into the following investment terms (Exhibit 3):

                                                                                                    2005                (2004)

Under 1 month                                                    21.2%              (20.9%)

1 month to 3 months                                                        30.3%              (20.2%)

3 months to 1 year                                                           16.9%              (22.7%)

Over 1 year                                                                     31.5%              (36.2%)

 

            Weighted average investment term                                882.2 days       (916.0 days)

Weighted average days to maturity                                555.6 days       (564.5 days)

 

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 T-bill rate for 2005 was 2.68% (source: Bank of Canada).   Money market investments held by the Town of Markham during 2005 had an average return of 2.73%.  Therefore, the Town’s money market investments outperformed 3-month T-Bills by 5 basis points.  See Exhibit 4 for all Money Market securities held by the Town of Markham in the year 2005.

 

Bond Market Performance

 

2005 marked the fourth year of an aggressive bond trading strategy.  The 2005 highlights of the program are as follows:

 

  • 33 bonds were purchased with a face value of $64.3 million
  • 15 bonds were sold with a combined face value of $30.0 million
  • $727,000 of Capital Gains were realized

 

At December 31, 2005, the Town held 52 bonds in the general fund portfolio.  The amortized value of these bonds at year-end was $103.2 million.  The market value of these bonds at December 31, 2005 was $102.9 million.  This translates into $688,000 of unrealized gains.  See Appendix 5 for all 2005 bond transactions. 

 

The strategy for 2005 was to take advantage of the increase in the price of longer term bonds.  Throughout the year, the yield curve flattened significantly (i.e. the difference in yield between one year bonds and ten year bonds decreased) which allowed the Town to take profits on a portion of its longer term holdings and placing the funds in shorter term instruments.  The Town will begin to increase the weighted average to maturity once the 10 year bond yields go back up in 2006.   2005 marked the most successful year to date for the Town’s bond trading strategy, resulting in $727,000 of Capital Gains.


 

FINANCIAL CONSIDERATIONS:

 

 

After the rapid interest rate hikes by the Bank of Canada in late 2005, it is not expected that the Bank Rate will change significantly in 2006.  The forecast is for both the average portfolio balance and rate of return to increase for 2006 (although Capital Gains are not expected to reach the same levels as 2005).  The 2006 budget will be based on a $184 million average portfolio balance with an estimated 3.85% rate of return, resulting in Investment Income of $7.084 million (an increase of $424,000 over the 2005 budget). 

 

 

ATTACHMENTS:

 

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2005 Money Market Investments

Exhibit 5 – 2005 Bond Market Investments

Exhibit 6 – 2005 Bond Market Investments

 

 

 

 

 

 

Barb Cribbett, Treasurer

 

Andy Taylor, Commissioner, Corporate Services

 

 

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