FINANCE AND ADMINISTRATIVE 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:	2005-Nov-7
	SUBJECT:	2005 Third Quarter Investment Performance Review

RECOMMENDATION:

THAT the report dated November 7, 2005 entitled “2005 Third Quarter 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 nine months ending September 30, 2005, the Town of Markham’s Income Earned on Investments was $5.48 million, compared to a budget of $4.98 million, representing a $495,000 favourable variance.

The 2005 budget assumes an average general fund portfolio balance of $180 million to be invested at an average rate of return of 3.70%. Both the actual average portfolio balance and rate of returns were above budgeted levels. The details of these two factors will be discussed below.

Interest Rate

At the beginning of 2005, the Bank Rate was 2.75%. It remained at this level until September when it increased to 3.00%. During the first nine months of 2005, the Town’s investments had an average interest rate of 3.38%, 32 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 3.90%; 20 points higher than the 3.70% budgeted rate. The difference in the rate of return accounts for $280,000 of the $495,000 favourable variance.

Portfolio Balance

The budgeted average portfolio balance for 2005 was $180 million. The actual average general fund portfolio balance for the first nine months of 2005 was $187.8 million, resulting in an additional $7.8 million that was available for investment purposes throughout the first nine months of 2005. The higher portfolio balance accounts for $215,000 of the $495,000 favourable variance.

The general portfolio balance is lower than in pervious years 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 first nine months of 2005 adhered to the Town of Markham investment policy. At September 30, 2005, 37% of the Town’s portfolio was comprised of government issued securities. 54% of the portfolio was made up of instruments issued by Schedule A Banks, while the remaining 9% was made up of instruments issued by Schedule B Banks. All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

The September 30, 2005 general investment portfolio was comprised of the following instruments: Banker’s Acceptances 41%, Bonds 36%, Banker’s Deposit Notes 15%, and T-Bills 8% (Exhibit 2).

At September 30, 2005, the Town’s portfolio balance for all funds was $286.2 million. DCA investments represented $62.5 million of this amount. The Town’s portfolio (all funds excluding DCA) of $223.7 million was broken down into the following investment terms (Exhibit 3):

Under 1 month 23.0%

1 month to 3 months 39.4%

3 months to 1 year 13.3%

Over 1 year 24.3%

Weighted average investment term 743.5 days

Weighted average days to maturity 435.4 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 3-month T-bill rate for the first nine months of 2005 was 2.56% (source: Bank of Canada). Non-DCA Fund money market investments held by the Town of Markham during the first nine months of 2005 had an average return of 2.63%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 7 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in the first nine months of 2005.

Bond Market Performance

2005 marks the fourth year of the bond trading strategy. The 2005 YTD highlights of the program are as follows:

• 22 bonds were purchased with a face value of $44.3 million
• 15 bonds were sold with a combined face value of $30.0 million
• $727,000 of Capital Gains were realized

The strategy for 2005 has been to take advantage of the high prices of longer duration bonds. The overnight interest rate increased to 3.00% on October 17. Since 10 year Canada bonds are trading below the 4.00% range, it provides a good environment to sell some of the Town’s 8-10 year bonds and put money in shorter-term investments for the time being. As a result, the sale of bonds has earned the Town $727,000 in Capital Gains. It is expected the 10 year bond rates will increase over the next 3 months. This time will be used to build back some of the bond inventory.

FINANCIAL CONSIDERATIONS:

It is anticipated that there will be a small negative variance in Investment Income for Q4. This is due to the low yields in the bond market as well as having less money to invest (the Town paid out $86 million to the Region and School Boards on September 30th). The year end Investment Income is forecasted to be near the $7.0 million mark ($0.34 million over budget).

ATTACHMENTS:

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2005 Q3 Money Market Investments

Exhibit 5 – 2005 Q3 Bond Market Investments

Barb Cribbett, Treasurer

Andy Taylor, Commissioner of Corporate Services

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