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:

2005-Feb-14

 

 

 

 

SUBJECT:

2004 Investment Performance Review

 

 

 

 

 

RECOMMENDATION:

 

THAT the report dated February 14, 2005 entitled “2004 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, 2004, the Town of Markham’s Income Earned on Investments was $7.46 million, compared to a budget of $6.66 million, representing a $793,000 favourable variance. 

 

The 2004 budget assumed an average general fund portfolio balance of $180 million to be invested at an average rate of return of 3.70%.  A higher than budgeted average portfolio balance contributed to $744,000 of the variance, while a higher realized rate return accounted for the remaining $49,000.  The details of these two factors will be discussed below.

 

Interest Rate

 

At the beginning of 2004, the Bank Rate was 3.00%.  Through a succession of cuts early in the year, it hit a low of 2.25% from April to September.  By October, the Bank Rate had been increased to 2.75%; a level at which it stayed at for the remainder of the year.  During 2003, the Town’s investments had an average interest rate of 3.53%; 17 basis points lower than budget.  However, through active bond trading, the Town realized $396,000 of Capital Gains, thereby increasing the actual rate of return to 3.72%; 2 basis points higher than budgeted.  The actual rate of return (including Capital Gains) accounts for a favourable variance of $49,000. 

 

Portfolio Balance

 

The budgeted portfolio balance for 2004 was $180 million (an increase of $30 million over 2003 budgeted levels).  The actual average general fund portfolio balance in 2004 was $200 million, resulting in an additional average of $20 million that was available for investment purposes throughout the year.  The higher portfolio balance accounts for a favourable variance of $744,000.

 

Portfolio Composition

 

All investments made in the year 2004 adhered to the Town of Markham investment policy.  At December 31, 2004, 39% of the Town’s portfolio was comprised of government issued securities.  The remaining 61% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 55% and 6% 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 46%, Banker’s Acceptances 39%, Banker’s Deposit Notes 11% and Certificates of Deposit 4% (Exhibit 2).

 

The Town’s year-end portfolio (all funds excluding DCA) of $200 million was broken down into the following investment terms (Exhibit 3):

 

Under 1 month                                                 20.9%

1 month to 3 months                                                     20.2%

3 months to 1 year                                                        22.7%

Over 1 year                                                                  36.2%

 

            Weighted average investment term                                916.0 days

Weighted average days to maturity                                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 2004 was 2.24% (source: Bank of Canada).   Money market investments held by the Town of Markham during 2004 had an average return of 2.31%.  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 year 2004.

 

Bond Market Performance

 

2004 marked the third year of an aggressive bond trading strategy.  The 2004 highlights of the program are as follows:

 

  • 43 bonds were purchased with a face value of $86.6 million
  • 14 bonds were sold with a combined face value of $36.5 million
  • $396,000 of Capital Gains were realized

 

At December 31, 2004, the Town held 62 bonds in the general fund portfolio.  The amortized value of these bonds at year-end was $114.0 million.  The market value of these bonds at December 31, 2003 was $116.4 million.  This translates into $2.4 million of unrealized gains.  See Appendix 5 for all 2004 bond transactions. 

 

The strategy for 2004 was to increase the Town’s bond holdings and the average investment length where applicable.  The year-end weighted average investment length increased from 732 days in 2003 to 916 days in 2004.  The Town was able to take advantage of certain market fluctuations by taking profits on 14 bonds throughout the year resulting in $396,000 of capital gains.   Market fluctuations were not as dramatic as the previous two years and as a result, the $396,000 of capital gains represents a decrease of $225,000 from 2003.

 

 

FINANCIAL CONSIDERATIONS:

 

At the beginning of 2004, the Bank Rate was 3.00%.  Through a succession of cuts early in the year, it hit a low of 2.25% from April to September.  By October, the Bank Rate had been increased to 2.75%; a level at which it stayed at for the remainder of the year.  The most recent interest rate forecasts see the interest rate staying at this level for another 5-6 months, with possible increases beginning in the summer months.  Based on the strong Canadian dollar and its impact on trade, it is not unreasonable to suggest the rate will be at 2.75% for most of the year.

As a result, it is expected that the Town’s average rate of return will be approximately 3.7% for 2005. 

 

Furthermore, the recent Reserve Study recommends that that Town consolidate its reserves and start to allocate interest to these reserves.  As this could equate to a substantial transfer of interest income from the general fund to the reserves, it was decided that the 2005 budget for Interest Earned on Investments would remain constant at $6.66 million. 

 

 

ATTACHMENTS:

 

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2004 Money Market Investments

Exhibit 5 – 2004 Bond Market Investments

Exhibit 6 – 2004 Bond Market Investments

 

 

 

 

 

 

Barb Cribbett, Treasurer

 

Andy Taylor, Commissioner, Corporate Services

 

 

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